Bloomberg News

Companies Invest ‘Trapped’ Untaxed Foreign Profits in U.S.

December 20, 2011

(Updates with comment from Johnson & Johnson spokesman in 11th paragraph.)

Dec. 15 (Bloomberg) -- Twenty-seven U.S. companies that report holding $538 billion in untaxed profits outside the country have invested 46 percent of that total in U.S. banks or assets, according to a report by Senator Carl Levin.

Levin, a Michigan Democrat who opposes a tax break on repatriating offshore profits, released the report yesterday to counter companies’ claims that their earnings are “trapped” outside the country by the tax system, he said.

The companies surveyed, including Google Inc., Microsoft Corp. and Cisco Systems Inc., have been lobbying Congress for a reduced tax rate on bringing back profits to the U.S., and they maintain that such a tax holiday would spur economic growth.

“They want to avoid paying taxes,” Levin told reporters in Washington. “It’s just pretty obvious what they want to do.”

Levin’s staff compiled the report based on surveys they sent to the companies earlier this year. The companies gave Levin data that they don’t publicly disclose in securities filings about how they invest their overseas assets.

Under U.S. law, multinational companies with operations overseas don’t have to pay U.S. corporate income taxes of as much as 35 percent on that income until they bring the money home. They can receive credits for taxes paid to other governments.

U.S. Tax Rules

The tax code lets companies invest those tax-deferred earnings -- estimated at more than $1 trillion for all of the companies -- in U.S. assets such as Treasury bonds, bank accounts and stocks of other companies. Levin has previously proposed preventing companies from investing offshore funds in the U.S. without paying the residual tax.

Levin’s report found that nine of the companies in the study, including Qualcomm Inc., Johnson & Johnson and EMC Corp., have more than 75 percent of their untaxed overseas earnings in U.S. assets. The report doesn’t include data for each company.

“Almost half of the so-called offshore funds were really onshore,” Levin said.

According to the report, companies said in the surveys that they invest in U.S. assets because of the dollar’s stability, potential accounting issues related to currency fluctuations and suppliers’ requests to be paid in U.S. dollars.

Safety and Liquidity

“We follow the strategy of investing in U.S. securities with our overseas cash because we want to maximize the safety and liquidity of our investments,” said Al Wasilewski, a spokesman for New Brunswick, New Jersey-based Johnson & Johnson. The maker of Listerine and Tylenol had $37 billion permanently invested outside the U.S. as of Jan. 2, 2011, according to its financial statement.

Levin said the companies are taking advantage of the U.S. financial system without contributing enough to it.

The report didn’t include General Electric Co., which leads U.S.-based companies with $94 billion in profits outside the country. It also didn’t include banks such as Bank of America Corp. with accumulated foreign profits.

Many companies report total untaxed overseas earnings in their annual reports. The totals include items other than cash, such as the value of factories and other permanent investments that companies have made outside the U.S. Levin’s report didn’t break out the portion of earnings that are liquid assets.

Earnings ‘Trapped’ Abroad

U.S. Representative Kevin Brady, who has sponsored legislation that would establish a temporary 5.25 percent tax rate for repatriated profits, said in a statement today that the report missed the point of the potential economic benefits of the repatriation proposal.

“The bottom line is that these earnings are trapped in the foreign subsidiaries of American international companies and effectively blocked from being invested in America’s struggling economy,” said Brady, a Texas Republican. “It makes no sense, especially with 25 million American workers who can’t find a full-time job.”

Brady’s proposal hasn’t advanced in Congress this year.

Opponents of a repatriation tax holiday contend that the tax break -- estimated by the nonpartisan Joint Committee on Taxation to cost the government $78.7 billion over 10 years -- would benefit shareholders and executives and do little to help the broader economy.

Those lobbying for the tax break say the companies should be given more freedom to decide how to deploy their profits.

“Even these U.S. deposits will eventually be spent overseas without a change in our tax laws,” said a statement released yesterday by the WIN America Campaign, the lobbying coalition created by Cisco, Qualcomm and more than a dozen other companies. “Senator Levin’s one-sided, partisan report does nothing but attempt to score rhetorical points while U.S. profits continue to be invested around the world instead of here at home due to a seriously flawed tax code.”

--Editors: Jodi Schneider, Leslie Hoffecker

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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