Here’s a question for investors in any big US corporation with foreign operations: do you know what the company’s tax bill would be if it had to bring its overseas earnings home? The answer, alas, is that they probably don’t.
That’s because most companies with large foreign earnings don’t disclose a potential tax liability associated with those earnings, even though inquiring shareholders want to know. Given the pile of foreign earnings amassed by large multinational companies in recent years, this has become a yawning disclosure gap.
Under US tax laws, companies with operations overseas pay no taxes on earnings generated there as long as the money stays there. When it is repatriated, though, taxes come due.
Accounting rules require that public companies disclose the amount of earnings they have generated and reinvested in foreign operations each year, even if they have no plans to bring the money home.
Last year, the top 1,000 US companies reported $2.1 trillion in such earnings, a figure that has almost doubled since 2008, according to a report by Audit Analytics, a research firm.
Those foreign earnings also represented a growing percentage of the companies’ total assets, the report said: 8.7 per cent last year, up from 5.8 per cent in 2008.
Accounting rules also say companies should provide investors with an estimate of how much they’d have to pay in taxes if they were to bring those earnings back home. But rulemakers gave companies an out, allowing them to forgo the disclosure if they concluded that it was “not practicable” to determine a potential tax bill.
It’s no surprise that most companies choose to leave investors in the dark about these potential liabilities. Consider the 10 companies identified in the Audit Analytics report with the largest hoards of offshore earnings. Of them, seven don’t disclose the potential tax liability.
Non-disclosure list
General Electric
sits atop this non-disclosure list, with $110 billion (€80 billion) of offshore earnings in 2013, according to its financial statements, or 17 per cent of its total assets.
Other big companies that don't disclose tax liability figures are Pfizer, with $69 billion in offshore earnings; Merck, with $57.1 billion; and IBM, with $52.3 billion.
None of these companies’ filings provide detail about why the figure is not calculated, beyond that it isn’t practicable. Representatives for IBM and Merck did not return phone calls seeking comment. Joan Campion, a Pfizer spokeswoman, said in a statement: “We don’t perform this analysis because it would be purely hypothetical and irrelevant given that we have no current intention to repatriate these earnings.” She said the company complied with all tax rules.
Seth Martin, a spokesman for GE, said in a statement: “Over many years, GE has reinvested the majority of its overseas earnings in active non-US operations like manufacturing plants. We don’t think a hypothetical tax computation based on an unlikely repatriation scenario is useful information for investors.”
It’s not clear that investors agree with Campion and Martin. In a 2013 review of the current accounting standard, the US Financial Accounting Standards Board noted an interest in greater transparency.
“The information may not be detailed enough for users to analyse the cash flows associated with income taxes and to analyse earnings determined to be indefinitely reinvested in foreign subsidiaries,” the review said.
In a statement, Christine Klimek, a spokeswoman for the board, said the organisation was evaluating whether improvements were needed in several reporting areas, including income tax disclosures. It is asking users and preparers of financial statements whether changes are needed and will discuss its findings in a public board meeting this summer.
To say it’s impracticable to calculate a possible offshore tax liability seems dubious for large companies employing armies of accountants and tax staffers. And the impracticability arguments lose even more credibility given that other large and complex multinationals have no trouble making the disclosures.
Microsoft, for example, with $76.4 billion in foreign earnings, said that if it had brought those earnings home in 2013, they would have generated a tax bill of $24.4 billion. That represents a 32 per cent tax rate.
Apple figures
Apple also tells investors what it would owe if it were to bring offshore profits home. It has amassed $54.4 billion in these earnings, according to its filings, and though it has no plans to repatriate the money, it said such a move would cost it $18.4 billion. That reflects a 33.8 per cent rate.
Citigroup, with $43.8 billion in offshore earnings and a highly complex corporate structure, told investors that it would have had to pay $11.7 billion in additional taxes on those earnings in 2013, a 26.7 per cent rate.
"I don't understand why companies are not providing the disclosure when it is just an explanation of what they would have to pay if they brought the money back," said Don Whalen, director of research at Audit Analytics.
“All the companies on the top of this list have the sophistication to provide that kind of information.”
Here’s a hypothesis: Maybe these companies don’t want to disclose the liabilities associated with offshore earnings because they would highlight how little they are paying overseas and possibly attract unwanted scrutiny – or tax increases – from governments in these jurisdictions.
Some members of Congress contend that companies choosing to reinvest their offshore earnings in foreign operations do so simply to avoid taxes.
In a 2012 hearing, Democrat Senator Carl Levin, who heads the Senate permanent subcommittee on investigations, noted that after corporations were allowed to repatriate overseas earnings under a 2004 tax holiday, some $84 billion returned to the United States.
“What does that say about the true intent of those companies?” Levin asked. “To me, it says this money isn’t held offshore for permanent reinvestment. It’s there to avoid taxes. Yet, the auditors who must pass off on the validity of a company’s assertion, and the Financial Accounting Standards Board, have appeared to go along.”
One reason investors may want more detail on these possible tax bills: if a company gets into an unexpected cash squeeze, it may need the money to meet operating costs or other obligations.
This is also why accounting standards require companies to analyse their financial position to determine that none of the offshore earnings would be required to run operations.
But if the 2008 crisis taught us anything, it’s that large and healthy companies’ financial conditions can deteriorate quickly. As the amount of offshore earnings multiplies, it is troubling that so few companies tally the potential tax liabilities.
A result is a larger disclosure problem for investors with each passing year. – ( New York Times service )
