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Thursday, March 31, 2011

GE Responds to NY Times Criticism of its Tax Planning

G.E. Logo Following up on last week's post, NY Times: G.E.: Tax Imagination at Work (and commentary by Jon Stewart): Bloomberg, Immelt Says GE’s 2011 Tax Rate to Be ‘Much Higher’ as Losses End:

General Electric Co. (GE)’s tax rate will rise this year and beyond after $32 billion of losses absorbed by the company’s financial-services business pushed down rates in 2008 and 2009, Chief Executive Officer Jeffrey Immelt said. “We got socked with losses during that time,” Immelt said yesterday in a speech at Rice University in Houston. “Our tax rate is going to be much higher in 2011 and the future.”

The New York Times reported March 24 that GE had a tax bill of zero in 2010, an assertion that the Fairfield, Connecticut- based company said on its website is misleading, in part because of its characterization of tax rebates, benefits and so-called tax loss-carryforwards. The complexity of the U.S. tax system needs to change, Immelt said.

“Rarely does business speak with one voice, but they do on taxes,” Immelt said. “Our system is old, it’s outdated, it’s complicated -- and all of us are for closing the loopholes. Absolutely, a lower corporate tax rate, and a territorial system, just like our global competitors have.”

Update:

http://taxprof.typepad.com/taxprof_blog/2011/03/ges-immelt.html

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Comments

I wonder why tax law is so complicated. Maybe sophisticated corporate maneuvering by companies like GE has something to do with it....

Posted by: yahoo | Mar 31, 2011 2:11:18 PM

I used to work for GE's international tax department. The NYT article was incendiary and inaccurate in many ways, but it makes a couple of valid points:

1) GE successfully lobbies for changes to the tax law to suit its interests (along with those of many other US Corporations), and
2) GE spends an awful lot of effort on gain and loss timing and US vs foreign income sourcing

All of the above is done in a manner that very strictly follows the tax laws (and USGAAP for financial reporting purposes). GE actively uses the tax and accounting rules to its benefit, but does not engage in illegal or unethical behavior.

In terms of the NYT article, it was mistaken on several counts:

1) The active financing exception (AFE) had nothing to do with the fact GE paid no tax on its US source income...the exception is only relevant to foreign source income and for those purposes it is an extremely useful tax deferral and foreign tax credit planning tool, but it does not offset US source income.
2) The so called $3.2 billion "refund" is no such thing, but rather a benefit to the tax line taken for financial reporting purposes, which is really a function of deferred tax accounting. GE has not even finished preparing its US 2010 income tax return yet.
3) The insinuation of corruption related to Charlie Rangel is extremely difficult to believe. In the years I spent with GE, the rules governing interaction with government officials were extremely strict.

The real reason for the $0 2010 tax bill were a combination of tax loss carryforwards from 2008 and the ability to offset GE Capital financial losses against GE Company industrial gains through consolidaiton. The ability to use the sourcing rules to maximize US losses also played a role.

As far as tax reform is concerned, the consolidation and income/loss sourcing rules are the biggest so called "loopholes" here and the hence the most in need of reform...but that may not be enough. We may need to deep six the CFC and Worldwide income model altogether and replace it with a hybrid more similar to the Canadian and European model.

Posted by: Andrew Speer | Mar 31, 2011 7:39:13 PM

"replace it with a hybrid more similar to the Canadian and European model"

Why bother? Companies like GE would find a way around that too.

Posted by: yahoo | Apr 1, 2011 8:36:11 AM

The NYT article was incendiary and misleading largely because the author doesn't understand tax accounting very well. Of course,a large majority of the article's readers don't understand tax accounting well either. But GE's public relations department didn't help the company much. Although the article focused the readers' attention on GE's federal income tax liability (really, on its cash tax payments) for 2010, GE's responses kept shifting the subject from single year data to multiyear data, and from US federal income taxes to total US taxes to total international and confusing readers between tax liabilities and tax payments. Readers who couldn't follow the technical tax issues could still see all those points as evasions by GE of the basic question: how much federal income tax does GE owe for 2010?

I doubt whether many readers understood GE's explanation of its 2010 tax benefit, which GE said was due to reversals of prior tax accruals. While it may be true that the booked benefit did not reflect a cash payment from the US Treasury in 2010 to GE, doesn't that mean that GE had already kept the cash when it booked the deferred liabilities? If not, wouldn't GE be seeking a refund for those paid taxes?

Posted by: Michael | Apr 5, 2011 3:39:35 PM