Taxes are a funny thing. Even as an accountant, once tax code issues come up, I have to suppress a strong instinct to zone out. It’s such a veritable maze, and one gets the feeling America wants it that way. After all, some years ago, Congress wanted to pass a bill to simplify the tax code so much that anyone can just fill out a piece of paper and, in less than 30 minutes, be done with their tax filing. Intuit, the company that sells TurboTax software killed that one dead. Don’t believe, just read.
Recently, Obama threw out a proposal out there: US companies can repatriate all the foreign earnings they parked tax free for a one time 14% tax charge, and then going forward, bring their foreign earnings back tax free if at least 19% tax was paid on it in the country it was earned. If the tax paid was less than that, the company pays the US the difference between whatever the rate paid and 19%. To give an example: McDonald’s made $100 in US, and $100 in their only other foreign location, London (pretend that’s true). They pay 35% on their US earnings, or $35 dollars. If they paid at least $19 on their London earnings, they get to bring the balance home tax free. If they paid only $5 then they have to pay an additional $14 to the US government and bring the cash home, by law. That’s the essential proposal. The idea is to bring that money home to stimulate domestic investment. And if that law is implemented, in a lot of ways, it’s better than the current scenario where to repatriate their foreign earnings, US companies face anywhere from 25-35% full tax. However, there is a catch. Forget the part where once that law passes, you are mandated to repatriate your earnings. At 19%, that is a net positive. The catch is the 14% tax charge on the money being brought in today. It sounds like a small amount but given that foreign earnings are a huge part of many American public companies showing an actual profit, not many of them would incur such huge expenses at a go. Let’s use on of the most well known for example: General Electric. Based on this article, GE has around $110 billion of its earnings outside the US as of middle of 2014. By all indications, that amount has increased slightly but let’s keep it at that figure. 14% of that is $15.4 billion. That’s a good $325 million more than their entire annual profit for 2014. If you were the company, or the shareholders, would you do that?
Here’s the thing, no CEO would ever look his staff in the face and tell them they’re going to take a loss on a profitable year to pay taxes in money they made in previous years outside the US, just for the inconvenience of being an American company. Not when he could easily sit down with a legal counsel, create a new company, say International Electric, headquartered in London or Singapore, divest all it’s foreign holdings to the new entity, and float 10% of the new entity’s shares in London Stock Exchange to separate it from the American GE, and then send the remaining 90% shares in the company to it’s existing shareholders. They wouldn’t have to pay the tax unless they sold the new shares and many of them wouldn’t. Just like that, GE is solely an American company and there’d be no foreign earnings to tax. I don’t understand how the politicians don’t see this. So I’m going to believe that they do. They just want to look like they’re doing something.
It’s a simple concept really, most countries believe that you pay taxes on earnings in the country where those earnings occur. Only the US taxes both your domestic earnings, and any money you earned in other countries simply because you’re an American company. It’s absurd.
And Obama is too smart to not know this isn’t going nowhere. He’s just playing the Washington game, as far as I can see.