The truth about GE’s tax bill
By Allan Sloan and Jeff Gerth,
There is hot debate over General Electric’s taxes in places ranging from the front page of the New York Times to the blogosphere to, of all places, “The Daily Show.” In the days since the Times touched it off, what started out as something resembling a conversation has degenerated into posturing, name-calling and shrieking. So, did GE really not pay any income taxes on a $5.1 billion U.S. profit last year? Is it getting a tax refund?
We’re going to try to answer these questions. We’ll also show you some things that we’ve learned about GE that few people outside the company and the insular world of tax techies know. The Times, of course, made GE and its tax gamesmanship a national issue with its agenda-setting piece March 25. (By the way, they beat us on the story; we’d been working on it for months.) Unfortunately, for all its good work, the article has created at least one major misperception: that GE paid no U.S. income taxes last year and is getting a $3.2 billion refund from the Treasury.
The paper’s own headline writers had that impression. “GE Turns the Tax Man Away Empty-Handed” read the headline on early editions, including in Washington edition, the version politicians and the D.C.-based media and commentariat see. “G.E.’s Strategies Let It Avoid Taxes Altogether” was the original head on nytimes.com, the version the blogosphere reads.
What is a ‘tax benefit’?
Those headlines are based on the article’s opening paragraphs, which discuss GE’s 2010 financial results. “Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.” That seems to say that GE is getting a tax refund for 2010 — but the words “tax benefit” are ambiguous, and the article never explains them or mentions them again.
By the time a revised (and accurate) headline got slapped on the later-edition print issues — “At G.E. on Tax Day, Billions of Reasons to Smile” — the idea that GE paid no U.S. income taxes and was getting a big refund was firmly implanted.
GE made a muddled situation worse by putting complicated, technical and lawyerly rebuttals on its Web site, tweeting them, tripping over itself and then proving unable to explain itself in public exchanges with the likes of Henry Blodget, proprietor of the widely followed Business Insider blog. Or in conversations with reporters.
Now, we’ll give you brief answers to the main questions, but you’ll have to bear with us afterward for the full explanation.
Did GE get a $3.2 billion tax refund? No.
Did GE pay U.S. income taxes in 2010? Yes, it paid estimated taxes for 2010 and made payments for previous years. Think of it as your having paid withholding taxes on your salary in 2010 and sending the IRS a check on April 15, 2010, covering your balance owed for 2009.
Will GE ultimately pay U.S. income taxes for 2010? After much to-ing and fro-ing — the company says it hasn’t completed its 2010 tax return — GE now says that it will.
Doing the math
Why should you care about this? Because we all have a stake in how it plays out. Thanks to the uproar over GE, we now risk ending up with legislation that targets GE but produces all sorts of unintended consequences.
Public rage can make for bad law. For example, the alternative minimum tax was adopted in 1969 amid an uproar generated by a Treasury report that said 155 wealthy families had paid no income tax. But the bill, badly designed and badly amended, has morphed into a mess that affects millions of middle- and upper-middle-class families, but not the really-high-income tax-minimizing families. They’re not affected because the alternative minimum tax fades out of the picture for families with income of $600,000 and up.
Let’s take it from the top, slowly, and sort this all out.
GE’s 2010 financial statements reported a $3.25 billion U.S. “current tax benefit,” which is where the Times, which declined to comment, got its $3.2 billion “tax benefit” number. But a company’s “current tax” number has nothing to do with what it actually pays in taxes for a given year. “Current tax benefit” and “current tax expense” are financial reporting numbers used to calculate the profit a company reports to shareholders.
They have nothing to do with what a company sends to — or receives from — the IRS. “Any correlation between the ‘current tax expense’ and the current tax payable is likely coincidental,” says a leading tax authority, Ed Outslay, the Deloitte/Michael Licata professor of accounting at Michigan State University’s business school.
After repeated conversations with GE, we can finally give you reasonably definitive answers.
The company says it’s not getting any refund for 2010 — validating Outslay’s analysis. Its 2010 tax situation? “We expect to have a small U.S. income tax liability for 2010,” said Gary Sheffer, GE’s chief spokesman. How big is small? GE declined to say. The number is unlikely to be disclosed unless GE goes public with it or is forced to do so.
One reason the Times was ensnared — and that it took us a while to sort this out — is that the material is confusing. Outslay drew up 10 GE tax metrics for us and could have given us at least six more. None shows what GE’s U.S. income tax bill is for a given year.
We’re certainly not trying to denigrate the Times. (Full disclosure: Co-author Jeff Gerth worked there for 30 years, and it occasionally runs ProPublica articles.) We’re certainly not siding with GE, which for decades has been an aggressive tax-minimizer and could have averted this mess by explaining things simply and clearly to the Times and us and others. It either couldn’t or wouldn’t.
So instead of chewing over GE and the Times endlessly, let’s look at the big picture.
For the first time in a long while, corporate taxes are actually a hot topic — one that nonbusiness types care about. Corporate tax reform was already in the air, but now it’s supercharged.
It’s been 25 years since the last big tax-reform legislation, which cut the corporate rate from 46 percent to 34 percent and eliminated a lot of deductions and tax breaks.
But a quarter-century of pushing by businesses — GE being among the most aggressive — has left us with both the lower tax rate (now 35 percent) and lots more deductions and shelters and other tax-reducing tactics than the 1986 legislation envisioned. GE’s current idea of reform, as expounded by John Samuels, the head of its tax department, is to cut the rate but to allow some of GE’s major tax-minimizing maneuvers to remain in place. It’s hard to imagine anything like that happening now.
Samuels said at a tax forum in February that GE needs a tax system that will let it compete effectively with such giant, foreign-based multinationals as Mitsubishi, Siemens and Phillips. However, their effective tax rates for earnings purposes last year were 40 percent, 31 percent and 26 percent, respectively, compared with 7 percent for GE. (GE says its tax rate has been artificially low in past years and will rise.)
We’ve had more than enough heat about corporate taxes. What we need now is some light. And an appreciation that this problem, like GE’s tax situation, is more complicated than the screamers would have us believe.
This article was reported jointly with ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest.