World risk: Alert - Multinationals find tax relief abroad

883 words
2 February 2004
Economist Intelligence Unit - RiskWire
Riskwire
37
Number 101
English
(C) 2004 The Economist Intelligence Unit Ltd.

COUNTRY BRIEFING

FROM FINANCIAL TIMES

By Dan Roberts and Gary Silverman

Death and taxes used tobe the only certainties in life. For multinational companies constantly shiftingresources around countries with varying tax rates, the percentage of their income they hand to governments is increasingly a matter of choice.

Few like to talk about it publicly in a year of rising profits and a record US federal deficit, but Citigroup broke ranks last October by telling analysts it was looking for ways to reduce its third-quarter tax rate of 31.3 per cent by investing more capital overseas.

"There are possibilities to manage that number down through some of our international operations," said Todd Thomson, chief financial officer, in an interview.

Three months later, the bank's tax rate is down to 30.6 per cent, boosting net income by $52m over the quarter. For 2003 as a whole, the results are more dramatic. A drop of three percentage points on record pre-tax profits of $26bn saved the company some $780m.

However, savings equivalent to many companies' annual income are not enough when competitors are doing better still.

"We think it's okay but it's still something we need to focus on," Citigroup told analysts on January 20.

Citigroup's envy is directed principally at General Electric, whose financial services businesses have reduced their tax rate from 27 per cent in 1999, to 20 per cent in 2001 and just 16 per cent in 2003. GE's group rate is just 21.6 per cent.

While some of the difference is due to federal tax breaks for wind energy, GE says that much of the fall is due to the increasing share of business it does outside the US.

Like most multinationals, it is able to reduce the proportion of tax paid at higher US rates through paying tax on profits generated by its factories in China or back-office processing centres in India.

However, tax authorities are taking an increasingly tough line over how multinationals allocate costs and profits between national subsidiaries. In January, Glaxo-SmithKline was hit with a $5.2bn bill for additional taxes and interest.

At atime of soaring profits, shaving fractions off the tax rate has resumed importance and many US companies are adopting GE management techniques such as Six Sigma to achieve similar reductions.

Dow Chemical, which has received positive tax credits in both 2002 and 2003, said: "Because of Six Sigma tax planning initiatives, Dow now expects to be able to utilise tax assets that might otherwise have expired unused. These tax savings are real and are part of 2003 underlying results."

Results at Boeing and Exxon were also boosted by one-off tax benefits totalling $3.3bn and big manufacturers such as GE, Caterpillar and Intel receive extra tax benefits from surging exports as the dollar falls.

Falling tax rates helped generate significant increases in 2003 net income, raising questions about the long-term sustainability of company growth rates.

Analysis carried out by the Financial Times of the 100 largest companies focused on 68 companies that were profitable in both the past two years and have already reported preliminary financial statements for 2003.

Among these companies, a 2.3 percentage point drop in average tax rates can be measured by comparing their stated provisions for income tax, which include both current and deferred liabilities, and dividing it into pre- tax income.

Although experts prefer to wait until annual reports are published to conduct more sophisticated analysis, the trend is clear. The $106bn these 68 companies expect to pay on 2003 income would have been $8.1bn, or 7.6 per cent higher, if they had not managed to bring down their rate of tax from 2002 levels.

Those responsible for compiling the fiendishly complicated tax returns of multi-nationals say the relative growth of assets overseas has played the biggest part in allowing them to bring down the average rate.

"You only have to look at the way we have tightened our belts in the US through lay-offs to see how the mix will have changed," says the co-head of tax at one global bank.

"Even the UK can look like a relative fiscal paradise when you consider there is no state tax to pay but tax breaks elsewhere can mean effective rates are much lower than the US."

All this is in spite of a crackdown on the more aggressive tax avoidance schemes that proliferated in the late 1990s.

In October, the Senate finance committee shed light on illegal tax shelters and abuses of so-called "transfer pricing" rules that will make it far harder for companies to bend the rules in future.

Nevertheless, the legitimate growth in the global activities of multinationals is making it steadily more difficult to maintain relatively high rates of corporation tax in single countries like the US.

"It's going to get more difficult to tax multinationals and there is a big issue about whether it is even sustainable in the long term," says George Plesko, assistant professor of accounting at MIT. Additional reporting by Gary Silverman in New York

SOURCE: Financial Times

RiskWire 2 Feb 2004, Part 37 of 40

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