Why undergo the bad press and potential Congressional backlash of an inversion–not to mention the risk President Obama will call the deals ‘unpatriotic’–-if you already pay no tax? It would be like going out for a big meal right after Thanksgiving Dinner. It’s long been true that inversions are only one tax tool in the arsenal of big and sophisticated companies.
Remember the flap over Apple’s taxes? In May 2013, the Senate Permanent Subcommittee on Investigations released a report finding that Apple avoided $9 billion in U.S. taxes in 2012. For Apple, the key was offshore units with no tax home, so-called stateless income. CEO Tim Cook testified that Apple doesn’t use gimmicks, and that Apple and other companies in this high stakes game are doing nothing illegal.
Some companies say they would like nothing better than repatriating profits to the U.S. if they could only do it in a way that won’t be taxed. And the amounts at stake are staggering. Senators Levin and McCain claimed that Apple skirted U.S. taxes on $44 billion over four years. Apple isn’t the only one.
In September 2012, the Senate Permanent Investigations Subcommittee examined Microsoft and Hewlett-Packard tax avoidance strategies. Much of it is about off-shoring. But a new study says many big U.S. companies pay no taxes or have effective tax rates of 0%.
There are 20 such companies in the Standard & Poor’s 500, including drugmaker Merck (MRK), computer storage company Seagate (STX) and automaker General Motors (GM). They reported effective tax rates of 0% or lower in the second calendar quarter despite reporting a profit for that same period.
So says a USA Today analysis of data from S&P Capital IQ. To be included, the companies also needed to report positive earnings before taxes including unusual items. So do you need to go offshore to pay 12%? Nope, not if you can pay zero at home. Reform the U.S. tax rate to make it competitive? Do they want less than zero, maybe a refundable credit?
A 2013 report from the U.S. Government Accountability Office found that profitable U.S. firms filing a Schedule M-3 paid federal taxes of 13% of pretax worldwide income. That’s well below the top 35% statutory rate. But some profitable companies pay even less.
Take Merck, which had a negative effective tax rate during the second quarter of 7.5%, It got money back despite the fact that its income before taxes soared 52% to $1.9 billion during the quarter. Merck earns profits in countries with lower tax rates. In its regulatory filing, Merck pointed to the “beneficial impact of foreign earnings” as part of the reason for the low effective tax rate.
Perhaps more importantly, Merck got a tax benefit in the quarter from an option exercise connected with rival AstraZeneca buying Merck’s interest in a partnership. Financial moves connected to the deal resulted in Merck getting a one-time tax benefit. Last year, Merck’s effective tax rate was 18%.
Seagate’s fiscal year ended June 27, and the company had an income tax benefit of $14 million. That was double Seagate’s $7 million income tax benefit for fiscal 2013. During fiscal 2014, Seagate got a big tax benefit from “the reversal of a portion of the valuation allowances recorded in prior periods.”
But Seagate also points out it gets a boost from the fact its parent holding company is based in low-tax country Ireland. Seagate paid this low tax rate despite reporting income before taxes of $1.6 billion during the quarter. In a familiar refrain, these companies say they’re following appropriate tax rules.
For example, several on this list are real-estate investment trusts, also called REITs. They include Public Storage (PSA) and Kimco Realty (KIM). REITs have become very popular, and it’s likely they will be expanded even further. They are required to pay out nearly all of their profits to investors. That keeps taxes low at the corporate level.
From S&P Capital IQ & USA Today research, here are 20 companies in the S&P 500 reporting 0% (or lower) effective tax rates during the second calendar quarter of 2014:
Company Symbol Net income Q2 2013 ($ mils)
- Merck MRK $2,004
- Seagate Tech. STX $320
- Thermo Fisher TMO $278.5
- General Motors GM $278
- Public Storage PSA $276.8
- Iron Mountain IRM $271.6
- Newmont Mining NEM $180
- Eaton ETN $171
- Avalonbay AVB $158.1
- Kimco Realty KIM $89.5
- Prologis PLD $81.2
- Boston Properties BXP $79.1
- Apartment Investment AIV $77
- Plum Creek Timber PCL $55
- Citrix Systems CTXS $53
- Crown Castle CTXS $53
- Macerich MAC $16.1
- News Corp. NWSA $13
- Essex Prop. MRK $6.3
- First Solar FSLR $4.5
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
via The Tax Lawyer http://ift.tt/1qbsxMX