Further explaining why it likes doing business abroad, GE explains "there is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax," according to the 10-K.
One important reason for GE's low tax bill is an "active financing exception," which allows GE and other financial services companies to avoid paying taxes on "certain active financial services income," as the 10-K puts it, such as interest payments on loans made outside the U.S.
Referring to the active financing exception, GE warns in the "risk factors" section of the 10-K that "this provision, which expired at the end of 2011, had been scheduled to expire and had been extended by Congress on six previous occasions, including in December of 2010, but there can be no assurance that it will be extended."
In fact it was extended as part of the budget deal struck by Congress Tuesday night. However, the "territorial" tax system proposed by Simpson-Bowles would mean GE could remove those sentences from the "risk factors."Just as a company is willing to pay up to settle a lawsuit and give shareholders a degree of certainty, GE would be happy to risk paying a little extra in taxes so it could stop asking Congress to repeatedly extend this active financing exception. This is the loophole GE wants to close. It's true: if we stop threatening to tax GE's foreign earnings, GE won't need a loophole to be sure we don't do it. Meanwhile, GE's U.S. tax rate goes lower. Sure, as GE says, that's simple. It also sounds like a great deal for GE, but maybe not so great for the rest of us. Simple sounds great--especially when we're talking about something as complex as taxes. GE is smart to appeal to our desire for simplicity in the tax code. But we must be careful not to be seduced by simplicity: simple and fair aren't the same thing. -- Written by Dan Freed in New York. Follow @dan_freed
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