Firms stashing $2.1 trillion overseas to avoid U.S. taxes

Eight of the biggest U.S. technology companies — including five from the Silicon Valley — added a combined $69 billion to their stockpiled offshore profits over the past year, even as some corporations in other industries felt pressure to bring cash back home.

Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.1 trillion in profits that U.S. companies are holding overseas, according to a Bloomberg News review of the securities filings of 304 corporations.

The total amount held outside the U.S. by the companies was up 8 percent from the previous year, though 58 companies reported smaller stockpiles.

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Little political action

The money pileup, reflecting companies’ incentives to park profits in low-tax countries, has drawn the attention of President Obama and lawmakers, who see a chance to tap the funds for spending programs and to revamp the tax code. That effort is stalled in Washington, and there are few signs that tech companies will bring the profits back to the U.S. until Congress gives them an incentive or mandate.

“It just makes no sense to repatriate, pay a substantial tax on it,” said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation, a policy-research group whose board of directors includes executives from Microsoft and Oracle Corp. “Computing and IT companies especially have a lot of flexibility in where they declare their profits.”

Microsoft, Apple and Google each boosted their accumulated foreign profits by more than 20 percent over the year, the largest increases by any of the 34 companies with at least $16 billion outside the U.S. International Business Machines Corp., Cisco Systems Inc., Oracle, Qualcomm Inc. and Hewlett-Packard Co. each added at least $4 billion.

The profits added by the eight companies accounted for 45 percent of the net gain in overseas funds among the corporations surveyed. At the same time, firms in some other industries felt enough pressure to meet domestic needs that they chose to take the tax hit by bringing money home.

General Electric Co. topped the list for the fifth straight year. The company now has $119 billion outside the U.S., an increase of 8 percent from the end of 2013 and a 27 percent gain since 2010.

Big increases

By contrast, Microsoft has more than tripled its offshore holdings since 2010. Apple, which counts only part of its non-U.S. holdings as indefinitely held offshore, increased that portion to $69.7 billion from $12.3 billion in 2010. Cisco now has $52.7 billion outside the U.S., up 10 percent since 2013.

Microsoft referred back to 2012 Senate testimony by Bill Sample, its vice president for worldwide tax. Sample said then that the company is “fundamentally a global business” and that U.S. law creates a disincentive for U.S. investment.

An Apple spokeswoman declined an interview request.

Google referred to a December 2013 letter that it sent to the Securities and Exchange Commission. It said Google needs $20 billion to $30 billion for future acquisitions outside the U.S., $12 billion to $14 billion for foreign subsidiaries’ share of developing intellectual property and $2 billion to $4 billion for capital expenditures.

John Chambers, Cisco’s chief executive officer, said on Bloomberg TV on Feb. 20 that his company is investing in India, Israel and France in the absence of U.S. tax law changes.

“I’d prefer to have the vast majority of my employees here,” Chambers said. “And our tax policy is causing me to make decisions that I don’t think is in the interest of our country, or even in our shareholders, long term.”

304 companies

The Bloomberg analysis covers 304 large U.S. companies that are required to report annually how much they hold outside the country in profits, which isn’t the same thing as cash.

It’s a measure of accumulated profits, including those reinvested in active businesses and factories. The companies say they won’t repatriate these profits, and they haven’t assumed that they will pay future U.S. taxes that would be owed if they did.

“One of the reasons that they’re holding the hoards of cash abroad is they don’t want to pay the repatriation tax when they bring it back,” said Rosanne Altshuler, a Rutgers University economist who studies international taxation.

The analysis starts with corporations in the Standard & Poor’s 500 index and excludes purely domestic firms, real estate investment trusts and companies with headquarters outside the U.S. It includes each company’s most recent annual report, many of which were filed over the past month.

The companies owe taxes at the full U.S. corporate tax rate of 35 percent on profits they earn around the world. They get tax credits for payments to foreign governments and don’t have to pay the residual U.S. tax until they bring the money home.

Keeping money overseas is particularly easy for technology and pharmaceutical companies whose profits stem from intellectual property that can swiftly be moved.

“It’s very easy to place a patent in another country and accrue the income there,” Altshuler said. “They’re very sensitive to differentials in corporate tax rates.”

Gilead’s strategy

Gilead Sciences Inc., for example, reported that it held $15.6 billion outside the U.S. as of Dec. 31, up from $8.6 billion a year earlier. That’s because the intellectual property for the Foster City company’s blockbuster drug — Sovaldi — was in Ireland before the Food and Drug Administration approved it in 2013.

Corporations that rely on intellectual property — trademarks, logos or patents — have an advantage over heavy industrial companies and the financial industry, which relies on providing services to customers, said Jennifer Blouin, an associate professor of accounting at the University of Pennsylvania’s Wharton School.

“You can’t move an oil rig out of certain jurisdictions,” she said. “You can’t shift the service income without moving the people.”

Richard Rubin is a Bloomberg writer. E-mail: rrubin12@bloomberg.net