Charlotte’s largest companies have 5 billion reasons to keep their foreign profits stashed overseas: the $5 billion they’d owe Uncle Sam to bring the money back, an Observer review of securities filings shows.
The issue of U.S. firms using their foreign operations to avoid American taxes was reinvigorated earlier this month when Apple CEO Tim Cook was brought before a Senate panel to explain his company’s overseas earnings. A congressional probe found that billions in profits were earned by subsidiaries in Ireland with no employees.
In general, as long as the money stays out of the country, it isn’t taxed by the federal government. It’s taxed by the foreign government instead, often at lower rates.
Charlotte-based companies are making use of that tax structure, as well – totaling nearly $22 billion in earnings kept overseas, the Observer review found. If they were to bring those profits back to the U.S. to hire employees or buy equipment, they’d collectively owe that $5 billion tax bill, according to estimates provided in the filings.
Unsurprisingly, the vast majority of that comes from Bank of America, the state’s largest company by far and one with a large international presence. The Charlotte bank has $17.2 billion of undistributed earnings in its offshore subsidiaries, according to its latest annual filing.
Duke Energy, the nation’s largest utility, has about $2 billion in foreign profits that remain overseas, primarily from investments in Latin America. Five more of the city’s largest companies also report keeping some of their earnings offshore.
Of course, Apple appears to be an extreme case. Charlotte’s companies argue that their overseas profits came from actual operations serving international customers. The tech giant also had amassed overseas cash in quantities many times greater than what you’ll find anywhere else.
It’s unclear exactly how and where the Charlotte companies recorded their foreign profits. But their annual reports shine some light on their role in the international economy and how keeping money overseas can save millions. For example:
• SPX Corp. banked $27.8 million in 2011 by changing how it allocates expenses between U.S. and foreign subsidiaries. The industrial equipment maker paid an effective tax rate of 8.4 percent that year.
• The tax rate at Babcock & Wilcox rose from 25 percent in 2011 to 32 percent in 2012, in large part because of differences in where it recorded earnings in the two years. The energy technology company paid a foreign tax rate of 12 percent in 2011 – saving the company about $11 million in taxes from what it would have paid in the U.S.
The companies either did not respond to requests for comment or declined to speak.
‘Most economical sense’
The moves benefit shareholders, as well. Just as a person would want to avoid paying more in taxes than is required, so do companies.
Duke Energy argues that the current U.S. tax system makes it too “painful” to bring back these profits, vice president for tax Keith Butler said. In many cases, Duke would end up paying more than 40 percent in taxes on foreign earnings if they were returned to the U.S. The standard U.S. corporate tax rate is 35 percent.
“You’re looking at it and saying, ‘Gosh, you’d be crazy to bring those earnings back home,’ ” he said.
But progressive organizations such as Citizens for Tax Justice are still concerned about large companies’ role in a growing trend. Nearly one-fifth of the Fortune 500 increased their overseas profit holdings by more than $500 million last year – a total of $229 billion, a recent report found.
“It’s the biggest corporate tax issue,” Citizens for Tax Justice director Bob McIntyre said. “Apple’s just an example. This is the kind of things these guys do.”
Duke Energy got into the international business in the 1990s by buying utility infrastructure in Latin America. It’s still attractive to the company because of continually increasing demand for electricity in those countries – 6 to 10 percent per year, Butler said, when domestic demand struggles to reach 1 percent growth.
Duke could take the money it makes in countries such as Brazil and use it to build new power plants in the U.S. But especially with interest rates so low, it’s a lot cheaper to borrow money for projects in America than take the tax hit. Instead, the cash stays overseas to make more investments in those countries.
“As long as you’re finding those opportunities, it makes the most economical sense to take those earnings you’re making in the foreign jurisdictions and reinvest them,” Butler said, and not pay U.S. taxes on them. “That’s been Duke Energy’s philosophy.”
Bank of America’s corporate investment banking operations span the globe. Last year, about 13 percent of the bank’s revenues came outside the U.S., and a third of its pre-tax income. Bank of America spokesman Jerry Dubrowski said most of its overseas profits have come from the United Kingdom, Canada, Hong Kong and India.
“These are earnings in active foreign operations where we’re serving real customers,” Dubrowski said.
Despite lawmakers’ anger over this type of activity, a good portion of the blame can be reflected back on them. Cook told senators Tuesday that Apple is complying with an outmoded tax system that disadvantages American companies, according to The New York Times.
Both sides of the argument agree that the U.S. tax system is to blame. But the agreement ends there.
Duke Energy is one of a number of multinational businesses that argue in favor of a tax system where earnings are taxed only in the country where they originate. Companies would then be able to move capital freely.
That would eliminate the “lock-out” effect, said Kyle Pomerleau, economist at the nonpartisan Tax Foundation, which advocates for such a system. He said countries like the United Kingdom and Japan have gone that route.
But opponents say that would encourage companies to shift more of their earnings offshore to avoid more taxes. Instead, Citizens for Tax Justice takes the opposite approach. McIntyre, its director, suggests a policy where all profits are taxed at the U.S. rate, regardless of where they’re earned, with credits given to U.S. companies for their foreign taxes paid.
Though politicians in both parties have discussed tax reform, it is unclear whether there will be enough momentum to accomplish it.
“It would be tragic if they didn’t look at it,” Pomerleau said. “The United States is falling farther and farther behind the rest of the world when it comes to sensible corporate tax reform.”
Until then, companies are going to work within the system. Because of that, Butler said the Senate’s criticism of Apple was an unfair attack.
“They are minimizing the amount of tax they have to pay in compliance with the laws,” he said. “That is exactly what Duke Energy does.”
Dunn: 704-358-5235 Twitter: @andrew_dunn
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