GE's Tax Avoidance

March 25th, 2011
in econ_news

GE logo Econintersect:  General Electric is a master at avoiding taxes.  Presumably this is all done within the law because there is no news about potential legal action by the IRS.  Naked Capitalism and The New York Times have discussed this situation in great detail in the past two days.  This situation is a poster child for the claims that U.S. corporate taxes are not serious burdens to corporate America.

Follow up:

The 2010 annual report from the company claims the effective tax rate for 2010 was 7.4% on operating earnings.  A New York Times article says the company not only didn't pay any income taxes, but actually got payments from the IRS:

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

 Yves Smith has this to say at Naked Capitalism:

The New York Times reports tonight on what a great job General Electric does in tax evasion avoidance, reaping a tax credit of $3.2 billion on $5.1 billion of reported US profits. And while GE is a particularly egregious example by virtue of having the most sophisticated tax operation in the US, it illustrates a more general point. The idea that US corporations are heavily or even meaningfully taxed is a canard (and this is true at the small end of the spectrum too). While nominal tax rates may appear to take a serious bite out of corporate earnings, a myriad of loopholes and income-shifting schemes allows companies to slip the taxman’s leash.

And before some of you contend that this line of thinking is somehow anti-capitalist, consider the reaction of President Reagan when learning of GE’s skills in tax dodging:

As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.

And don’t try contending that it has always been like this. From Richard Wolf in the Guardian (emphasis his):

During the Great Depression, federal income tax receipts from individuals and corporations were roughly equal. During the second world war, income tax receipts from corporations were 50% greater than from individuals. The national crises of depression and war produced successful popular demands for corporations to contribute significant portions of federal tax revenues.

US corporations resented that arrangement, and after the war, they changed it. Corporate profits financed politicians’ campaigns and lobbies to make sure that income tax receipts from individuals rose faster than those from corporations and that tax cuts were larger for corporations than for individuals. By the 1980s, individual income taxes regularly yielded four times more than taxes on corporations’ profits…

What The New York Times and Naked Capitalism have written is quite straight forward.  By contrast, the following is the tax discussion from the Operations section (p. 35-36) 2010 GE Annual Report:

INCOME TAXES have a significant effect on our net earnings.  As a global commercial enterprise, our tax rates are affected by many factors, including our global mix of earnings, the extent to which those global earnings are indefinitely reinvested outside the United States, legislation, acquisitions, dispositions and tax characteristics of our income. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions.

 

GE and GECS file a consolidated U.S. federal income tax return.  This enables GE to use GECS tax deductions and credits to reduce  the tax that otherwise would have been payable by GE.

 

Our consolidated income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures, and our 2009 and 2008 decisions to indefinitely reinvest prior-year earnings outside the U.S.  There is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate.  These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GE funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes.

 

Income taxes (benefit) on consolidated earnings from continuing operations were 7.4% in 2010 compared with (11.5)% in 2009 and 5.6% in 2008. We expect our consolidated effective tax rate to increase in 2011 in part because we expect a high effective tax rate on the pre-tax gain on the NBCU transaction with Comcast (more than $3 billion) discussed in Note 2.

 

We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue, subject to changes of U.S. or foreign law, including, as discussed in Note 14, the possible expiration of the U.S. tax law provision deferring tax on active financial services income. In addition, since this benefit depends on management’s intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer indefinitely reinvest foreign earnings.

 

Our benefits from lower-taxed global operations declined to $2.8 billion in 2010 from $4.0 billion in 2009 principally because of lower earnings in our operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate, and from losses for which there was not a full tax benefit. These decreases also reflected management’s decision in 2009 to indefinitely reinvest prior year earnings outside the U.S. The benefit from lower-taxed global operations increased in 2010 by $0.4 billion due to audit resolutions.  To the extent global interest rates and non-U.S. operating income increase we would expect tax benefits to increase, subject to management’s intention to indefinitely reinvest those earnings.

 

Our benefits from lower-taxed global operations included the effect of the lower foreign tax rate on our indefinitely reinvested non-U.S. earnings which provided a tax benefit of $2.0 billion in 2010 and $3.0 billion in 2009.  The tax benefit from non-U.S. income taxed at a local country rather than the U.S. statutory tax rate is reported in the effective tax rate reconciliation in the line “Tax on global earnings including exports.”

 

Our benefits from lower-taxed global operations declined to $4.0 billion in 2009 from $5.1 billion in 2008 (including in each year a benefit from the decision to indefinitely reinvest prior year earnings outside the U.S.) principally because of lower earnings in

our operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate.  These decreases were partially offset by management’s decision in 2009 to indefinitely reinvest prior-year earnings outside the U.S. that was larger than the 2008 decision to indefinitely reinvest prior-year earnings outside the U.S.

 

Our consolidated income tax rate increased from 2009 to 2010 primarily because of an increase during 2010 of income in higher taxed jurisdictions. This decreased the relative effect of our tax benefits from lower-taxed global operations. In addition, the consolidated income tax rate increased from 2009 to 2010 due to the decrease, discussed above, in the benefit from lower-taxed global operations. These effects were partially offset by an increase in the benefit from audit resolutions, primarily a decrease in the balance of our unrecognized tax benefits from the completion of our 2003–2005 audit with the IRS.

 

Cash income taxes paid in 2010 were $2.7 billion, reflecting the effects of changes to temporary differences between the carrying amount of assets and liabilities and their tax bases.

 

Our consolidated income tax rate decreased from 2008 to 2009 primarily because of a reduction during 2009 of income in higher-taxed jurisdictions. This increased the relative effect of our tax benefits from lower-taxed global operations, including the decision, discussed below, to indefinitely reinvest prior-year earnings outside the U.S.

 

These effects were partially offset by a decrease from 2008 to 2009 in the benefit from lower-taxed earnings from global operations.  A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other information about our income tax provisions, is provided in Note 14.  The nature of business activities and associated income taxes differ for GE and for GECS and a separate analysis of each is presented in the paragraphs that follow.

 

Because GE tax expense does not include taxes on GECS earnings, the GE effective tax rate is best analyzed in relation to GE earnings excluding GECS.  GE pre-tax earnings from continuing operations, excluding GECS earnings from continuing operations, were $12.0 billion, $12.6 billion and $14.2 billion for 2010, 2009 and 2008, respectively.  On this basis, GE’s effective tax rate was 16.8% in 2010, 21.8% in 2009 and 24.2% in 2008.

 

Resolution of audit matters reduced the GE effective tax rate throughout this period.  The effects of such resolutions are included in the following captions in Note 14.

 

GE operations table 

The GE effective tax rate decreased from 2009 to 2010 primarily because of the 4.0 percentage point increase in the benefit from audit resolutions shown above.

 

The GE effective tax rate decreased from 2008 to 2009 primarily because of the 3.6 percentage point increase in the benefit from lower-taxed earnings from global operations, excluding audit resolutions. The 2008 GE rate reflects the benefit of lower taxed earnings from global operations.

 

The GECS effective income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures. There is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GECS funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes.

 

We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue subject to changes of U.S. or foreign law, including, as discussed in Note 14, the possible expiration of the U.S. tax law provision deferring tax on active financial services income. In addition, since this benefit depends on management’s intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer indefinitely reinvest foreign earnings.

 

As noted above, GE and GECS file a consolidated U.S. federal income tax return. This enables GE to use GECS tax deductions and credits to reduce the tax that otherwise would have been payable by GE. The GECS effective tax rate for each period reflects the benefit of these tax reductions in the consolidated return.

 

GE makes cash payments to GECS for these tax reductions at the time GE’s tax payments are due. The effect of GECS on the amount of the consolidated tax liability from the formation of the NBCU joint venture will be settled in cash when it otherwise would have reduced the liability of the group absent the tax on joint venture formation.

 

The GECS effective tax rate was (44.8)% in 2010, compared with 152.0% in 2009 and (41.4)% in 2008.  Comparing a tax benefit to pre-tax income resulted in a negative tax rate in 2010 and 2008.

 

Comparing a tax benefit to pre-tax loss results in the positive tax rate in 2009. The GECS tax benefit of $3.9 billion in 2009 decreased by $2.9 billion to $1.0 billion in 2010.  The lower 2010 tax benefit resulted in large part from the change from a pre-tax loss in 2009 to pre-tax income in 2010, which increased pre-tax income $4.7 billion and decreased the benefit ($1.7 billion), the non-repeat of the one-time benefit related to the 2009 decision (discussed below) to indefinitely reinvest undistributed prior year non-U.S. earnings ($0.7 billion), and a decrease in lower-taxed global operations in 2010 as compared to 2009 ($0.6 billion) caused in part by an increase in losses for which there was not a full tax benefit, including an increase in the valuation allowance associated with the deferred tax asset related to the 2008 loss on the sale of GE Money Japan ($0.2 billion). These lower benefits were partially offset by the benefit from resolution of the 2003–2005 IRS audit ($0.3 billion), which is reported in the caption “All other—net” in the effective tax rate reconciliation in Note 14.

 

The GECS tax benefit of $2.3 billion in 2008 increased by $1.6 billion to $3.9 billion in 2009.  The higher benefit resulted in large part from the change from pre-tax income in 2008 to a pre-tax loss in 2009, which decreased pre-tax income $8.2 billion and increased the benefit ($2.9 billion) and the one-time benefit related to the 2009 decision (discussed below) to indefinitely reinvest undistributed prior-year non-U.S. earnings that was larger than the 2008 decision to indefinitely reinvest prior-year non-U.S. earnings ($0.4 billion). These increases in benefits were significantly offset by a decrease in 2009 benefits from lower taxed global operations as compared to 2008 ($1.9 billion), substantially as a result of the impact in 2009 of lower interest rates and foreign exchange on the funding of our non-U.S. operations through companies that are subject to a low rate of tax.

 

During 2009, following the change in GECS external credit ratings, funding actions taken and our continued review of our operations, liquidity and funding, we determined that undistributed prior-year earnings of non-U.S. subsidiaries of GECS, on which we had previously provided deferred U.S. taxes, would be indefinitely reinvested outside the U.S.  This change increased the amount of prior-year earnings indefinitely reinvested outside the U.S. by approximately $2 billion, resulting in an income tax benefit of $0.7 billion in 2009.

 

The GECS 2008 rate reflects a reduction during 2008 of income in higher-taxed jurisdictions which increased the relative effect of tax benefits from lower-taxed global operations on the tax rate.

So now you have a description from the company of their tax payment situation.  Of course you can just go back and read what Naked Capitalism and The New York Times have to say.

Sources:  Naked Capitalism, GEV 2010 Annual Report and The New York Times









Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.















 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved