General Electric's Future Looks Taxing

General Electric ( GE) investors are finding taxes are becoming an ever-growing concern.

Major changes in how U.S. companies pay taxes on foreign earnings are widely seen as inevitable, and no company is likely to take as big a hit as GE, according to tax expert Robert Willens, a longtime Lehman Brothers executive who now runs his own consulting firm.

Willens says analysts at Lehman used to ask him whether GE would continue to be able to claim that most of its income was earned in countries with low tax rates.

"That's always been a big concern of analysts -- when this game would end -- and it looks like this is when it's going to end," he says, arguing that a raft of changes in proposed legislation proposed by House Ways and Means Committee Chairman Charles Rangel (D., N.Y.) stand a very strong chance of being enacted.

Willens and Nick Heymann, an analyst at Sterne Agee, estimate GE will end up paying a tax rate of about 28% to 30%, assuming, as expected, new laws are passed and take effect in 2011. That compares to the 5.5% GE paid in 2008, 15.6% in 2007 and 16.9% in 2006.

The result would mean billions of dollars subtracted from GE earnings. In 2008, for example, if GE had paid a tax rate of 28% instead of 5.5%, it would have earned $13.78 billion from its ongoing businesses, instead of $18.09 billion -- a $4.31 billion hit to earnings.

"This is definitely another issue for GE and GE Capital to contend with," Heymann says. He notes GE industrial units pay a much higher tax rate, and nearly conform with Rangel's proposals. However, GE Capital typically pays a rate in the single digits, Heymann says. He believes the proposed tax changes could result in GE Capital posting net losses, resulting in a further erosion of its capital base.

Anxiety over the proposed changes appears to be evident in GE's earnings calls, as analysts try to better understand how changes in tax laws will impact the company. The word "tax" came up 48 times during the April earnings call and 53 times in January, a few days after President Obama took the Oath of Office. That compares to 33 mentions of the word "tax" during the pre-election October call, 12 mentions during the July call and seven mentions in April 2008.

GE watchers are already highly sensitized to the benefit GE gets from its low tax rate. In January, a report from Barclays Capital analyst Robert Cornell that predicted an outsized tax-related contribution to GE's fourth quarter earnings caused shares to plummet at the time.

Still, because GE does not project earnings beyond 2010, the issue is likely not reflected in analyst forecasts.

GE has shown it will not back down without a fight on the tax issue, even if its opposition is not expected to affect the outcome.

It has lobbied against the proposals with the help of other corporate titans including Intel ( INTC), IBM ( IBM), McDonald's ( MCD), Merck & Co. ( MRK) and Microsoft ( MSFT).

"No other major country in the world has rules like those proposed by the administration," wrote GE spokeswoman Anne Eisele, in an email message. She adds it is "premature to predict the impact, if any, the proposed change would have on GE operations."

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