US companies are stashing US$2.1t overseas to avoid taxes

4 Mar7:36 PM

[NEW YORK] Eight of the biggest US technology companies added a combined US$69 billion to their stockpiled offshore profits over the past year, even as some corporations in other industries felt pressure to bring cash back home.

Microsoft Corp, Apple Inc, Google Inc and five other tech firms now account for more than a fifth of the US$2.10 trillion in profits that US companies are holding overseas, according to a Bloomberg News review of the securities filings of 304 corporations. The total amount held outside the US by the companies was up 8 per cent from the previous year, though 58 companies reported smaller stockpiles.

The money pileup, reflecting companies' incentives to park profits in low-tax countries, has drawn the attention of President Barack Obama and US lawmakers, who see a chance to tap the funds for spending programs and to revamp the tax code. That effort is stalled in Washington, and there are few signs that tech companies will bring the profits back to the US until Congress gives them an incentive or a mandate.

"It just makes no sense to repatriate, pay a substantial tax on it," said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation, a policy- research group whose board of directors includes executives from Microsoft and Oracle Corp. "Computing and IT companies especially have a lot of flexibility in where they declare their profits."

Apple, Google Microsoft, Apple and Google each boosted their accumulated foreign profits by more than 20 per cent over the year, the largest increases by any of the 34 companies with at least US$16 billion outside the US International Business Machines Corp, Cisco Systems Inc, Oracle, Qualcomm Inc and Hewlett-Packard Co each added at least US$4 billion.

The profits added by the eight technology companies accounted for 45 per cent of the net gain in overseas funds among the corporations surveyed. At the same time, firms in some other industries felt enough pressure to meet domestic needs that they chose to take the tax hit by bringing money home.

Duke Energy Corp, based in Charlotte, North Carolina, took a US$373 million tax charge against earnings in February as part of a plan to get access to US$2.7 billion in accumulated foreign profits. Stryker Corp, a Kalamazoo, Michigan-based maker of medical devices, is planning to repatriate US$2 billion this year.

Apache Corp, a Houston-based oil and gas company, had US$17 billion indefinitely reinvested overseas at the end of 2013. Now, it has none.

"The company made the decision to utilize international cash to pay down US debt and grow its North American operations," Castlen Kennedy, a spokeswoman, said in an e-mail.

General Electric Co topped the list for the fifth straight year. The company now has US$119 billion outside the US, an increase of 8 per cent from the end of 2013 and a 27 per cent gain since 2010.

By contrast, Microsoft has more than tripled its offshore holdings since 2010. Apple, which counts only part of its non-US holdings as indefinitely held offshore, increased that portion to US$69.7 billion from US$12.3 billion in 2010. Cisco now has $52.7 billion outside the US, up 10 per cent since 2013.

Microsoft referred back to 2012 Senate testimony by Bill Sample, its vice president for worldwide tax. Sample said then that the Redmond, Washington-based company is "fundamentally a global business" and that US law creates a disincentive for US investment.

Kristin Huguet, a spokeswoman for Cupertino, California- based Apple, declined an interview request.

Google referred to a December 2013 letter that the Mountain View, California, company sent to the Securities and Exchange Commission. It said Google needs US$20 billion to US$30 billion for future acquisitions outside the US, US$12 billion to US$14 billion for foreign subsidiaries' share of developing intellectual property and US$2 billion to US$4 billion for capital expenditures.

John Chambers, Cisco's chief executive officer, said on Bloomberg TV on Feb 20 that his company is investing in India, Israel and France in the absence of US tax law changes.

"I'd prefer to have the vast majority of my employees here," Mr Chambers said. "And our tax policy is causing me to make decisions that I don't think is in the interest of our country, or even in our shareholders, long term."

The Bloomberg analysis covers 304 large US-based companies that are required to report annually how much they hold outside the country in profits, which isn't the same thing as cash.

It's a measure of accumulated profits, including those reinvested in active businesses and factories. The companies say they won't repatriate these profits, and they haven't assumed that they will pay future US taxes that would be owed if they did.

"One of the reasons that they're holding the hoards of cash abroad is they don't want to pay the repatriation tax when they bring it back," said Rosanne Altshuler, a Rutgers University economist who studies international taxation.

The analysis starts with corporations in the Standard & Poor's 500 Index and excludes purely domestic firms, real estate investment trusts and companies with headquarters outside the US. It includes each company's most recent annual report, many of which were filed over the past month.

The companies owe taxes at the full US corporate tax rate of 35 per cent on profits they earn around the world. They get tax credits for payments to foreign governments and don't have to pay the residual US tax until they bring the money home.

Keeping money overseas is particularly easy for technology and pharmaceutical companies whose profits stem from intellectual property that can swiftly be moved.

"It's very easy to place a patent in another country and accrue the income there," Mr Altshuler said. "They're very sensitive to differentials in corporate tax rates."

Gilead Sciences Inc, for example, reported that it held US$15.6 billion outside the US as of Dec 31, up from US$8.6 billion a year earlier. That's because the intellectual property for the company's blockbuster drug - Sovaldi - was in Ireland before the Food and Drug Administration approved it in 2013.

Corporations that rely on intellectual property - trademarks, logos or patents - have an advantage over heavy industrial companies and the financial industry, which relies on providing services to customers, said Jennifer Blouin, an associate professor of accounting at the University of Pennsylvania's Wharton School.

"You can't move an oil rig out of certain jurisdictions," she said. "You can't shift the service income without moving the people."

Companies have a duty to their shareholders and they're responding logically to the incentives in the system, Mr Kennedy said.

"Companies are strongly driven by the need to increase shareholder value, and especially any public company has to meet market expectations," he said.

Whatever the reasons, the potential tax revenue from offshore profits is tempting to US lawmakers, who have been struggling to fund road projects and revamp the tax system.

Mr Obama and top Republicans on the tax-writing committees say they won't repeat a 2004 law that gave companies a voluntary repatriation holiday with a 5.25 per cent tax rate.

Instead, Mr Obama earlier this year proposed applying a 14 per cent mandatory tax on the stockpiled profits and a 19 per cent minimum tax on foreign earnings going forward.

The one-time tax would generate US$268 billion over six years, which Mr Obama wants to use for infrastructure.

Because the one-time transition tax is levied on past earnings, it doesn't distort companies' decisions, Mr Altshuler said. The real questions are the rate and the details of the tax system for future earnings.

Mr Obama's plan hasn't advanced in Congress, amid Republican objections to some of the details and the idea of using one-time money for needs such as highway construction.

The president met March 2 with the chief executive officers of Xerox Corp, Micron Technology Inc, Qualcomm, IBM and EMC Corp, which have a combined US$114 billion in accumulated offshore profits.

"The president and the executives also discussed a shared desire to work with Congress to enact pro-growth, business tax reform," the White House said in a statement.

That doesn't mean it's going to happen anytime soon.

BLOOMBERG