Friday, July 15, 2011

How Multinational Corporations Convert U.S. Earnings to "Foreign" as They Lobby For a Tax Holiday Repatriation (CSCO; GE; GOOG)

A major piece of reporting from Bloomberg:
Biggest Tax Avoiders Win Most Gaming $1 Trillion U.S. Tax Break
Cisco Systems Inc. (CSCO) has cut its income taxes by $7 billion since 2005 by booking roughly half its worldwide profits at a subsidiary at the foot of the Swiss Alps that employs about 100 people.

Now Cisco, the largest maker of networking equipment, wants to save even more -- by asking Congress to waive most federal taxes due when multinationals bring such offshore earnings home. Chief Executive Officer John T. Chambers has led the charge for the tax holiday, which would be the second since 2004. He says it would encourage companies to “repatriate” as much as $1 trillion held abroad, spur domestic investment and create jobs.

Cisco’s techniques cut the effective tax rate on its reported international income to about 5 percent since 2008 by moving profits from roughly $20 billion in annual global sales through the Netherlands, Switzerland and Bermuda, according to its records in four countries. The maneuvers, permitted by tax law, show how companies that use such strategies most aggressively would get the biggest benefit from the holiday, said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles.

“Why should we reward firms for successfully gaming the tax system when we in turn are called on to make up the missing tax revenues?” said Kleinbard, a former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP. “Much of these earnings overseas are reaped from an enormous shell game: Firms move their taxable income from the U.S. and other major economies -- where their customers and key employees are in reality located -- to tax havens.”

Complying With Laws
“Cisco complies with all global tax laws,” said John Earnhardt, a spokesman for the San Jose, California-based company, which makes switches, routers and other products, in an e-mailed statement. “In the past three years alone, Cisco (which has over 35,000 U.S. employees) has paid approximately $4.4 billion in U.S. federal corporate income taxes.” The company reported an effective tax rate last year of 17.5 percent, half the U.S. statutory rate.

Companies including Google Inc. (GOOG), Apple Inc. (AAPL) and Pfizer Inc. (PFE) are also pushing the proposed tax holiday, which would allow profits to return to the U.S. at a discounted 5.25 percent rate. Under current law, American companies can defer federal income taxes on most overseas earnings indefinitely. When they do return to the U.S., they’re taxed at the corporate rate of 35 percent -- with credits for foreign income taxes paid. Thus, companies paying little overseas face higher U.S. tax bills upon repatriation, and would get more benefit from the discount.

Competitors’ Rates
“Cisco would like to bring its after-tax foreign earnings back to spend in the U.S., but cannot with the U.S. corporate tax rate at 35 percent,” Earnhardt said. “Our foreign competitors are allowed to repatriate foreign earnings at rates of 0 to 2 percent.” The tax-holiday push comes as the company faces shareholder pressure to add to its cash outlays by paying higher dividends to boost its stock price. It closed at $15.05 yesterday, down 25.6 percent this year.

One way multinationals avoid taxes is through “transfer pricing,” transactions among subsidiaries that allow for allocating expenses to high-tax countries and profits to tax havens.

As governments worldwide grapple with budget deficits -- $1.4 trillion projected for the U.S. and 597 billion euros for the European Union -- such income-shifting by multinationals cost the U.S. Treasury about $90 billion in revenue in 2008 alone, according to a March article by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

Cisco transfers a portion of the patent rights to technology developed in the U.S. to a Dutch unit, which sells some of the resulting products back to its parent for eventual distribution in the U.S., according to annual reports filed by the Amsterdam subsidiary. That means Cisco credits about $5 billion in U.S. sales annually to the Netherlands....MUCH MORE 
General Electric's Immelt Calls for Tax Holiday on Overseas Funds, Hows About we Just let Them Leave the Money in China? (GE)

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