For all the outcry over GE, a number of corporate titans are paying much higher rates than the average citizen.
As many Americans finish up their personal tax returns over the next few days, they'll marvel with horror at how much hard-earned cash gets siphoned up by the government. At times like this, it's satisfying to have a corporate bogeyman to hate -- like General Electric, which has faced a withering hail of criticism since the New York Times proclaimed last month that the conglomerate paid no federal taxes in 2010, despite $5 billion in U.S. profits. There goes corporate America again, always sticking it to the little guy.
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But is there any real reason to believe that? Sure, GE has an army of accountants and lobbyists trying to reduce its tax burden, but wouldn't you if you had $150 billion in worldwide revenue and $14.2 billion in pretax income last year?
To see if GE was an aberration, we took a look at the 2010 annual reports of the 20 most profitable U.S. companies. Some of the results may surprise you. The average income tax rate within the group was 25.4%. America's three biggest oil companies, ExxonMobil (NYSE: XOM - News), Chevron (NYSE: CVX - News) and ConocoPhillips (NYSE: COP - News), all endure income tax burdens of more than 40% -- higher than the statutory U.S. rate of 35%. Exxon, with a 45% rate, tallied $21.6 billion in worldwide income taxes for 2010. Wal-Mart Stores (NYSE: WMT - News) paid $7.1 billion (at a rate of 32.4%) in income taxes.
All these tax burdens are higher than the average citizen pays. So where does General Electric (NYSE: GE - News) stand? Contrary to what many in the public seem to think, the conglomerate did pay taxes in 2010. It reported $2.7 billion in cash tax payments during the year, and on its income statement lists a provision for income taxes of $1.05 billion. Considering GE's pretax income of $14.2 billion, that makes for a tax rate of just 7.4%. The only one of the 20 corporate giants with a lower rate was AT&T (NYSE: T - News), at -6.4% -- but that was only because MaBell won a tax settlement with the IRS that reduced its tax liability by $8.3 billion.
So how to make sense of GE's taxes? The outcry seems to focus on the $5 billion in profits GE made in the U.S. Now if GE were to pay the 35% statutory federal corporate tax rate on that, it would come to $1.75 billion. Yet, as the Times trumpeted, GE has recorded a $3.25 billion tax benefit for the year on its U.S. operations. It's important to understand that this "benefit" is not a refund (which is why the Associated Press should be doubly embarrassed for being fooled Wednesday by a bogus GE press release concocted by the Yes Men that said the conglomerate intended to return its $3.2 billion tax "refund" to the U.S. Treasury). It just represents an amount GE will balance out against other tax obligations.
But why does GE get this benefit? Simple: its finance arm, GE Capital, lost a lot of money during the financial meltdown (roughly $30 billion) and it's still carrying those losses forward and deducting them from current income. As GE spokesman Gary Sheffer wrote in his response to the Times story: "Without these financial crisis losses at GE Capital, GE's tax rate would have been near the average of other multinational corporations." He added, "In short, when you lose money, you don't pay taxes."
If GE's industrial side (maker of jet engines, light bulbs, turbines and such) were a standalone entity, its global tax rate would be 16.8%. It's only after consolidating its results with the GE Capital side that its rate drops down to 7.4%.
A lot of other mega-corporations suffered losses during the financial meltdown as well, but their tax rates aren't as low as GE's. So what's GE doing that they aren't? Yes, GE's lobbyists have helped get laws passed like those that grant federal tax credits for green energy investments like wind turbines. GE both builds such turbines and invests in wind farms and gets millions in such credits.
But the real tax benefits are gleaned overseas. The U.S. has higher corporate tax rates than nearly all the world's biggest economies, so it's only natural that GE would seek to generate as much of its profits overseas as possible. As long as those profits aren't repatriated to the U.S., GE doesn't owe U.S. tax rates on them.
GE's surely not the only company taking advantage of overseas tax shelters. Google (Nasdaq: GOOG - News) reportedly uses colorful-sounding strategies like "Double Irish" and "Dutch Sandwich" to send revenues through low-tax countries like Ireland and Holland, giving it a 20% tax rate for 2010. Hewlett-Packard (NYSE: HPQ - News) says that it saves $1 billion a year in taxes by operating in some countries where it's "wholly exempt from taxes," resulting in a 21% rate. Apple's (Nasdaq: AAPL - News) overseas cash hoard leapt from $17.4 billion in 2009 to $30.8 billion in 2010, in part because its intellectual property is owned by foreign subsidiaries.
GE reports that its overseas profit pile has grown to $94 billion. That cash is put to work, often lent to customers of GE's big ticket items. GE explains in its annual report some of these "intercompany transactions." GE makes aircraft engines for the likes of Boeing (NYSE: BA - News), then GE Capital buys the planes and leases them out. Likewise, GE Capital will buy buildings and cars and lease them to GE And GE will sell GE Capital its receivables. Last year GE Capital acquired $7.7 billion of property and equipment, primarily commercial aircraft. All told, the division holds 1,800 aircraft worth $35 billion in 75 countries.
Overseas profits stay overseas, beyond the arm of Uncle Sam. But when losses happen, like in the credit crunch, they can be netted against U.S. profits. Just another balancing act in the global marketplace.
If you want to blame someone for shipping jobs and capital overseas, blame Congress. There would be no reason for GE or any company to engage in accounting contortions if Congress just reduced corporate taxes to be competitive with the rest of the world--say 25%.
And if you're still determined to hate GE for its tax "avoision" consider this: None of its executives are jumping for joy over the value of their stock-based compensation. An investment of $100 in GE five years ago would be worth just $58 today. The same money in the S&P 500 would be worth $101.
With that kind of sad-sack performance, maybe it's time for Jeff Immelt to start emulating the head of an even more diverse conglomerate: Berkshire Hathaway (NYSE: BRK - News) chairman Warren Buffett. The Oracle of Omaha has for years pushed for higher taxes for the rich, lamenting that his tax rate is lower than his secretary's. Berkshire paid some $5.6 billion in income taxes last year, at a 29% rate. That same $100 in Berkshire would now be up to $140.
What the Top U.S. Companies Pay in Taxes
©J. Scott Applewhite/AP
Pretax income: $52 billion
Provision for income taxes (worldwide): $21.6 billion
Net income: $30.5 billion
Income tax rate: 45%
Exxon estimates its total worldwide tax bill for 2010 at $89 billion, including the provision for income taxes noted above. Most of that $89 billion total is sales and excise taxes. Of $10 billion in total taxes paid in the U.S., $3 billion is income tax.
©F. Carter Smith/Bloomberg via Getty Images
Pretax income: $19.8 billion
Provision for income taxes: $8.3 billion
Net income: $11.4 billion
Tax rate: 42%
Of the world's biggest companies, Big Oil pays the highest tax rates. Plus they get hit for a plethora of non-income taxes (think excise tax and value-added tax). Conoco's "other taxes" hit $16.8 billion last year.
Pretax income: $32 billion
Provision for income taxes: $12.9 billion
Net income: $19.1 billion
Tax rate: 40%
Chevron's "other" taxes totaled $18.2 billion in 2010. Would it be fair for politicians to add a "windfall profits" tax on top of that?
Pretax income: $12.9 billion
Provision for income taxes: $4.5 billion
Net income: $7.7 billion
Tax rate: 35.2%
Goldman's high 2010 tax rate is due to one-time hits like its $550 million SEC settlement and $465 million in U.K. payroll tax. Excluding those, the rate would be 32.7%.
©Noah Berger/Bloomberg via Getty Images
Pretax income: $19 billion
Provision for income taxes: $6.3 billion
Net income: $12.4 billion
Tax rate: 33.9%
The bank's tax rate jumped from 30.3% in 2009. The increase was primarily caused by the accounting effect of new health care legislation.
Pretax income: $22 billion
Provision for income taxes: $7.1 billion
Net income: $14.3 billion
Tax rate: 32.4%
Sales budged less than 1% for the discount giant, but net income climbed 6.7%, helped by a slightly lower tax rate.
JP Morgan Chase
Pretax income: $24.9 billion
Provision for income taxes: $7.5 billion
Net income: $17.4 billion
Tax rate: 30.1%
America's most profitable bank (by a long shot) has roared out of the recession with net income up 48% in a year. JPMorgan's provision for income taxes jumped 70% to $7.5 billion. Considering that the bank reported paying cash taxes of $9.75 billion during the year, it looks like a refund might be in order.
©Pankaj Nangia/Bloomberg via Getty Images
Pretax income: $19 billion
Provision for income taxes: $5.6 billion
Net income: $13 billion
Tax rate: 29%
Warren Buffett's empire filed 14,097 pages of tax returns last year. The Oracle of Omaha has for years pushed for higher taxes on the rich, lamenting that his tax rate is lower than his secretary's.
©Jacob Kepler/Bloomberg via Getty Images
Pretax income: $16 billion
Provision for income taxes: $4.6 billion
Net income: $11.5 billion
Tax rate: 28.6%
Intel's 2010 tax provision was more than three times 2009's $1.3 billion. But that's OK -- earnings tripled as well. Intel has $12 billion in earnings parked overseas.
Procter & Gamble
Pretax income: $15 billion
Provision for income taxes: $4.1 billion
Net income: $12.7
Tax rate: 27.3%
P&G says its tax provisions for 2010 were split: $2.5 billion in the U.S. and $1.6 billion overseas.
- income tax
- GE Capital