Bloomberg News

Cash Abroad Rises $206 Billion as Apple to IBM Avoid Tax

March 12, 2014

Apple Inc.

Some of the first customers in line walk into the Apple store to purchase the new iPad Air, the fifth generation of its tablet, on Nov. 1, 2013 in New York City. Photographer: Spencer Platt/Getty Images

The largest U.S.-based companies added $206 billion to their stockpiles of offshore profits last year, parking earnings in low-tax countries until Congress gives them a reason not to.

The multinational companies have accumulated $1.95 trillion outside the U.S., up 11.8 percent from a year earlier, according to securities filings from 307 corporations reviewed by Bloomberg News. Three U.S.-based companies -- Microsoft Corp. (MSFT:US), Apple Inc. and International Business Machines Corp. -- added $37.5 billion, or 18.2 percent of the total increase.

“The loopholes in our tax code right now give such a big reward to companies that use gimmicks to make it look like they earn their profits offshore,” said Dan Smith, a tax and budget advocate at the U.S. Public Interest Research Group, which seeks to counteract corporate influence.

Even as governments around the world cut tax rates and try to keep corporations from shifting profits to tax havens, the U.S. Congress remains paralyzed in its efforts. The response of U.S.-based companies over the past few years has been consistent: book profits offshore and leave them there.

Congress hasn’t acted because of disagreements over whether to be tougher on U.S. companies operating abroad amid broader disputes over government spending and taxation. The stalemate has prevented the U.S. from tapping a pot of money that President Barack Obama and the top Republican tax writer in Congress have eyed for such projects as rebuilding highways.

Deferring Taxes

Meanwhile, the companies are deferring hundreds of billions of dollars in U.S. taxes as they lobby to end a system they describe as a competitive disadvantage in world markets. The top 15 companies now hold $795.2 billion outside the U.S., up 10.6 percent.

That increase was slower than the 15.9 percent rise in stockpiled profits those same companies had the previous year. Pfizer Inc. reported a decrease in offshore profits this year, and General Electric Co. and Citigroup Inc. each reported growth of less than 3 percent.

The Bloomberg analysis covers the two most recent annual filings from 307 companies in the Standard & Poor’s 500 Index. (SPX) It excludes purely domestic corporations, those that don’t disclose offshore holdings, companies with headquarters outside the U.S. and real estate investment trusts that aren’t subject to corporate taxes.

Low-Tax Locales

The increase in profits held outside the U.S. has been particularly large and steady at technology companies, many of which have moved patents and other intellectual property to low-tax locales.

U.S. multinational companies reported earning 43 percent of their 2008 overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland, more than five times the share of workers and investment they have in those jurisdictions, according to a 2013 Congressional Research Service report.

That report cites academic estimates of the annual revenue loss to the U.S. that ranges from $30 billion to $90 billion.

Lawmakers in the U.S., the U.K., France and Italy have scrutinized companies such as Microsoft, Hewlett-Packard Co., Apple, Google Inc. (GOOG:US) and Amazon.com Inc.

Those inquiries have revealed an Apple subsidiary that earned $30 billion over four years with no home for tax purposes and loans that let HP access its off-limits offshore cash. The Organization for Economic Cooperation and Development and the Group of 20 nations are trying to negotiate a common set of rules to prevent such profit shifting.

Microsoft, Apple

In three years, Microsoft’s profits held offshore have more than doubled and Apple’s have more than quadrupled. Google’s cache has more than doubled in the past three years, to $38.9 billion from $17.5 billion.

The companies and their critics say the growing stockpiles are symbols of a broken U.S. tax system, for which they offer sharply divergent solutions.

Companies including Coca-Cola Co. (KO:US) and United Technologies Corp., working through groups such as the Business Roundtable and the Lift America coalition, advocate adopting a system that would impose lighter taxes on foreign profits.

The U.K. and Japan are reducing their corporate tax rates and making it easier for companies based there to bring money home. Countries such as Ireland -- with a corporate rate of 12.5 percent compared with 35 percent in the U.S. -- are increasingly attractive.

Relocating Headquarters

That combination of policies provides an incentive for formerly U.S.-based companies such as Actavis Plc (ACT:US), Endo International Plc (ENDP:US) and Eaton Plc to move their headquarters outside the country through mergers. This week, Chiquita Brands International Inc., based in Charlotte, North Carolina, announced a merger with Fyffes Plc (FFY) that would locate the world’s largest banana company in Ireland.

In his final message after more than eight years as chief executive officer of Qualcomm Inc. (QCOM:US), Paul Jacobs on March 4 gave shareholders what he called a “homework assignment.”

“Send your Congress people your opinion that you’d like American companies to be able to bring offshore money back to the United States to either reinvest” or return to shareholders, said Jacobs, now executive chairman of the San Diego-based chipmaker, which has $21.6 billion in overseas profits.

Congress should impose rules to make it tougher for companies to shift earnings and intellectual property out of the U.S., said Representative Lloyd Doggett, a Texas Democrat.

‘Choose Between’

“If you can choose between San Antonio and Shanghai, and you pay no taxes one place and 25 to 35 percent at home, you’re encouraged to move jobs overseas,” he said in an interview.

For U.S. corporations, the untaxed cash keeps building up and few are choosing to bring it home, instead preferring to borrow for any domestic cash needs.

GE’s $110 billion leads U.S. companies, followed by Microsoft’s $76.4 billion, Pfizer’s $69 billion, Merck & Co.’s $57.1 billion and Apple’s $54.4 billion.

“Until they change the tax law, there’s not much other than extreme distress in the United States that would precipitate a repatriation,” said Jennifer Blouin, an accounting professor at the University of Pennsylvania’s Wharton School who has studied companies’ decisions about overseas profits. “I’m stumped as to why we can’t change the U.S. system.”

MasterCard’s Case

Executives at MasterCard Inc. (MA:US) have regular meetings about managing the company’s so-called trapped cash, Martina Hund-Mejean, the chief financial officer, said at a tax conference in Washington last month.

MasterCard, based in Purchase, New York, processes transactions from more than 210 countries and territories and earned 39 percent of its revenue in the U.S. in 2013. The company reported $3.5 billion in accumulated profits outside the country that haven’t been taxed by the U.S., up from $2.6 billion a year earlier.

The company said it may have foreign tax credits available to reduce any U.S. income tax liability if it repatriated profits.

When MasterCard considers investment opportunities around the world, Hund-Mejean said, it stress-tests those with a worst-case scenario under which tax would be paid on repatriated foreign profits.

“That’s a huge disadvantage being a U.S.-based company,” she said, adding that companies based in other countries don’t have the same challenge. “That is a direct competition and it’s a direct cost to us.”

22 Companies

The bulk of the offshore profits are held by a relatively small number of companies. The top 22 corporations in the analysis have more accumulated earnings outside the U.S. than the other 285 combined.

James Sciales, a spokesman for IBM, didn’t respond to requests for comment.

Apple pointed to May 2013 congressional testimony submitted by CEO Tim Cook, who said the company doesn’t use “tax gimmicks” and supports comprehensive tax code changes that might raise the company’s taxes.

Microsoft’s Bill Sample, corporate vice president for worldwide tax, said in September 2012 congressional testimony that the company complies with tax laws. He said the company’s “tax results follow from its business, which is fundamentally a global business that requires us to operate in foreign markets in order to compete and grow.”

To prevent double-counting, the Bloomberg analysis adjusted the end-of-2012 figure for Abbott Laboratories (ABT:US) to subtract $19.4 billion that went to AbbVie Inc. when the companies split.

Tax Credits

U.S. companies owe taxes up to a 35 percent rate on profits they earn around the world. They pay taxes in foreign countries and receive credits they can use to offset their payments to the Internal Revenue Service.

The U.S.-based companies don’t have to pay taxes on foreign income from active businesses until they bring the money home, which creates the incentive to reduce foreign taxes and leave profits offshore.

Under U.S. accounting rules, companies don’t have to assume they will pay federal taxes on profits they have deemed indefinitely reinvested outside the U.S. They must disclose the total profits they haven’t taken into account for taxes.

Little Paid

Some companies disclose what they’d owe if they had to bring all the money home, providing insight into how little they’ve paid in foreign taxes. Microsoft, for example, would owe $24.4 billion if it brought its offshore profits home. That’s a 31.9 percent tax rate, suggesting that Microsoft has paid as little as 3.1 percent in foreign taxes.

Reinvested profits aren’t equal to offshore cash, because some companies have accounted for taxes on part of their offshore profits even if they haven’t actually paid yet.

Other companies, notably Corning Inc. and 3M Co., have invested in active businesses and hard assets such as factories. They’ve been lobbying Congress to consider proposals that don’t assume all the money could be brought home.

A significant share of the money is offshore only for tax purposes and is held in segregated U.S. bank accounts. A 2011 report from Democratic Senator Carl Levin of Michigan found that a sample of 27 companies were holding 46 percent of their offshore profits in U.S. banks or assets.

Few Repatriating

Only a few companies are repatriating money and absorbing the resulting taxes, in part because most large companies prefer to borrow at low interest rates rather than incur a much higher tax cost.

VeriSign Inc., which operates Internet infrastructure, is planning to bring home between $700 million and $800 million in 2014. The company will offset the tax cost by pairing it with benefits from another deduction, George Kilguss, the chief financial officer, told analysts Feb. 6.

Obama, House Ways and Means Committee Chairman Dave Camp and Senate Finance Chairman Ron Wyden all support lowering the corporate rate and making significant changes to the taxation of foreign income.

Camp, a Michigan Republican, released a draft plan Feb. 26 to lower the corporate tax rate to 25 percent. He would exempt most foreign income from U.S. taxes and make it harder to shift profits to low-tax countries.

Highway Fund

His plan would impose a one-time tax on the accumulated profits -- 8.75 percent for cash and equivalents and 3.5 percent for everything else. The money would be used to pay for permanent changes to the international tax system and would flow into the Highway Trust Fund.

Obama’s budget calls for $276 billion in additional revenue from U.S. multinationals over the next decade. Obama wants a corporate tax rate of 28 percent and a global minimum tax. One-time revenue from tax changes would cover one-time spending on infrastructure.

“In some ways you can say there’s convergence,” Ray Beeman, a senior aide to Camp, said March 7 on a KPMG LLP webcast. “In other ways, there is still a fundamental difference.”

None of the plans has received a vote in a congressional committee.

Democrats say plans like Camp’s could encourage U.S. companies to locate even more operations outside the country. Doggett says he worries that the prospect of a quick infusion of cash for highways could push Congress to offer a low tax rate for companies after the 2014 election.

Doggett’s argument hasn’t won the day. Neither have pleas from groups such as the U.S. Chamber of Commerce to ease the tax burden on U.S. corporations competing in foreign markets.

“It’s just not very politically appealing,” Blouin said, “to give corporations more.”

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

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net Laurie Asseo


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