The New York Times | DealBook, November 25, 2015 commentary: "Pfizer Didn’t Need an Inversion to Avoid Paying U.S. Taxes" [Use of non-taxable funds for stock buybacks instead of the production of goods and services]

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Source: The New York Times | DealBook, November 25, 2015 commentary

Pfizer Didn’t Need an Inversion to Avoid Paying U.S. Taxes

NOV. 25, 2015

Credit Josh Holinaty


Pfizer’s declaration that it intends to merge with Allergan and cut taxes by moving its tax home to Dublin from New York City has set off something of a furor.

The deal, which may not technically be a tax inversion, functions similarly. President Obama has called inversions unpatriotic, the Treasury has tried to block them, and an array of political and government figures have criticized them.

Tax inversions pose a quandary, but by focusing on them too narrowly we might easily overlook an important truth: Companies haven’t needed tax inversions to avoid American taxes. They’ve already got mountains of earnings stored overseas, well over $2 trillion and, quite likely, much, much more.

That’s because global tax rules give American multinationals enormous incentives to park their earnings outside the United States even without inversions. What the executives of America’s largest companies are doing is entirely rational and often in the interest of their shareholders. But it means that those of us who pay income taxes in the United States are being forced to pick up the slack.

Pfizer intends to merge with Allergan, the maker of Botox, and move its headquarters to Ireland. Michael Falco for The New York Times

While the movement of American corporate earnings overseas is difficult to measure precisely, it is clearly significant and it has been growing rapidly.

An excellent report by Audit Analytics, an accounting research firm, found that at the end of 2014, the companies in the Russell 1000 index held more than $2.3 trillion in earnings abroad. The report, which had limited scope and is already slightly out of date, restricted itself to earnings that those 1,000 big companies had declared to be “permanently” or “indefinitely” invested abroad. Under United States rules, when companies give earnings this designation, they are not required to actually pay American taxes on that money unless they return the cash to the United States. Audit Analytics found that the 2014 total was twice the 2008 amount. The jump from 2013 to 2014 alone was 8.6 percent.

There are several reasons to believe that the report, which is based on data drawn from corporate financial statements filed with the Securities and Exchange Commission, substantially understates the current total of corporate earnings being held abroad.

First, there are indications that the overseas hoard has been increasing since last year. Data from Audit Analytics substantiates that assumption. At my request, the company extracted updated S.E.C. filings from the 87 members of the Russell 1000 index with fiscal years that ended after Dec. 31. All told, just those 87 companies held nearly $518 billion in earnings that they designated as permanently invested abroad and not subject to American taxes — an increase of 12 percent since the previous year. That alone pushes the foreign earnings hoard to close to $2.4 trillion. If that rate of increase were to hold for all of the companies in the Russell index, they would hold nearly $2.6 trillion in the “permanently reinvested” basket by the end of 2015.

Perhaps more significant, the report did not even begin to address a second basket of earnings that go untaxed in the United States — money that the companies say is being held abroad only temporarily. This pile of money is, in some cases, very large, yet it is difficult to unearth in the corporate data.

I did some digging into Pfizer’s accounts and found that while the company designated $74 billion as “indefinitely” invested abroad, it also laid out a financial trail suggesting that it was holding an additional $70 billion or so on a temporary basis. Pfizer confirmed my calculations. How many other companies are doing this isn’t immediately discernible. But many financial statements contain clues.

I surveyed the financial statements of 15 companies with large foreign hoards, including Apple, Microsoft, Pfizer, General Electric, IBM, Oracle, Cisco Systems and Procter & Gamble. Collectively, their “indefinitely invested” foreign holdings in the 2014 filings amounted to $893 billion; including the most up-to-date figures raised the total to $924 billion. Adding temporary foreign holdings and an increase for 2015, I estimated that the 15 are easily holding more than $1.1 trillion out of the reach of the American tax system.

Apple, for example, designated only $69.7 billion in “foreign indefinitely reinvested” earnings in the 2014 Audit Analytics Report. But Apple’s fiscal year ended on Sept. 26, 2015, and on Oct. 28, it disclosed that it had $91.5 billion in “indefinitely reinvested” earnings abroad — 31 percent more than in 2014. Apple acknowledged that it kept a considerable sum abroad “temporarily,” without disclosing the amount. It also said that it held a total of $186.9 billion abroad, and disclosed that it had reduced its effective tax rate in the United States from the 35 percent statutory rate to 26.4 percent, largely because it has paid much lower taxes on earnings abroad.

Microsoft said in its filings that it had $108.3 billion in “permanently reinvested” earnings abroad when its fiscal year ended on June 30, compared with the $92.9 billion picked up in the 2014 Audit Analytics report. Microsoft acknowledged that it would be responsible for $34.5 billion in United States taxes were it to repatriate that “permanently reinvested” sum. Microsoft has found a way to bring money back into the United States for years, even as it cuts taxes by designating some of its money as earnings held “permanently” abroad: It has been borrowing money overseas at very low interest rates and using some of it to buy back shares and pay dividends in the United States, methods that tend to increase its share price.

In its filings, IBM, which said it was holding $61.4 billion in earnings overseas indefinitely on Dec. 31, acknowledged that by keeping earnings out of the United States it had reduced its effective income tax rate to 21 percent — 14 percentage points below the statutory rate last year. Its financial statement suggested how important this was to the company. It reported its net income as $12 billion — but disclosed in a footnote that for every 1 percent increase in income tax rate, its income would fall by $200 million.

In short, reducing income taxes by shifting money overseas has become very important for American companies.

The Treasury is making tax inversions more difficult — though Pfizer may have found a way around the rules. Measures pending in Congress would limit or ban tax inversions, but Congress has up to now not had the political will to grapple with this issue. It seems unlikely to somehow find the will during a presidential election season.

But even if the Pfizer merger, or tax inversions generally, are ruled out of bounds, the United States still faces a gigantic problem. American companies are hoarding money overseas and avoiding United States taxes without inversions. Unless the laws change, it is difficult to imagine them bringing all that money home.

A version of this article appears in print on November 29, 2015, on page BU3 of the New York edition with the headline: The Benefits of Keeping Earnings in Exile.

Copyright 2015 The New York Times Company


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