Notorious tax dodger GE recently released its annual financial report and the only thing eye-raising about the company’s paltry 0.9 percent federal income tax rate is that it's marginally higher than the 0.4 percent average rate it paid over the past decade.
Released without fanfare late in the afternoon last Friday, GE’s latest annual report shows the company enjoyed $5.8 billion in pretax U.S. profits in 2014, but paid just $51 million in federal income taxes. In other words, GE remains a champion tax dodger. Whether it can continue to avoid taxes may depend upon what Congress decides to do about one of the misguided tax breaks that helps make GE’s tax avoidance possible, a tax break that expired at the end of last year.
The tax break in question, the “active financing exception,” has come back from the dead before. Repealed as part of the loophole-closing Tax Reform Act of 1986, Congress temporarily reinstated the active financing exception in 1997 after fierce lobbying by GE and other multinational financial companies. Since then, lawmakers have extended it numerous times, usually for one or two years at a time and often retroactively.
This tax loophole allows American corporations to indefinitely defer paying U.S. taxes on their offshore profits, but there is a general rule (often called “subpart F” in reference to the part of the tax code that spells it out) that corporations cannot defer U.S. taxes on dividends, interest or other types of “passive” income. That’s because these types of income are easy to shift from one country to another to avoid taxes. The “active financing exception” is an exception to subpart F. As a result of this “exception,” companies like GE can indefinitely avoid paying taxes to any nation on much of their financing income, by claiming that they earned the profits in in offshore tax havens.
The active financing exception has been repeatedly extended as part of the so-called “extenders” — legislation that Congress enacts every couple of years to continue a package of (ostensibly temporary) tax breaks for business interests, and is one of dozens of “extenders” that expired at the end of 2014.
GE won’t disclose just how valuable the active financing rule is to its bottom line. But when the tax break was set to expire in 2008, the head of the company’s tax department infamously went down on one knee in the office of the Ways and Means Committee chairman Charles Rangel to beg for its extension. In GE’s annual reports to shareholders, it notes that “[i]f this provision is not extended, we expect our effective tax rate to increase significantly.”
It’s hard to know what “significantly” means to a company that pays virtually nothing in federal income taxes. But at a time when both President Barack Obama and Democrats in the House are proposing sensible strategies for increasing taxes on the financial sector, it’s worth remembering that the active financing exception plays a significant role in the ability of many large U.S.-based financial institutions besides GE to pay low effective U.S. tax rates.
With the lobbying power of GE and the financial services industry, it will sadly be no surprise if congressional lawmakers ride to the rescue of low-tax multinationals once again. But the $5 billion a year price tag of the “active-financing exception” should be a good reason for Congress to sit on its collective hands and let this tax giveaway stay dead. GE will undoubtedly survive if its tax bill goes up a bit.