GE Aerospace (GE)

[MiamiGent]

GE Bites Tax Bullet in Move to Help Share Buybacks

BY Dow Jones & Company, Inc. — 7:15 PM ET 04/10/2015

http://stockcharts.com/h-sc/ui?s=GE

As General Electric Co. (GE) unveiled a reshaping of its balance sheet and operations, the company's decision to repatriate $36 billion in foreign cash brings a large tax bill and raises concerns about whether multinationals' efforts to minimize taxes are taking too heavy a toll back home.

The U.S. tax system, with one of the world's highest corporate rates, has led U.S. companies with significant overseas operations to park much of their cash offshore. But that decision comes with its own cost in the form of lost opportunities at home, and GE's decision suggests more companies may be reaching a tipping point, some observers said.

"It's great to keep your profits out of the U.S. tax net," said Martin Sullivan, chief economist at Tax Analysts, a newsletter. "But as those piles of cash grow [offshore], you are missing more and more opportunities to employ that cash in the U.S. At some point, saving tax is not worth it."

GE said Friday that it would repatriate $36 billion, more than half its foreign cash, as part of a broader move to jettison its banking operations and focus on industrial units. The money will help fund a $50 billion stock buyback GE's board has approved, part of a plan to return up to $90 billion to shareholders over the next few years.

The cash transfer will trigger $6 billion in taxes, a significant sum, even for a firm of GE's size. The expected tax bill amounts to about 40% of its total net income last year of $15.3 billion.

GE is taking a step most big U.S. multinationals have resisted in recent years. At 35%, the U.S.'s top corporate tax rate is among the highest in the world. The U.S. allows firms to defer federal tax on their foreign earnings as long as the money remains overseas. That has led many U.S. firms to choose to leave their foreign profits offshore indefinitely.

The 1,000 largest U.S. companies recently held $2.3 trillion overseas, roughly double 2009 levels, according to research firm Audit Analytics. Foreign cash has risen from 6.6% of total assets at those companies to 9.1% over the past five years.

Yet signs of stress have started to emerge.

For some companies, cash amassed overseas has strained their ability to fund operations at home. At others, stockholders, often rallied by activist hedge funds, are clamoring for companies to share the wealth in the form of buybacks or dividends.

Already, U.S. companies have been bringing somewhat more money home in the past year or so and parking a little less overseas.

Analysts at Credit Suisse estimated in March that about $301 billion was repatriated or earmarked for repatriation in 2014 by firms in the S&P 500, the highest level in about a decade.

E-commerce company eBay Inc. and medical-device maker Stryker Corp., among others, have recently set aside large chunks of foreign profits to be brought back to the U.S.

Those moves, along with GE's, reflect "the growing pressures surrounding companies that have massive unremitted foreign earnings balances," said Robert Willens, an independent tax expert.

The recent trend toward higher repatriation could reflect a perception that a tax overhaul in the U.S. likely won't happen until 2017 at the earliest, some observers said. A tax overhaul could include a lower one-time tax on accumulated overseas profits, potentially making it cheaper to bring money home.

Borrowing in the U.S. to fund operations, pay dividends or buy back shares also could become more expensive as the Federal Reserve is expected to raise interest rates later this year.

To be sure, GE's move likely was significantly shaped by factors that are specific to the company and the restructuring it is undertaking. Several observers warned it likely doesn't herald a big shift in corporate behavior.

"This is a function of executing this plan," Chief Financial Officer Jeff Bornstein said on a conference call Friday. "In the context of remaking GE Capital, this is a pretty reasonable friction cost."

The move is notable coming from GE, which has faced criticism in the past for its ultralow tax rate and for lobbying in Washington for beneficial corporate tax treatments. The company's effective tax rate was 10.3% last year and 4.2% in 2013, in large part by deferring U.S. taxes and creating subsidiaries in countries with lower rates like Ireland, home to its aircraft-leasing and financing division.

Write to John D. McKinnon at [e-mail] and Liz Hoffman at [e-mail]