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Posted by on Sep 22, 2011 in Economy, Politics | 7 comments

The Zero Cost Job Stimulus the White House Should Be Pursuing and The Reason Why General Electric Pays No U.S. Corporate Income Taxes (Guest Voice)

The Zero Cost Job Stimulus the White House Should Be Pursuing
The Reason Why General Electric Pays No U.S. Corporate Income Taxes
by Johnny Byrd

How many times in the past year have you heard someone in the political sphere make reference to the fact that General Electric pays no U.S. income taxes as proof that the U.S. corporate tax system is broken? Plenty. I’ve heard it until I am sick of hearing it, so sick that recently I decided to get to the bottom this ubiquitous assertion, mostly made by people from the left side of the aisle.

So, I decided to read GE’s 2010 10-K which reports the global financial results and position of the company for last year. I didn’t have to use the SEC website or even Google, as the 10-K was easily accessible from GE’s website. It took me all of 5 minutes to figure out why they are paying no U.S. income taxes. There is no “deep pocket” corporate tax planning going on where the most money buys you the best tax lawyers and CPA’s, no corporate shell game or complicated structure of legal entities, and no risky reportable transactions with massive uncertain tax positions that could blow up in the company’s face triggering a massive tax bill in the future.

No, the reason GE isn’t paying any U.S. income taxes to speak of is simple. At first glance the culprit might appear to be losses atrtributable to GE’s financial services arm, but GE paid $2.7 billion in income taxes for the year 2010, it just wasn’t to the United States—most of it went to foreign countries. And it is in the realm of foreign taxes where the true answers lie.

GE has accumulated $94 billion in earnings made outside the U.S., already taxed outside the U.S., and as long as they take the position that it is permanently reinvested abroad, they don’t have to repatriate these earnings to the U.S. and subject them to tax here. Heck, even if they did, they would probably be able to repatriate most of that $94 billion and use foreign tax credits to substantially offset most U.S. taxes that would be incurred as a result of repatriation.

That’s it. Nothing sinister is afoot at GE in the tax department, just following the rules agreed to long ago between the U.S. government and other foreign countries. Long ago GE and many other companies like it began setting up shop in foreign countries because it expanded their global offering for products, gave them access to lower cost job and infrastructure markets where income taxes were lower, and they can pretty much repatriate earnings back to the U.S. on their own terms.

As a result, foreign countries like India, where there are more English speaking people than in the U.S., have built massive economies at the expense of the U.S. economy. Call your computer manufacturer for customer support and you’ll likely get some guy named “Frank” with a thick accent because he lives in another country telling you, “I am very knowledgeable about your computer.”

Times are changing some things though and not for the better. India, for example, thinks they have the multi-national companies by the throat, that they are “pot committed” to doing business there now, so India is hiking its domestic taxes mostly through transfer pricing audits meant to force most multi-national enterprises into showing even more profit in India and less in the U.S. Other countries are sure to follow suit.

The sad part is, the U.S. government is letting them do it!

Back office functions like customer support and other “low-tech” functions are being performed in foreign subsidiary entities abroad who assume little if any business risks, yet reap 20% or more profits to these foreign subsidiaries, yielding substantial tax collections to other countries and less to good old Uncle Sam–if there is a 20% profit abroad, it has an offsetting 20% expense or loss on the U.S. side where intercompany transactions are concerned. Often these markup percentages get negotiated between what is called the Competent Authority for each nation—someone from the U.S. Treasury and that of the foreign government. Deals are made, and the U.S. economy gets screwed in the process via more job growth and higher tax revenues abroad, and less jobs and lower tax revenues here in the U.S.

It is past time for the U.S. government to do something about this—something positive for the U.S. economy, that is. Let’s go back to our GE example. Right now GE has $94 billion in profits parked overseas, and if the status quo is maintained the U.S. government won’t see a dime of tax revenue from it, probably ever, as GE has no compelling reason to repatriate the earnings back to the U.S.

Given that presupposition, it would cost the U.S. government nothing to allow GE and other companies like it to repatriate earnings back to the U.S. tax-free to the extent these earnings are used to create jobs and investment back here in the good old U.S. of A. These jobs would create consumer income, consumer demand for other products, and increased tax revenues at local, state, and federal government levels. We are talking about a huge boon for the U.S. economy, with effectively no cost to the federal budget. In fact, it would not only increase income, but lower expense as higher employment would mean less government payments to fund unemployment benefits.

You may say, “Wait a minute, isn’t it also much cheaper for companies like GE to do business abroad?” The costs of doing business abroad have been growing in many places at rates much higher than in the U.S. Often times companies are not allowed to own property in a country like India, so they have to pay rent a year or more in advance on deposit (another measure meant to keep businesses “on the hook”), with rental rates growing in some places at double digit annual increases. Foreign wages are also growing in many parts of the world much faster than in the U.S., so the cost differences are being substantially mitigated. Also, for most job skills with anything more technical than answering the phone, productivity is often higher when the work is performed in the U.S. by American workers than abroad by foreign English speaking people, further mitigating already shrinking cost differences between the U.S. and abroad.

A no-cost solution that grows jobs, increases tax collections, lowers unemployment and its costly benefits–why is this a solution no one is talking about? Don’t let anyone fool you into, “Well, it takes time to do something like that.” It took time for us to get where we are today—YEARS! Notice that any time budget cuts for the purpose of lowering the national debt are discussed, benefits are measured in billions of dollars over ten or more years. This is no different.

All we need are people in Washington shrewd enough to stand up to foreign governments, and savvy enough to partner with billion dollar corporations.

Johnny Byrd is a tax CPA with 15 years of experience specializing in corporate and individual income taxes, transfer pricing, foreign taxes, and estate planning. Byrd earned a B.S. in Business Administration and Masters in Taxation from the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. A resident of Franklin, TN, in addition to politics and writing, he enjoys golf, hunting, music, fantasy football, chess, and entertaining his five children and wife of 17 years, Gina.