That is the holy grail sought by GE and countless other companies. Thus the tax department can be like a profit center of its own — perfectly legally, we might add.
For example, GE boosted its 2008 and 2009 reported profits by a total of about $1 billion just by changing its mind about how it treated some of its overseas earnings.
Here’s why — and how — it works:
Many U.S. multinational corporations keep some profits abroad, none more than GE: Its total was $94 billion at the end of last year. As long as corporations tell their accountants they intend to indefinitely invest those profits outside the United States, they don’t have to make a provision for federal and state taxes on them. If the profits stay abroad, they remain untaxed.
GE, in 2008 and 2009, told its accountants that about $3 billion of overseas profits were going to be indefinitely invested abroad. Previously, the company had not made that investment decision, so it was required to set aside a bookkeeping provision of about $1 billion for U.S. taxes. That provision affected publicly reported earnings when it was taken.
GE never actually paid the $1 billion in taxes. And it doesn’t say when the previous accounting provision of $1 billion was taken. But, lo and behold, in 2008 and 2009, when the company sorely needed higher profits, there they were, thanks to a tax benefit. It didn’t have to sell more jet engines or turbines or kitchen appliances.
A leading tax accounting professor uses the GE shift as a case study in the flexibility of the accounting rules. Ed Outslay, the Deloitte/Michael Licata professor of accounting at Michigan State University’s business school, says GE’s move shows the “discretion” inherent in the accounting rule.
In answers provided through a spokeswoman, GE said it fully disclosed the investment changes as well as the reason behind them. “We don’t think [that the rule] allows too much discretion,” the company added.
But its top tax executive, John Samuels, said at a conference last year that the ability to defer taxes on overseas profit gives companies an incentive to shift them abroad.
It’s “a heads-I-win, tails-I-break-even situation,” Samuels said.
This article was reported jointly with ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest.