So who pays for the BIG STICK? GE makes profits overseas and should help pay for the expenses of maintaining US government institutions overseas.
I guess the tax liabilities are in the balance sheet somewhere.
Posted on 07/12/2004 5:19:58 AM PDT by MikeJ75
July 12 (Bloomberg) -- Since 1999, General Electric Co. deferred U.S. taxes on as much as $21 billion in income earned overseas. Congress is now considering changing the law so the company may never have to pay those taxes.
General Electric, which spends more on lobbying than any other U.S. company, has pressed lawmakers for two years for the relief, led by its vice president of taxes, John Samuels. The House of Representatives approved the measure last month as part of a broad tax bill; the Senate excluded the provision in its version. House and Senate negotiators this month will begin negotiating a compromise.
The provision would allow General Electric, the world's largest company by market value, to bring home income it earns in nations such as Ireland and Singapore without being taxed again in the U.S. Those countries' corporate tax rates are as low as 10 percent compared to 35 percent in the U.S. Fairfield, Connecticut- based General Electric gets about 45 percent of total revenue from abroad.
``Anything that cuts their taxes increases their after-tax return on investment, wherever it is in the world they are applying those breaks,'' said Brian James, an analyst at Loomis Sayles in Boston, which owns more than 4.3 million General Electric shares. ``It's pure math: The lower the tax rate, the higher the profits on invested capital.''
$4 Billion Sanctions
The House, under pressure to overhaul the tax code, approved the bill 251-178 on June 17. The World Trade Organization ruled that a clause in the code that provides tax credits to exporters was an unfair subsidy, and Congress is trying to head off $4 billion in annual sanctions that the European Union is imposing to retaliate.
The Capitol Hill negotiations are part of a wider debate in the presidential campaign, where tax policy and jobs are central issues. President George W. Bush backs the House bill, including the provision sought by General Electric. Bush has argued that relaxing international tax rules will make U.S. companies more competitive and create higher-paying jobs at home.
Senator John Kerry, the Democratic candidate, proposed ending most forms of tax deferral on the foreign profits of U.S. companies, including financial services taxed at low rates in other countries.
Much of the $21 billion in income that General Electric is deferring from taxes has been generated by its financial services operations in other countries, a move allowed by Congress in 1998.
Lock In Savings
The company, which gained about $200 million a year from the export subsidies that the WTO struck down according to a General Accounting Office estimate, would likely benefit even more from the proposed legislation. That's because General Electric could lock in savings it has generated by basing some of its financial services businesses in low-tax countries.
Backed by Representative Bill Thomas, chairman of the tax- writing Ways and Means Committee, the company stands a good chance of having the measure survive the House-Senate negotiations, said Louisiana Representative Jim McCrery, who heads the subcommittee on select revenue measures. If enacted, the provision would reduce the amount of revenue collected by the government by $7.8 billion over the next 10 years, according to the congressional Joint Committee on Taxation.
The provision would increase the value of credits the U.S. offers to companies that pay taxes to other governments for income earned overseas from manufacturing or financial services. The more valuable credits would lower their U.S. tax liability, encouraging the companies to invest some of the money in this country, Thomas and McCrery say.
``The provision provides the largest benefit to multinationals that have both large manufacturing offshore and large financing activities offshore,'' said John Buckley, chief tax counsel for the Democratic staff of the Ways and Means Committee.
Kerry, Bush
Samuels didn't return phone calls seeking comment on his lobbying. General Electric spokesman David Frail declined to comment on a specific bill, saying, ``We support legislation that will preserve the ability of U.S. exporters to compete globally, and thereby preserve American jobs.''
Allowing companies to defer U.S. taxes on their international financial services income has been debated since 1997, when former President Bill Clinton vetoed the provision, using authority the Supreme Court later ruled unconstitutional. Clinton said the deferral, restored by Congress a year later, aided only a limited number of companies such as General Electric, Citigroup Inc. and American International Group Inc.
This year, Kerry, a four-term senator from Massachusetts, says he wants to end tax breaks for companies that operate overseas and use the $12 billion annual savings to reduce the overall U.S. corporate tax rate to 33.25 percent.
`Self-Inflicted Wound'
Kerry, who didn't cast a vote when the Senate approved its version of the legislation on May 11, would allow companies to pay their deferred taxes to the U.S. at a rate of 10 percent for one year. After that, they would pay U.S. taxes on all profits, no matter where they are earned.
``Money made by American businesses overseas should be taxed at the same rate as money made by businesses here,'' Kerry said March 26, when he outlined his proposal in Detroit.
Bush's Treasury Department urged Congress last July to adopt the changes sought by General Electric in testimony before the Senate Finance Committee. The administration says Kerry's proposal is tantamount to a tax increase on multinational corporations and will cost jobs.
``Imposing an immediate U.S. tax on companies operating overseas would be a serious blow to U.S. corporations seeking to compete in the global marketplace,'' said Treasury spokeswoman Tara Bradshaw. She called it ``a self-inflicted wound to our economy.''
160,000 U.S. Jobs
General Electric has maintained employment of about 160,000 in the U.S. during the past decade. The number of jobs outside the U.S. rose from about 60,000 in 1993 to almost 150,000 at the end of 2003. The company, which operates in more than 100 countries, says it must branch into new markets overseas to keep revenue and profit rising.
Representative Charles Rangel of New York, the top Democrat on the Ways and Means Committee, said the measure being sought by General Electric and other companies would provide U.S. corporations incentive to move business out of the U.S.
``The bill says it creates jobs but it contains provisions to make sure the jobs are anywhere but America,'' Rangel said in an e-mail. ``I'm not against corporate tax cuts, but you better believe I want U.S. tax cuts to mean more jobs for U.S. workers.''
Senate Finance Committee Chairman Charles Grassley said the House proposal may derail bipartisan support for the bill in the Senate. ``It's very tough to get just about any bill, especially a business tax bill, out of the Senate these days, and consensus is critical to doing so,'' Grassley said in an e-mail response. ``This bill is very important, and it has to pass.''
Lobbying
The broader tax bill would replace export breaks with a discounted rate on manufacturing profits for companies such as Boeing Co., Microsoft Corp. and Caterpillar Inc., the export credit's biggest beneficiaries.
The legislation also helps companies such as Procter & Gamble Co., Hewlett-Packard Co. and Eli Lilly & Co. by encouraging expansion overseas through tax incentives. That includes changing the way companies allocate interest and a one- time tax holiday for companies to import foreign profits at a discounted rate of 5.25 percent.
Since the debate began two years ago in Congress, General Electric has increased its spending on lobbying. The company last year spent $17.2 million on political contributions and lobbying, according to PoliticalMoneyline, a nonpartisan company that tracks lobbying. That included almost $200,000 in contributions to members of the House Ways and Means and the Financial Services committees.
Samuels made PowerPoint presentations to lawmakers in meetings of the House Policy Committee, moderated conferences sponsored by research groups such as the American Enterprise Institute, and led an association of 36 multinational corporations urging changes to the way the U.S. taxes foreign profits.
More Business Overseas
``GE has been very active,'' said McCrery.
The company is doing an increasing amount of business overseas. About $60.8 billion, or 45 percent, of its $134 billion in sales came from outside the U.S. last year, including $6.7 billion in exports. Revenue from abroad rose 14 percent last year, including $27.8 billion from finance units, formerly called GE Capital.
The company said it expects $5 billion in revenue from China in 2005, up from an estimated $3.6 billion this year. In 2003, $30.5 billion in sales came from Europe, up from $24.8 billion in 2001.
The company is the world's biggest provider of jet engines, turbines for power plants, locomotives and medical-imaging equipment. It's also the biggest aircraft lessor and private label credit-card issuer.
It has taken advantage of growing profit outside the U.S. to reduce its overall tax rate, records show. In 2003, General Electric's consolidated, effective tax rate was 21.7 percent, lowered by 9 percentage points because of international operations, including low-taxed financial services.
Ford, Caterpillar
Few other companies are in a position to benefit as much as General Electric, even those with both financing and manufacturing operations.
Ford Motor Co., which earns money from loans and selling cars, has lost money in two of the last five years and has only $870 million in foreign profits that have never been taxed by the U.S. Rival General Motors Corp., which also has profitable financial services operations, has more tax-deferred income offshore -- $11.6 billion -- but hasn't reduced its tax rate through low-taxed foreign operations.
Caterpillar Inc., which has manufacturing and financing operations, opposes the House legislation because it gets a bigger benefit relative to net income from the export subsidy being repealed than does General Electric.
In cases where companies such as General Electric have based financing businesses in low-tax countries, they don't generate enough foreign tax credits to wipe out any residual U.S. liability. As a result, they keep that money overseas. From 2002 to 2003, General Electric increased its tax-deferred ``permanently reinvested'' income overseas by $6 billion to $21 billion, the second biggest increase of any U.S. corporation, behind Pfizer Inc., the world's biggest drugmaker.
Overall, the accrued $21 billion General Electric has deferred ranks third among U.S. companies, behind Pfizer's accrued $38 billion and Exxon Mobil Corp., with $22 billion.
The provision in the House bill would unlock that income for General Electric.
Unlike other financial-services firms that operate exclusively in the banking, insurance, and securities sectors, General Electric earns profits from its manufacturing activities, which are often taxed at high rates in places like Europe and Canada.
U.S. Bears The Cost
In 1986, Congress designated various categories of income, called ``baskets'' and said foreign tax credits accrued in one basket, such as highly taxed manufacturing income, cannot be used to wipe out U.S. liability on income in another income category, such as lower-taxed financial services income. There are other baskets for investment income and foreign oil and gas profits.
The House-passed tax bill would eliminate these barriers, allowing General Electric to blend foreign tax credits from two pools of foreign profits to get the lowest net U.S. tax rate, lawmakers such as Wisconsin Representative Paul Ryan said.
Critics such as Buckley said allowing companies to blend their tax credits essentially forces the U.S. to subsidize taxes they pay to other governments.
``The U.S. government, not the company, bears the cost of foreign taxes above our rates,'' he said.
Former New Jersey Senator Bill Bradley is a Democrat who championed the 1986 legislation that put the restrictions in place that General Electric is now lobbying to abolish.
Interviewed at a Sun Valley, Idaho retreat sponsored by his firm, Allen & Co., Bradley said Congress is abandoning the principles that allowed it to curtail special interest provisions in the tax code in exchange for lower tax rates overall.
``What we did in '86 has been dismantled over the past 18 years,'' said Bradley, who unsuccessfully challenged former Vice President Al Gore for the Democratic presidential nomination in 2000. "It's become fashionable to insert tax loopholes for social and quasi-economic purposes, for political purposes."
On the one hand, requiring US companies to pay the same rate of tax on their overseas income as on their US income removes the incentive to move their operations overseas. Should the provision allowing deferral be eliminated?
But on the other hand, allowing US companies to move their overseas profits back into the US tax free encourages investment in the US.
So who pays for the BIG STICK? GE makes profits overseas and should help pay for the expenses of maintaining US government institutions overseas.
I guess the tax liabilities are in the balance sheet somewhere.
immigration inspectors guarding the nation's borders are laboring under an internal budget crisis that has forced freezes on overtime pay and new hiring – as well as the release of hundreds of illegal immigrants from detention centers.
GREAT IDEA GE!
It comes as a suprise to most people, but they already do pay taxes on overseas income -- to the overseas government where the money was made. There's no international "tax credit" for taxes paid to some other government, akin to what happens in the US when you make money in one state but reside in another. So, effectively, US companies get taxed twice on income from overseas operations.
Taxation of "C" corporations is double taxation. The shareholders get taxed on dividends (profits) a second time. The answer is to not tax corporate income, or to not tax dividends.
C Corporatrions enjoy benefits for their shareholders that are worth more (in some cases) than the 15% cap gains and special dividends rates. The reasons for the double taxation is in part- 1) the corporate shield from unlimited legal liability 2) perpetuity 3) ease of transfer of ownership and aggregation of ownership, 4) a uniform unit of account / method of exchange / store of value.
Legal system in place to oversee these rights and privileges.
If that isn't a "compliance cost" of the income tax system, then I don't know what is...
Wonder how large his payroll is?
Lawyers, accountants, tax planners, tax research, ... don't come cheap, even by the dozen.
Plus facilites, equipment, travel & expenses, staff (and all of their costs)...
But, of course, the economic illiterates will try and convince folks that this doesn't affect the price cosnumers pay for the myriad of GE goods and services.
Chairman of the House Ways and Means Committee,
Rep. Bill Archer (R-TX)
August 12, 1996
- "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
Tax only at retail level on consumption, both import and homegrown taxed identically collected from the consumer where it all gets paid anyway, and make sure the consumer/voter knows just how much that every growing government is costing him, instead of letting Congress Critters hide the butchers bill behind a veil of inflated prices.
A Taxreform bump for you all.
If you would like to be added to this ping list let me know.
John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and payroll taxes outright (both individual and corporate), and provide a IRS free replacement in the form of a retail sales tax:
H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information: http://www.fairtax.org & http://www.salestax.org
I have news for you. The defense industry jokes about their work being "pro bono." I worked for one company that didn't get paid for six months--we had to borrow money, and the law didn't allow to deduct the interest as any sort of business expense. When all was said and done, we lost about ten megabucks on that contract.
Should corporations be taxed at all? Are corporations just a Federal device to get more revenues into the DC coffers?
Damn straight!!!
I say you don't tax corporate income because it makes prices higher, thus making our exporters less competitive overseas.
Perpetuity only has "value" in light of the death tax. An "S" corporation also shields shareholders from unlimited liability. Any contract, like a real estate trust, also allows trasfer and aggregation of ownership.
"C" corporations are not that special that the government can legitimately hit their shareholders for a double dip.
Under the current system (the Bradley-Kerry version), a likely outcome is that companies will spin off small parts of themselves to overseas based corporations and the contract with those corporations for the original work. This same thing does happen domestically, GM and Delco for example. One might set up, for example, a phone-answering service in, for example, India, and then just hire the foreign company to do the work. US taxes are avoided on the transactions.
``What we did in '86 has been dismantled over the past 18 years,'' said Bradley, who unsuccessfully challenged former Vice President Al Gore for the Democratic presidential nomination in 2000. "It's become fashionable to insert tax loopholes for social and quasi-economic purposes, for political purposes."
This is what the flat-taxers don't get. We had an almost flat tax in 86 and now, thousands of amendments later, the IRC is far warse than the one that was simplified in 86. The problem is that any income based system is inevitablt going to get really really complicated .... and unfair.
"Should corporations be taxed at all? Are corporations just a Federal device to get more revenues into the DC coffers?"
IMHO, the corporate income tax is one of the greatest hoaxes ever perpetrated against American taxpayers. Very few US consumers/voters understand that they pay corporate income taxes, as well as the staggering associated compliance cost, when they purchase goods and services. Even Senator Grassley, chairman of the senate finance committee, said in an interview a couple of years ago that since individual income taxes have risen over the past several decades while corporate taxes have stayed essentially flat, that he would oppose any corporate tax relief until we got more individual tax relief. He obviously fails to understand that the consumer ultimately pays both.
The corporation is a sort of person in a legal sense. It is totally artificial and was created by Gov't. Maybe some think it is not fair to have a group of people competing as a corporation against individual people. The anti-corporation Naderites and organized street protestors apparently think so, while ignoring that they are also a group and some are incorporated themselves.
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