Atlanta Journal Constitution: Corporate giants find ample shelter

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by Russell Grantham

July 09, 2011

Atlanta’s corporate giants pay widely varying tax rates to Uncle Sam under a murky system that allows companies to reap tax benefits from mergers, overseas expansions and other moves.

Some cut their taxes the hard way. Delta Air Lines expects to pay no federal income taxes for several years, it said in regulatory filings, because of tax credits stemming from huge losses in recent years.

But it appears that other highly profitable companies pay federal income taxes significantly below the top corporate income tax rate of 35 percent, regulatory filings indicate. Sometimes, that rate is lower than the typical middle class family. And sometimes, it’s nothing.

Companies don’t disclose what federal income taxes they actually pay, but some tax experts say so-called “current” income tax expenses disclosed in their regulatory filings are a good indicator. Companies also disclose the total of their yearly cash income tax payments to all state, local, foreign and federal jurisdictions where they operate.

A review by The Atlanta Journal-Constitution of tax disclosures by five of the largest Atlanta companies showed:

- Coca-Cola’s “current” federal tax expense — not counting “deferred” taxes that might not be paid for decades, if ever — was $470 million last year. That was only 6.5 percent of the $7.2 billion in pre-tax profits that Coca-Cola reported for its U.S. operations in annual disclosures to investors last year. (A Coca-Cola spokesman said the company actually paid federal income taxes “significantly higher” than $470 million last year. It also said its federal tax rate worked out to 38 to 39 percent because its taxable income was lower than the $7.2 billion reported to shareholders, but didn’t release supporting figures.)

- Home Depot paid triple the “current” federal taxes that Coca-Cola did last year — $1.48 billion. Because it could only defer a small fraction of its federal income taxes, Home Depot’s current tax rate was 30.4 percent of its U.S. pre-tax profits of $4.9 billion. (A Home Depot spokesman said the tax rate was accurate but declined further comment.)

- Coca-Cola Enterprises’ “current” federal income taxes have rarely topped 2 percent of its yearly U.S. income since 2000, filings show. Globally, the company paid cash income taxes of $1.1 billion during that period, but its “current” foreign taxes accounted for more than $1 billion. The large bottler isn’t likely to pay much taxes to Uncle Sam in the future; Coca-Cola took over its North American operations last year. (CCE did not return a reporter’s calls.)

Role in debt debate

Such disparities are getting more attention these days as President Barack Obama and Republican lawmakers haggle over a deal to keep the U.S. government from defaulting on its debt before an Aug. 2 deadline.

A compromise to raise the federal debt limit may also eliminate some corporate accounting maneuvers that now produce big tax savings for some companies but not others.

Democrats are pushing to collect more revenues by ending tax breaks for oil companies, hedge fund managers and corporate jet owners. They’ve also proposed to eliminate a widely used method of accounting for sold goods that usually reduces companies’ taxable profits and, therefore, their taxes.

While Republican political leaders want a deficit reduction plan that is limited to spending cuts, some have said existing corporate tax loopholes can be tightened.

Back in the 1980s, President Ronald Reagan led a major overhaul of the tax system to close corporate tax loopholes. Since then, a growing pile of tax credits and deductions have allowed many companies to move into new tax shelters. These days, some companies making billions of dollars feel less of a pinch from Uncle Sam than the typical middle-class family.

Individual taxpayers — who pay the lion’s share of federal income taxes — shelled out an average of 12.2 percent of their income to Uncle Sam for such taxes in 2008, the latest year for which data is available from the IRS.

Meanwhile, companies’ share of federal tax revenues have dropped by half since 1950, according to the nonpartisan Congressional Budget Office. Companies paid $304 billion in taxes in 2008, or 12 percent of total federal tax revenues, down from 26.5 percent in 1950. Individuals’ share grew from 40 percent to 45 percent during 1950-2008, to $1.1 trillion.

Still, many companies argue that the United States’ top corporate tax rate of 35 percent — one of the world’s highest rates — makes it difficult to compete with foreign rivals.

But critics counter that, because of the many tax shelters available in the U.S. tax code, many companies’ tax rates are lower here than overseas, especially compared to other developed nations in the Organization for Economic Cooperation and Development.

“We have one of the higher marginal tax rates in the OECD but one of the lowest effective tax rates in the OECD,” said Tad Ransopher, a tax lawyer and director of Georgia State University’s graduate taxation program.

Last year, the Congressional Budget Office estimated that corporate tax breaks will allow companies to trim a total of $190 billion from their federal tax bills during 2009-13. The most costly tax breaks, according to the CBO, include deferred profits from overseas subsidiaries, credits for domestic production of oil and other products, and accelerated depreciation of factory equipment and other investments.

However, a big problem with the hodge-podge of loopholes and tax breaks is that some companies end up paying very high tax rates while other profitable companies pay little or nothing.

“There’s not any loopholes for retailers,” said Bob McIntyre, director of the union-backed watchdog group, Citizens for Tax Justice. That’s why Home Depot ended up paying a tax rate of over 30 percent last year, he said.

On the other hand, big multinational companies like General Electric — which paid no federal income taxes last year — have found ways to shift profits to lower-tax overseas units, he said. “It’s costing the government about $70 billion a year at least,” he said.

Some of those companies are now lobbying for a so-called “repatriation holiday” that would allow them to cut their federal income taxes from 35 percent to 5.25 percent for foreign profits that they transfer home.

They say the cash transfer would stimulate corporate expansion and job growth in the United States.

Critics say a similar move in 2005 didn’t work well because most companies just used the money to pay dividends and buy back stock.

Coca-Cola and CCE both took advantage of a similar repatriation holiday in 2005 to transfer billions of dollars of overseas profits, saving hundreds of millions of dollars on their federal taxes.

Global payments

The bottom line is that — for a variety of reasons, ranging from lower overseas tax rates to credits for past years’ losses — most of the largest Atlanta corporations’ total income tax burdens were well below the 35 percent federal rate.

Coca-Cola’s current global income tax rate — for federal, state, local and foreign taxes — was a little more than 12 percent of its worldwide income of $14.2 billion last year. Most of the tax payments went to overseas governments.

The company reported cash payments of almost $1.8 billion for its global income taxes.

“The Coca-Cola Company is a compliant taxpayer globally. We pay all legally required income taxes in the U.S. and every country in which its subsidiaries operate,” said Coca-Cola spokesman Kent Landers in emailed responses to questions.

Landers said Coca-Cola’s average tax rate is lower than the U.S. tax rate because the company sells 80 percent of its products in overseas markets that have lower tax rates. As a result, the company’s average tax rate across its global operations was about 23 percent, not counting special items related to its acquisition last year of CCE’s North American operations. Those items inflated the U.S. income Coca-Cola reported to its shareholders last year, but not its taxable income.

“We estimate the tax rate on our U.S. operations has been in the 38-39 percent range,” Landers said.

Coca-Cola’s 2010 deal with CCE split its then-largest bottler in two.

While Coca-Cola got the bottler’s North American operations in the $12 billion transaction, CCE kept its European operations and added some from Coca-Cola.

The deal also left CCE with an odd structure that has tax consequences for the bottler. While 100 percent of its revenues come from Europe, its headquarters, executives and many of its shareholders are in the United States. With no income from the U.S., that means the company pays almost no taxes in the United States — except on the foreign profits it repatriates to pay its headquarters staff and to buy back shares or pay dividends to its shareholders.

In filings, CCE said it paid current federal income taxes of $8 million last year.

Its global cash tax payments last year totaled $185 million, or 25 percent of its pre-tax income, all from overseas.

On the other hand, Home Depot, which generated most of its sales and profits in the United States, said its cash payments for federal, state, local and international income taxes were almost $2.1 billion for its most recent fiscal year, or 39 percent of its pre-tax income of $5.3 billion.

Package shipper UPS, which said a third of its operating profits came from overseas operations, reported tax rates that were somewhere in the middle.

On a cash basis, it paid $1.3 billion in taxes in 2010, or almost 24 percent of its total $5.5 billion pre-tax income. But in the previous two years, its cash payments of income taxes were much smaller: $443 million in 2009 and $760 million in 2008. The three-year average cash tax bill was 18 percent of worldwide income.

On a current tax basis — ignoring deferred taxes — UPS’ federal tax expense last year was $776 million, or 16 percent of its U.S. pre-tax income as reported to shareholders.

Finally, Delta, which acquired Northwest in 2008, didn’t pay any federal income taxes last year because of both carriers’ massive losses in recent years. In fact, Delta may not pay any federal taxes for a decade or more in the future.

“We believe we will not pay any cash federal income taxes during the next several years,” the airline said in regulatory filings, noting that it had $17.1 billion worth of so-called “net operating loss carry-forwards” at the end of last year. By offsetting future profits on the company’s tax returns, those carry-forwards allow the company to avoid paying federal income taxes until they are used up or expire.

Tax experts say the IRS has long allowed companies to use such tax credits to even the playing field. Otherwise, companies in boom-and-bust industries could end up paying higher taxes than companies that churn out the same total profits over several years, but without losses.

Delta’s tax credits don’t start expiring until 2022, meaning the company could potentially avoid roughly $6 billion in taxes over the next 10 years.