An article on the cover of the March 25, 2011, edition of the New York Times caught our attention. New York Times Columnist David Kocieniewski’s front-page article, notably titled, G.E.’s Strategies Let It Avoid Taxes Altogether, describes how General Electric Corporation has enjoyed multi-billion dollar profits over the past seven years, but has seen a decrease in their effective tax rate. The New York Times story said that GE reported worldwide profits of $14.2 billion, yet owed zero dollars in U.S. taxes. In fact, based on its public disclosures GE claimed a tax benefit last year of $3.2 billion, the story added. The fact that GE is in the tax avoidance spotlight was no surprise to The Ferraro Law Firm, as GE recently topped The Ferraro Law Firm’s Ferraro 500 list of companies with the largest reserves for Uncertain Tax Benefits.
Note: The Ferraro 500 is The Ferraro Law Firm’s reorganization of the Fortune 500 by the size of the companies’ Unrecognized Tax Benefit reserve, known simply as the company’s “tax reserve.” Under the accounting requirements of FIN 48, a company must reserve, or in other words “hold back,” earnings for tax positions for which the company thinks the IRS has a greater likelihood of prevailing than the company. GE topped the list with a tax reserve of $8.719 billion (which includes a reserve for penalties of $99 million and interest of $1.369 billion) for the 2009 tax year. In 2010, GE reported a tax reserve of $7.448 billion (which includes $109 million of penalties and $1.2 billion of interest).
How does GE do it? For starters, many of the ways in which GE reduces its tax bill came from legitimate tax planning strategies. E.g., the article discusses at length the story behind their use of the active financing exceptions of Subpart F. However, more than $6 billion was cut from GE’s tax bill due to the uncertain tax positions they took (positions that GE thinks the IRS will more likely than not be able to challenge successfully). GE employs one of the largest Tax Departments in the world, and the article noted that all 975 employees in this department are tasked with upholding the Tax Department’s mission, “look to exploit opportunities to reduce tax.” With 287,000 worldwide employees and worldwide profits of $14 billion in total, the Tax Department appears to be the largest profit center in the whole company by far, which they accomplished by cutting GE’s tax bill $6 billion using uncertain tax positions and further by securing an additional $3.2 billion of tax benefits.
As demonstrated by the Ferraro 500, GE is not alone. In 2009, Fortune 500 companies reported more than $200 billion in uncertain tax positions, which far exceeded the $138 billion paid in corporate taxes for the same year.
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