Did GE pay U.S. income taxes in 2010? The company known for minimizing its tax bill made a muddled situation worse responding to a New York Times report suggesting it might get a refund. GE now says it has a small tax liability for 2010.
By Allan Sloan, senior editor-at-large, Fortune, and Jeff Gerth, senior reporter, ProPublica
FORTUNE - There's a heated 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 10 days since the Times touched off this debate, 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 really 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 on 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 Times story has created at least one major misperception -- that GE paid no U.S. income taxes last year and is actually getting a $3.2 billion refund from the Treasury.
The Times' own headline writers got that impression too. "GE Turns the Tax Man Away Empty-Handed," read the headline on early editions, including the Times' Washington edition, the version that politicians and the DC-based news media and commentariat see. "GE's Strategies Let It Avoid Taxes Altogether," was the original head on nytimes.com, the version the blogosphere reads.
Those headlines are based on the story's third paragraph, which discusses GE's 2010 financial results. "Its American tax bill? None. In fact, GE claimed a tax benefit of $3.2 billion." That seems to say that GE (GE) is getting a tax refund for 2010 -- but the words "tax benefit" are so ambiguous that it's not clear what they mean, 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 GE on Tax Day, Billions of Reasons to Smile" -- the idea that the Times was saying 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 website, 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 also 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 pay tax. (For more on GE's tax strategies, see GE's taxes: A case study)
Why should you care about this? Because we all have a stake in how this 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 AMT fades out of the picture for families with income of $600,000 and up.
Now, 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 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 so-called financial reporting numbers, used to calculate the profits 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, Deloitte/Michael Licata professor of accounting at Michigan State University's business school.
After repeated conversations with GE -- remember, we've been working on this story too -- we can finally give you reasonably definitive answers.
The company says that 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," GE chief spokesman Gary Sheffer told us. How big is small? GE declined to say. The number is unlikely to ever be disclosed unless GE goes public with it, or is forced to do so.
One reason the Times got ensnared -- and that it took us a while to figure things out -- is that the material is confusing. Professor Outslay drew up 10 GE tax metrics for us (see the spreadsheet here), and could have given us at least six more. None of them show what GE's U.S. income tax bill is for a given year. (See also 5 ways GE plays the tax game)
We're certainly not trying to denigrate the Times. (Full disclosure: Co-author Jeff Gerth worked there for 30 years, co-author Allan Sloan once aspired to work there, ProPublica articles sometimes appear there.) 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 do so.
Okay. 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 non-business types care about. Corporate tax reform was already in the air; now it's supercharged.
It's been 25 years since the last big tax reform legislation, which cut the corporate rate to 34% from 46% and eliminated a lot of deductions and tax breaks. But a quarter-century of pushing by businesses -- of which GE has been among the most aggressive -- has left us with both the lower tax rate (now 35%) 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 giant, foreign-based multinationals like Mitsubishi, Siemens (SI), and Phillips. However, their effective tax rates for earnings purposes last year were 40%, 31% and 26% respectively, compared with 7% for GE. (GE says its tax rate's been artificially low the past few years, and will soon rise.)
We've already 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, non-profit newsroom that produces investigative journalism in the public interest.
For more, see GE's taxes: A case study and 5 ways GE plays the tax game.
The answer is simple. Eliminate the corporate tax and just go to a VAT instead. No complicated tax breaks, no need for tax lawyers. Of course, a lot of corporate accountants would lose their jobs....
Many of the boneheads now work for companies like GE.
Last week's CBS 60 minutes story told of over 600 US Corps that are sheltering their profits from US Taxes in Ireland and Switzerland. Why no mention of this? Our country is losing billions to Corporate underhandedness. Wake up Washington!
United state of the corporation, where they do away with taxing and we get stuck with paying the bills.
Sounds like GE deserves this whole "misunderstanding" as they have lobbied heavily to create a less-than transparent corporate tax structure. You reap what you sow.
It's not a matter of the poor standing up for themselves against corporations. They can stand all they like, and they will be ignored.
What's needed is the closing of the money doors in the lobbying process, and the imprisonment of representatives who take what are in fact bribes.
I agree that GE did what was necessary to meet its obligations, BUT the reason they get so many breaks is because they threw money at our government to change the laws in their favor.
For the author and many commenters to miss this crucial point is sad. Our government is bought! The rich will win unless the poor stand up for themselves.
I am not sure if I am enlightened after reading this article. First there is a difference between "book" income and tax income. Second as part of the calculation there are I am sure "loss carry forwards", tax credits, book depreciation, tax depreciation,completed contact issues, foreign taxes, and a myriad of other technical issues far out side the purview of most mortals (myself included). At best the tax is currently but an educated guess and will soon be in a negotiation between the IRS and GE's tax people. The real no. will not be known for years and certainly not by us.
As Frank in TX pointed out, companies aren't the ones who ultimately pay corporate income taxes. The end users of the goods and services produced pay the tax bill via higher prices. And while Pat in MN appears to have a problem with corporations, remember that profits are returned to stockholders in the form of higher share values and dividents.
The US tax code, at around 70,000 pages is incredibly complex because Congress uses it to try to control behaviour, not just to raise revenue, and because politicians like to dispense favors to supporters. With a simple and transparent tax code, most of the resources of GE's and other tax departments could be turned to more productive endeavors. One good approach to that is the Fair Tax (HR 25, S13). Check it out at http://www.fairtax.org.
There is a simple solution to this entire scenario. Create a flat 21% income tax for all corporations and elimintate all the loop-holes and ridiculous deductions. I doubt that we will find the political will to do this, particularly since the accounting world would come out against it. We continue to head the FASB which is comprised of accountants to advise us on how to structure our tax codes. We don't seem to see the irony of listening to accountants, who have a vested interest on maintaining as complicated a tax code as possible (aka job security). Indeed, if we simplified the tax code it would likely cost the major accounting firms tens of millions of dollars in lost billable hours.
Tim of San Diego's comment is dead on. Any business not doing whatever it legally can to minimize its tax bill is a business that won't be around long. There's a difference between legal tax avoidance and illegal tax evasion. Nothing in any of the articles purports GE broke the law, so what is the story here?
In my humble experience and after over 15 years of public practice as a tax accountant, I can honestly say most non-accounting business people and almost no individuals understand how their own tax return works. GE could be getting a $3.2B refund, but that doesn't mean they didn't have a 2010 tax liability. It just means what they paid in towards their expected 2010 liability exceeded their actual 2010 liability. That equation is no different than on an individual's tax return. Based on the media mania that comes this time every year about getting a big refund and getting it fast, I won't waste my time trying to explain that a tax refund is really a bad thing. If you did things right, you would owe a penalty-free balance 4/15.
GE paid the amount of taxes that they legally owed. No corporation run by rational people would do otherwise. If people have a problem with a corporation making $5 billion in profits and owing no taxes then they should pointing their fingers at the boneheads that wrote the tax code.
The only comment here that makes sense, was the one by Marcus from Orlando. This whole situation was caused by news writers, without sufficient knowledge of accounting, and unwilling to take the effort to learn. Even this article does a poor job of it. This is all about accrual accounting (please look up accrual if you don't understand), not tax returns and payments.
Dave - retired accountant from Austin.
GE should go after NYT for their poor excuse of reporting and sue the pants off of them for Liable and other damages. Clearly, GE's Goodwill has lost a ton of value over NYT's inability to get the story right in the first place. GE has had to spend hundreds of thousands, if not millions, defending itself for doing nothing wrong. NYT needs to pay for that.
Forbes ran this story a year ago. http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes.html. Why the traction today? Immelt's sucking up to Obama? A perceived likelihood of tax reform? The NYT story points out that Reagan championed the strategy of lowering the rate while broadening the base by eliminating loopholes.
No, it is not that complicated at all. GE is not a good corporate citizen and their filure to pay their fair share forces still more burden on the ever shrinking U.S. middle class.
FAS 109 is now obsolete and has been replacec by Acccounting Standards Chapter (ASC 740). But Marcus' commet that there is a great difference between book income and taxable income is right on point. GE has one of the most sophisticated tax departments of any company in the world. Naturally, their goal is to minimize the current payment of taxes altough they may still have to accrue taxes that will be payable in the future ("deferred taxes"). The 3.2 billion dollar "tax benefit" reported by GE most likely results in an adjustment to its reserves for contingent tax liabilities accrued in prior years for which the statute of limiations has expired.
When GE aquired RCA in 1985, they were allowed to take 2 Billion dollars out of the RCA retirement fund. They declared the funds were in excess of what was needed to pay obligations of the retirees. These excess funds were used to enhance the retirement and insurance needs of RCA employees. The courts agreed with GE that they were allowed to do this. The law was changed to prevent this from happening again. RCA and their employees contributed the funds and they should have been used for RCA employee benefits. Instead, GE took the money. I wonder if they paid any taxes this gain and the gains they made on the sale of RCA to Thomson.
your piece sounds more like annoyance and regret that the NYT got the story in front of the public before you did. Next time try to be bolder instead of holding back information that is in the national interest. That aside, and however you cut it, GE has been paying less because it helped define the loopholes in collusion with the political powers that be, and it's about time everyone pays their FAIR share isn't it!!!
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