GE Capital and Repatriation Taxes

Peter Eavis writes:

More than 10 years ago, the kinds of investors who seek out weak companies were circulating presentations on Wall Street that argued that General Electric’s enormous lending business was a ticking time bomb. The financial crisis of 2008 proved those skeptics right, and on Friday, they appeared to have the final laugh. General Electric announced that it was selling most of the loans inside its financial division, GE Capital, leaving a G.E. that will be dominated by industrial businesses. The shift, to be completed by 2018, would end one of the riskiest experiments in finance. It also indicates that regulations intended to limit destabilizing financial practices are starting to bite.

That Dodd-Frank reforms take away the joys of regulatory arbitrage just bites. And I guess paying U.S. taxes also bites as noted by Steve Goldstein:

General Electric’s deal to sell off real estate and get out of most of the finance business contains a little sweetener for the U.S. government, in the form of up to $4 billion worth of taxes on repatriated earnings. The issue of tax repatriation is arguably the hottest one in corporate tax policy. Right now, U.S.-based multinationals are not taxed by the U.S. government on what they earn overseas — until they bring that money back to the U.S.

GE is saying that this repatriation tax might be as much as $7 billion. But the GE Capital alone segment was parking $36 billion overseas. They have paid a modest amount of foreign taxes so they get a Foreign Tax Credit. And its other divisions are still parking a lot of profits overseas, which will likely not be repatriated allowing the effective tax rate for these other segments of their business to remain below 20%. Steve continues:

According to a report in March by Credit Suisse’s David Zion, the cumulative earnings parked by S&P 500 companies overseas is over $2 trillion

Under current law, the repatriation tax would be 35% minus any Foreign Tax Credits. Let’s assume that foreign taxes are 20% of foreign earnings. This would mean the US Treasury could net 15% of this $2 trillion if deferral benefits were ended. And $300 billion could finance a lot of infrastructure investment. But Steve notes that Washington is proposing to change this tax:

President Barack Obama has proposed a one-tax 14% tax on $2 trillion of overseas earnings, followed by a 19% minimum tax on future profit, and former House Ways and Means Committee Chairman Dave Camp proposed a one-time tax of 8.75%.

For companies whose foreign earnings are in tax havens, these proposals would raise at least some tax revenues but for companies where the foreign tax rate is above 19%, even the Obama proposal would effectively eliminate the repatriation tax given the Foreign Tax Credit.