Apple to IBM hoard $206b abroad to avoid US tax

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The largest US-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 US, up 11.8 per cent from a year earlier, according to securities filings from 307 companies reviewed by Bloomberg News. Three US-based companies — Microsoft, Apple and International Business Machines — added $37.5 billion, or 18.2 per cent 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 US 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 US Congress remains paralysed in its efforts. The response of the US-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 US companies operating abroad amid broader disputes over government spending and taxation. The stalemate has prevented the US 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.

Meanwhile, the companies are deferring hundreds of billions of dollars in US 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 US, up 10.6 per cent.

That increase was slower than the 15.9 per cent rise in stockpiled profits those same companies had the previous year. Pfizer reported a decrease in offshore profits this year, and General Electric and Citigroup each reported growth of less than 3 per cent. The Bloomberg analysis covered the two most recent annual filings from 307 companies in the S&P’s 500 index. It excludes purely domestic corporations, those that don’t disclose offshore holdings, companies with headquarters outside the US and real estate investment trusts that aren’t subject to corporate taxes.

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

US multinational companies reported earning 43 per cent 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 US that ranges from $30 billion to $90 billion. Lawmakers in the US, the UK, France and Italy have scrutinised companies such as Microsoft, Hewlett-Packard, Apple, Google and Amazon.com.

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 Organisation for Economic Cooperation and Development (OECD) and the Group of 20 nations are trying to negotiate a common set of rules to prevent such profit shifting.

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 US tax system, for which they offer sharply divergent solutions.

Companies including Coca-Cola and United Technologies, 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 UK 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 per cent compared with 35 per cent in the US — are increasingly attractive.

That combination of policies provides an incentive for formerly US-based companies such as Actavis, Endo International and Eaton to move their headquarters outside the country through mergers. This week, Chiquita Brands International, based in Charlotte, North Carolina, announced a merger with Fyffes 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, 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 US 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 US, said Representative Lloyd Doggett, a Texas Democrat.

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

For US 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 US companies, followed by Microsoft’s $76.4 billion, Pfizer’s $69 billion, Merck’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 US 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 US system.”

Executives at MasterCard have regular meetings about managing the company’s so-called trapped cash, Martina Hund-Mejean, CFO, 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 per cent of its revenue in the US in 2013. The company reported $3.5 billion in accumulated profits outside the country that haven’t been taxed by the US, up from $2.6 billion a year earlier.

The bulk of the offshore profits are held by a relatively small number of companies. The top 22 companies in the analysis have more accumulated earnings outside the US 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.”

US companies owe taxes up to a 35 per cent 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.

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