Right now, many of us are waiting to receive those W-2s, 1099s and K-1s that make it possible to complete our taxes. At about this time, some Americans regain their interest in learning how to reduce their tax burden, while others marvel or complain as to how some of the nation's largest and most profitable companies manage to maintain such low tax rates.
In 2010, General Electric Co. (GE) made over $14 billion in income in 2010, and $5 billion within the U.S. alone, but paid no federal income taxes for the year. According to GE's income statements, GE stated that it paid income taxes totaling $1.05 billion. That would be a fairly low tax rate, at around 7.5%, and appears to be based on state and foreign income tax payments, where applicable. Also, those state taxes are deductible.
The conglomerate did also have to pay an army of lobbyists and accountants to help achieve this no federal tax goal, though, and most of those bean counters and favor getters earned more than the average American. General Electric also holds huge carry over losses though GE Capital's irrational exuberance prior to the financial crisis, which can be used to offset gains in the coming years.
In fact, the primary difference between GE's minimal taxation and the prevailing tax rate is primarily made up of GE Capital losses from big financial bets that failed in 2008 and 2009. In total, GE Capital accumulated about $30 billion dollars in losses during the financial crisis.
General Electric also benefitted from getting on-board the President's green job and technology initiative. So very much that GE Industrial makes, such as solar cells, wind turbines and GE Lighting's new, expensive light bulbs qualify for tax breaks. The company expects to spend approximately $10 billion over the next five years on these and other 'ecomagination' products.
It isn't just what GE is making, but also what it is buying. GE pledged to purchase 25,000 Chevrolet Volts, a General Motors (GM) electric car, by 2015. These cars are also a big part of the Presidential agenda, both in supporting GM's bailout and the green car endeavor. In 2009, the U.S. government bailed out the then failing auto manufacturer with $62 billion in taxpayer aid. GM did get to keep its prior losses and will also refrain from paying a high rate of income tax in the coming years, should it continue to be profitable.
Nonetheless, the National Highway Traffic Safety Administration reported on a safety defect investigation into the potential risk of fire in Chevy Volts, prompting GM to request that thousands of owners return to their Volts so that structural modifications may be made. It is unclear whether this issue could or should be upgraded to a full recall. Either way, purchasing these vehicles should provide GE with a tax break, and the price paid should be a business expense that will reduce the conglomerate's tax burden.
Another reason that GE kept its tax bill low is that it is making and keeping more and more revenue outside the purview of the U.S. tax system, through offshore subsidiaries. The corporate tax rates in the U.S. are higher than most other first world nations. The U.S. does not tax profit earned and kept overseas until the money is transferred into the U.S., though the sad and obvious consequence of such a rule is that corporations are reluctant to ever repatriate income.
This is precisely why so many larger U.S. companies maintain such large cash positions outside the county; it is simply bad business to send it home. For example, in 2010, Apple Inc. (AAPL) and Google (GOOG) both hold billions of dollars in cash, much of which is maintained overseas. These two tech giants have found methods of shielding their revenue and income from U.S. taxation without the benefit of significant prior losses.
Apple partially earned its overseas money from international sales, but also moved some revenue streams outside the U.S. by holding various intellectual property patents within foreign holding company subsidiaries. The result is that the cash leaves the U.S. as a tax-deductible business expense that pays for something held by a more tax efficient subsidiary. Similarly, Google uses practices with names such as the DutchSandwich and DoubleIrish to funnel the company's revenue to countries with lower tax rates.
This money and tax revenue stays out of the U.S. because of common sense. These companies are doing business on a glabal scale, making it easy to open a subsidiary wherever it benefits them. Some have argued that providing an amnesty period might allow for a significant level of corporate cash repatriation to occur over a short period of time, while others believe that repositioning the U.S. tax rate more in line with the global average would make these companies less inclined to DoubleIrish their income. This year, though, we are only more likely to hear reports of additional companies reorganizing subsidiaries to hold their higher margin segments in tax-friendly nations.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.
Disclosure: I am long GE.
