Updated March 10, 2013 8:15 p.m. ET
U.S. companies are making record profits. And more of the money is staying offshore, and lightly taxed.
Across the Sea
See the total profits held offshore by 60 big U.S. companies in 2012 and 2011.
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A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S. The 60 companies were chosen for the analysis because each of them had held at least $5 billion offshore in 2011.
The practice is a result of U.S. tax rules that create incentives for companies to maximize the earnings, and holdings, of foreign subsidiaries. The law generally allows companies to not record or pay taxes on profits earned by overseas subsidiaries if the money isn't brought back to the U.S.
Big American companies are booking more of their sales in faster-growing foreign markets. But companies also are moving more of their earnings overseas by assigning valuable patents and licenses to foreign units.
Untaxed foreign earnings are part of a contentious debate over U.S. fiscal policy and tax code. The current system attracts criticism from many points of view. Business groups want the U.S. to tax profit based on where it is generated, as many countries do, rather than globally, as the U.S. does now. Moreover, they point out, tax rates are higher in the U.S. than in many other nations, putting American companies at a disadvantage.
Others say that the growing cash hoards often are the result of sophisticated corporate maneuvers to shift profits to low-tax countries.
Within the group of 60 companies, the Journal found 10 that parked more earnings offshore last year than they generated for their bottom lines. They include Abbott Laboratories, whose store of untaxed overseas earnings rose by $8.1 billion, to $40 billion. The increase exceeded the pharmaceutical maker's net income of $6 billion, which was weighed down by a $1.4 billion charge related to early repayment of debt. Including that charge, Abbott reported a pretax loss on its U.S. operations.
An Abbott spokesman declined to comment.
Honeywell International Inc. HON +1.51% boosted its store of untaxed earnings held by its offshore subsidiaries and earmarked for foreign investment by $3.5 billion last year to $11.6 billion, a rise equal to the industrial conglomerate's annual profit, excluding a pension adjustment. The company said the increase resulted from $2.1 billion of pretax earnings from its foreign subsidiaries and changes in estimates.
Chief Financial Officer Dave Anderson says Honeywell needs to invest outside the U.S. to fuel foreign sales, which accounted for 54% of Honeywell's revenue last year.
He also says the tax code is part of the equation. "The anachronistic tax system that we have penalizes companies for their success outside of the U.S.," Mr. Anderson says.
The amount of money at stake is significant, particularly when the U.S. budget deficit is high on the political agenda. Just 19 of the 60 companies in the Journal's survey disclose the tax hit they could face if they brought the money back to their U.S. parent. Those companies say they might have to pay $98 billion in additional tax—more than the $85 billion in automatic-spending cuts triggered this month after the White House and Congress couldn't agree on an alternative.
The Joint Committee on Taxation estimates that changing the law to fully tax overseas earnings would generate an additional $42 billion for the Treasury this year alone. Congress enacted a temporary tax holiday in 2004, prompting companies to repatriate $312 billion in foreign earnings. The law was intended to stimulate the U.S. economy, but studies found that few jobs were created and most of the money was used to repurchase shares and pay dividends. Another such holiday is considered unlikely in the next few years.
The Journal's survey of new regulatory filings found that the total earnings held by the 60 companies' foreign subsidiaries rose 15%, to $1.3 trillion, from $1.13 trillion a year earlier.
The trend was most pronounced among the 26 technology and health-care companies in the Journal survey. Collectively, they parked $120 billion in foreign units last year, accounting for nearly three-quarters of the total. At some of these companies, foreign subsidiaries hold almost all the company's cash. Johnson & Johnson JNJ +1.21% says its foreign subsidiaries held $14.8 billion in cash and cash equivalents as of Dec. 30, out of a total of $14.9 billion.
Not all of the earnings parked offshore are in cash. Some of the money is used to build plants and buy equipment overseas. In a paper last year, Wharton School accounting professor Jennifer Blouin and two co-authors estimated that 43% of the offshore earnings were held in cash.
A Senate committee last year found that many tech and health-care companies have shifted intellectual property—such as patent and marketing rights—to subsidiaries in low-tax countries. The companies then record sales and profits from these lower-tax countries, which reduces their tax payments.
"There are opportunities to basically wipe away your tax on your intellectual property," says Ms. Blouin, the Wharton professor.
Software maker Microsoft Corp. MSFT +0.93% boosted the holdings of its foreign subsidiaries by $16 billion in the fiscal year ended June 30, 2012, to $60.8 billion, the third-largest holding in the Journal survey. The growth in Microsoft's overseas holdings nearly equaled its net income for the year of $17 billion—in part because Microsoft said its foreign operations accounted for 93% of its pretax profit last year.
In its report, the Senate committee said Microsoft had shifted intellectual property to subsidiaries in Singapore, Ireland and Puerto Rico, to avoid roughly $4 billion in U.S. taxes in 2011. Licensing rights, and revenue, sometimes traveled through more than one subsidiary to minimize the tax bill.
"Microsoft complies with the tax rules in each jurisdiction in which it operates and pays billions of dollars in U.S. federal, state, local and foreign taxes each year," Bill Sample, Microsoft's corporate vice president for world-wide taxation, told the Senate committee in September.
A Microsoft spokesman declined to comment further.
Oracle Corp. ORCL +1.65% reported holding $20.9 billion in its foreign subsidiaries as of May 31, 2012, up 30% from a year earlier. Oracle lowered its tax rate last year to 23%, from 25.1% in 2011, raising its bottom line by $272 million.
In a securities filing, Oracle said the tax rate fell in part because it "increased the number of foreign subsidiaries" in low-tax countries; the filing listed four Irish subsidiaries that weren't listed the prior year. Oracle said it expects the new subsidiaries to help it maintain a lower tax rate. An Oracle spokeswoman didn't respond to requests for comment.
Abbott runs manufacturing plants in more than a dozen foreign countries, plus Puerto Rico, and generated 58% of its $40 billion in 2012 revenue outside the U.S. In a securities filing, Abbott estimated that lower tax rates on its foreign operations cut its U.S. tax bill by $1.6 billion last year.
A big Abbott subsidiary in Ireland, Abbott Laboratories Vascular Enterprises Ltd., reported profit of €1.1 billion for 2011 ($1.43 billion), the latest figures available, and paid no Irish tax, because it is incorporated in Bermuda, according to an Irish corporate filing.
Some companies are accumulating large sums of earnings that they say will remain outside the U.S. General Electric Co. GE +1.27% reported $108 billion held offshore at the end of last year, up from $102 billion a year earlier; GE says most of that is invested in active business operations such as plants and research centers. At Pfizer Inc.,PFE +0.61% the total rose to $73 billion, from $63 billion.
The swelling totals have sparked friction at companies such as Apple Inc., AAPL +0.39%where investors want executives to distribute more cash through dividends and share repurchases.
Overseas balances have grown in part because U.S. multinational companies are paying less tax on their overseas operations. Offshore subsidiaries of U.S. companies paid an average 14% tax rate in 2008, according to the most recent statistics from the Internal Revenue Service, down from 16% in 2004.
Corporate filings offer a glimpse of the low rates companies pay outside the U.S. Apple said it held $40.4 billion in untaxed earnings outside the U.S. as of Sept. 29, 2012. Apple estimated that it would owe $13.8 billion in tax if it brought that money back to the U.S. That is a 34% tax rate, just shy of the federal 35% rate. Since foreign income taxes are creditable on U.S. taxes, that means Apple has paid less than 5% tax on those earnings to date, says Ms. Blouin, the Wharton professor.
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