Challenge to US giants non-disclosure of potential tax bills

Companies choosing to leave investors in dark about the tax liabilities of repatriating profits

Wed, Jul 9, 2014, 15:54

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.

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