GE's strategies let it avoid taxes altogether

Its American tax bill? None. In fact, GE claimed tax benefit of $3.2 billion.

That may be hard to fathom. But low taxes are nothing new for GE. The company has been cutting percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. GE’s giant tax department is often referred to as world’s best tax law firm.

Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the IRS and virtually all tax-writing committees in US Congress.

While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although top corporate tax rate in the US is 35 per cent, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less. In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, GE reported that its tax burden was 7.4 per cent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the US. With those profits still offshore, GE is effectively getting money back.

Striking advantages

Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts — from 30 per cent of all federal revenue in the mid-1950s to 6.6 per cent in 2009. Yet many companies say the current level is so high it hobbles them in competing with foreign rivals.

A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks. Over the last decade, GE has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows GE to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas. Company officials say that these measures are necessary for GE to compete against global rivals and that they are acting as responsible citizens.

The assortment of tax breaks GE has won in Washington has provided a significant short-term gain for the company’s executives and shareholders. While the financial crisis led GE to post a loss in the US in 2009, regulatory filings show that in the last five years, GE has accumulated $26 billion in American profits, and received a net tax benefit from the IRS of $4.1 billion. But critics say the use of so many shelters amounts to corporate welfare, allowing GE not just to avoid taxes on profitable overseas lending but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing. They say that the assertive tax avoidance of multinationals like GE not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the US.

The shelters are so crucial to GE’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force. GE officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.

General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 per cent of revenue, while lending accounts for more than 30 per cent. Industrial, commercial and medical equipment like power plant turbines and jet engines account for about 50 per cent. Its industrial work includes everything from wind farms to nuclear energy projects like the troubled plant in Japan, built in the 1970s.

Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view GE not as a manufacturer but as an unregulated lender that also makes dishwashers and MRI machines. As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that GE — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

Disparity between profit & revenue

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the US were in sync — 73 per cent of the company’s total. Over the last three years, though, 46 per cent of the company’s revenue was in the US, but just 18 per cent of its profits.

GE officials say the disparity between American revenue and American profit is the result of ordinary business factors, such as investment in overseas markets and heavy lending losses in the US recently. The company also says the nation’s workers benefit when GE profits overseas.

The company does not specify how much of its global tax savings derive from active financing, but called it “significant” in its annual report. Stock analysts estimate the tax benefit to GE to be hundreds of millions of dollars a year.

Transforming the most creative strategies of the tax team into law is another extensive operation. GE spends heavily on lobbying: more than $200 million over the last decade, according to Centre for Responsive Politics. Records filed with election officials show a significant portion of that money was devoted to tax legislation. GE has even turned setbacks into successes with Congressional help. After the World Trade Organization forced the US to halt $5 billion a year in export subsidies to GE and other manufacturers, the company’s lawyers and lobbyists became deeply involved in rewriting a portion of the corporate tax code, according to news reports after the 2002 decision and a Congressional staff member. By the time the measure — the American Jobs Creation Act — was signed into law by President George W Bush in 2004, it contained more than $13 billion a year in tax breaks for corporations, many very beneficial to GE. One provision allowed companies to defer taxes on overseas profits from leasing planes to airlines. It was so generous — and so tailored to GE and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained that GE would reap “an overwhelming percentage” of the estimated $100 million in annual tax savings.

According to its 2007 regulatory filing, the company saved more than $1 billion in American taxes because of that law in the three years after it was enacted. By 2008, however, concern over the growing cost of overseas tax loopholes put GE and other corporations on the defensive. With Democrats in control of both houses of Congress, momentum was building to let the active financing exception expire.

Value to Americans?

While GE’s declining tax rates have bolstered profits and helped the company continue paying dividends to shareholders during the economic downturn, some tax experts question what taxpayers are getting in return. Since 2002, the company has eliminated a fifth of its work force in the US while increasing overseas employment. In that time, GE’s accumulated offshore profits have risen to $92 billion from $15 billion.

As the Obama administration and leaders in Congress consider proposals to revamp the corporate tax code, GE is well prepared to defend its interests. The company spent $4.1 million on outside lobbyists last year, including four boutique firms that specialize in tax policy. “We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders,” said Gary Sheffer, a GE spokesman.