As you work on your taxes this week, here's something to raise your hackles: Some of the world's biggest, most profitable corporations enjoy far lower tax rates than you do -- if they pay taxes at all.
The most egregious example is General Electric. Last year the conglomerate generated $10.3 billion in pretax income but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.
Avoiding taxes is nothing new for General Electric. In 2008, its effective tax rate was 5.3%; in 2007, it was 15%. The marginal U.S. corporate rate is 35%.
Inside you'll find that GE in effect consists of two divisions: General Electric Capital and everything else. That everything else -- the maker of engines, power plants, TV shows and more -- would have been taxed at a 22% rate had it been a stand-alone company.
But GE Capital keeps the overall tax bill low. Over the past two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009) and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely.
The timing of big deductions for depreciation in GE Capital's equipment leasing business also provides a tax benefit, as will loan losses left over from the credit crunch.
| Rank | Company | Sales | Pretax income | Income taxes* | Tax rate |
|---|---|---|---|---|---|
1 | $401 billion | $20.9 billion | $7.1 billion | 34% | |
2 | $311 billion | $37.3 billion | $17.6 billion | 47% | |
3 | $172 billion | $18.5 billion | $8 billion | 43% | |
4 | $157 billion | $10.3 billion | (-$1.1 billion) | N/A | |
5 | $152 billion | $10 billion | $5.1 billion | 51% | |
6 | $123 billion | $19 billion | $6.2 billion | 32% | |
7 | $120 billion | $4.4 billion | (-$1.9 billion) | N/A | |
8 | $118 billion | $3 billion | $69 million | 2% | |
9 | $115 billion | $9.4 billion | $1.75 billion | 19% | |
10 | $112 billion | $11.6 billion | $3.5 billion | 31% |
Click here for the full list of 25 companies
*Income tax numbers are based on companies' accounting provisions for taxes in their SEC filings. Their actual tax payments may differ somewhat.
But the tax benefit of overseas operations is the biggest reason many multinationals end up with lower tax rates than the rest of us. It makes sense that multinationals "put costs in high-tax countries and profits in low-tax countries," says Scott Hodge, the president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S.
"When you add in state taxes, the U.S. has the highest tax burden among industrialized countries," says Hodge. In contrast, China's rate is 25%; Ireland's is just 12.5%.
Corporations are getting smarter -- not just about doing more business in low-tax countries but in moving their more valuable assets there as well. That means setting up overseas subsidiaries, then transferring to them ownership of long-lived, often intangible but highly profitable assets, such as patents and software.
As a result, figures tax economist Martin Sullivan, companies keep about $28 billion a year out of the U.S. Treasury by engaging in so-called transfer pricing arrangements. In such an arrangement, a tech company, for example, could license an overseas subsidiary's software to its U.S. parent company in return for handsome royalties (which get taxed at lower overseas rates).
"Corporations are paying lower amounts of their profits in taxes now than in the past," says Douglas Shackelford, who teaches tax law at the University of North Carolina at Chapel Hill. "Other countries have been lowering their rates, but not the U.S."
Continued: Many corporations have big tax bills
