GE, Pfizer Face $506 Billion Foreign-Cash Tax in Obama Plan

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Microsoft Corp. Chief Executive Officer Satya Nadella Speaks At The Worldwide Partner Conference

The Microsoft Worldwide Partner Conference in Washington, D.C., on July 16, 2014.

Photographer: Andrew Harrer/Bloomberg

U.S. companies including General Electric Co., Microsoft Corp. and Pfizer Inc. would pay $506 billion over the next decade under President Barack Obama’s proposal to encourage them to bring back profits held overseas.

That trio tops the list of Standard & Poor’s 500 Index companies in earnings reinvested outside the U.S., according to Bloomberg Intelligence analysts Brian Friel and Tiffany Young. Obama’s budget estimates the stockpile of corporate earnings outside the U.S. at about $2 trillion.

U.S. business lobbyists have been seeking policy changes to help repatriate profits at a rate they deem acceptable. Obama’s plan envisions a levy of 19 percent for future earnings and a one-time, 14 percent tax on current profits outside the U.S. Many companies avoid higher U.S. taxes by keeping their foreign profits overseas -- a savings that precludes the use of that money in the U.S.

“The odds start low, but you can see momentum building because the president’s proposal here is the most in-depth proposal” he has offered, Friel said in a telephone interview from Washington. “That’s an indication that he’s serious about engaging with Republicans to try and strike a deal.”

Obama’s Proposals

Obama’s proposals on future foreign profits and other international tax-code changes would raise an estimated $238 billion over the next 10 years, according to an analysis by Friel and Young. The one-time tax on current earnings held abroad would fetch $268 billion over the next decade, Friel and Young’s analysis shows.

Proceeds from the one-time levy would go to invest in U.S. infrastructure, according to Obama’s budget plan.

GE led U.S. companies with about $110 billion of earnings reinvested outside of the U.S. as of the end of 2013, according to data compiled by Bloomberg Intelligence. Microsoft held $92.9 billion of its profits outside of the U.S. as of June 30, while Pfizer’s total was about $69 billion as of Dec. 31, 2013.

Joan Campion, a spokeswoman for New York-based Pfizer, declined to comment on Obama’s tax plan. Peter Wootton, a spokesman for Redmond, Washington-based Microsoft, didn’t respond to a voice-mail message left for comment.

GE, based in Fairfield, Connecticut, supports comprehensive tax-law changes, including closing loopholes and adopting a rate in line with those of major U.S. trading partners, said Seth Martin, a spokesman.

‘Taxed Twice’

GE keeps foreign earnings outside the U.S. because it needs to reinvest in those operations and because “under current U.S. law we would be taxed twice -- overseas at the point of sale and again in the U.S., essentially charging us more to invest at home than foreign competitors,” Martin said by e-mail.

The Information Technology Industry Council in Washington said taxation of overseas earnings “gives us significant pause” and urged the Obama administration and Congress to “give our broken tax code a complete reboot.”

Obama’s proposal to attract foreign-held cash to the U.S. would mark the second time companies have received this break in about a decade, said Reuven Avi-Yonah, director of the international tax program at the University of Michigan Law School. The American Jobs Creation Act of 2004 lowered the rate for corporate cash repatriated voluntarily to 5.25 percent.

“This is a pretty good deal in a way,” Avi-Yonah said. “It enables them to bring back this money at a rate that is significantly lower, and to use it freely.”

‘Nice Chunk’

Tax changes to bring back more corporate profits to the U.S. would let companies spend more at home on dividends, buybacks, acquisitions, capital investments and workers, said Philip Orlando, chief equity strategist for Federated Global Investment Management, which oversees about $360 billion in stocks, bonds and cash.

“That overseas money would be used to boost the U.S. economy and financial markets, and the federal government would get a nice chunk of money to be able to fund some much-needed infrastructure spending,” Orlando said by phone from New York.

The Republican-controlled Congress probably would negotiate for a lower rate than 14 percent for the one-time repatriation and for the tax on foreign earnings to be the same as a lowered domestic corporate rate, Orlando said.

Obama’s willingness to make a formal proposal “is amazingly positive,” Orlando said. “If he’s at least bringing it on the table perhaps we can start to have an intelligent discussion and move the numbers into areas that make sense.”

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