Florida companies stash billions abroad, avoiding U.S. taxes

ORLANDO SENTINEL
By Jason Garcia, Orlando Sentinel
August 10, 2013

Florida's largest companies are holding at least $9.4 billion in foreign profits, shielding the earnings from U.S. income taxes, according to an Orlando Sentinel review of financial statements.

And the amount is growing: The Sentinel's review found that the a 15 percent increase from their prior fiscal year.

The maneuvering, which is entirely legal, has saved the companies hundreds of millions of dollars in federal and state income-tax payments.

The Florida businesses cover a broad industrial spectrum. They range from St. Petersburg-based electronics manufacturer Jabil Circuit Inc., which has accumulated $1.8 billion in offshore profits on which it has not paid any U.S. tax, to Miramar cosmetics company Elizabeth Arden Inc., which has parked $270 million in foreign subsidiaries.

The list includes three companies based in Central Florida — defense contractor Harris Corp., plastics seller Tupperware Brands Corp. and time-share developer Marriott Vacations Worldwide Corp. — that are holding a combined $1.4 billion in foreign earnings.

American companies are supposed to pay U.S. taxes on income they earn in other countries. But they have to do so only when their international subsidiaries return the money, or "repatriate" it, to their U.S. parent.

So companies can defer paying U.S. taxes simply by keeping the earnings in their subsidiaries and telling the Internal Revenue Service that they intend to indefinitely reinvest the money. They can even have their international subsidiaries store the profits in U.S. bank accounts and still not pay U.S. tax on it.

Untaxed foreign profits have become one of the deepest sinkholes in the tax code. Congress' Joint Committee on Taxation estimates that U.S. multinationals are avoiding about $40 billion a year in taxes by deferring payments on foreign profits. That's expected to balloon to more than $60 billion annually within five years.

The state of Florida, which begins with the federal tax code when setting its own, loses even more.

Altogether, U.S. multinationals have accumulated an estimated $2 trillion in undistributed foreign profits, an amount that has roughly doubled during the past five years. General Electric Co. alone has $108 billion in untaxed profits abroad.

"There is no prospect of corporate-tax reform without resolving this issue," said Edward Kleinbard, a University of Southern California law professor and former chief of staff for the Joint Committee on Taxation.

To determine how much Florida companies are holding in foreign profits, the Sentinel reviewed annual financial statements for 50 publicly traded companies. All are headquartered in this state, and each of them generated approximately $1 billion or more in sales during its most recent fiscal year.

Eighteen of those companies disclosed a combined $9.4 billion in accumulated foreign profits on which they have not paid any U.S. taxes.

Corporate executives say their overseas profits are growing rapidly in large part because they are doing more of their businesses overseas, particularly in fast-growing Asian markets.

"The largest portion of our growth over the last decade has been international in nature," Jabil Circuit Chief Financial Officer Forbes Alexander said in an interview.

Jabil, which makes components for iPhones and other electronic devices, increased its offshore profits by about $500 million last year, from $1.3 billion to $1.8 billion. That was more than the $396 million in net income the company reported to shareholders for the year.

Regulatory filings show that the size of Jabil's international businesses — as measured by the percentage of total revenue — was essentially unchanged from 2011 to 2012. But Alexander said some of the company's higher-margin businesses are now overseas, so they contributed a larger share of Jabil's bottom-line profit.

Tax-minimizing strategies also appear to have contributed to Jabil's swelling offshore profits. Records show that the company has transferred valuable intellectual property, such as licenses and patents, to foreign subsidiaries, which can then charge the company's U.S.-based entities for the right to use them.

That tactic, often referred to as "transfer pricing," is commonly used by multinational companies as a way to shift profits out of the United States and into low-tax jurisdictions. A U.S. Senate investigation last year found that Microsoft Corp. was able to "offshore" nearly $21 billion from 2009 to 2011 — nearly half of its net U.S. sales — by transferring certain intellectual-property rights to a Puerto Rican subsidiary. That one move saved Microsoft as much as $4.5 billion in taxes on goods sold in the United States, or a bit more than $4 million a day.

Jabil's offshore dealings drew scrutiny from the IRS, which accused the company of transferring its IP to foreign subsidiaries for free instead of charging "arm's-length" prices. The agency also said Jabil's corporate parent did not charge the foreign subsidiaries for services it provides to them.