General Electric went into full public-relations pushback mode after The New York Times‘s damaging story Friday on how it avoids paying U.S. corporate income taxes. But in doing so, the company, unable to get its own story straight, just compounded the damage.
Its pushback included putting up a fact-check on its own site, commenting on a post I wrote, and getting into an embarrassing back-and-forth on Twitter and on Business Insider with Henry Blodget.
First, its response on its GE Reports website, where it calls the Times piece a “particularly distorted and misleading account,” is chock full of red herrings and straw men. Let’s take these one by one (the bold in the bullets is GE’s emphasis, not mine):
GE pays what it owes under the law and is scrupulous about its compliance with tax obligations in all jurisdictions. We are committed to acting with integrity in relation to our tax obligations. At the same time, we have a responsibility to our shareholders to reduce our tax costs as the law allows.
Tax evasion is illegal, but tax avoidance is legal, and the Times doesn’t accuse or imply that GE breaks the law by evading taxes. A major theme of the story is how GE uses its money and lobbying might to curry favor with the government to set up the law so it can avoid taxes.
Next, GE says:
Significant losses at GE Capital during the financial crisis, largely in the United States, reduced GE’s overall tax rate below historic levels the past few years. Those losses and the subsequent reduction in taxes owed is not a “tax avoidance” strategy. Taking out GE Capital makes GE’s effective tax rate 21% over the past several years. GE’s consolidated (or overall) effective tax rate prior to the financial crisis was in the teens to more than 20%.
But the whole point of the Times‘s piece is that GE uses GE Capital to lower its U.S. tax bill. Forbes said much the same thing a year ago in a story on how GE didn’t pay U.S. income taxes last year:
It’s GE Capital that keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely.
Further, the Times doesn’t say that losing money is a tax avoidance strategy for GE, and the paper did report, despite what GE says now, that “G.E. officials say the disparity between American revenue and American profit is the result of ordinary business factors, such as investment in overseas markets and heavy lending losses in the United States recently.” I agree that the NYT should have fleshed out the lending losses factor a bit more, but I don’t think it was required to do so here.
Also problematic for GE’s defense: It emphasizes its pre-crisis effective tax rate here. That tax rate, best as I can tell, includes deferred taxes that GE is likely never to have to pay, unless it for some reason decides to repatriate foreign earnings to the U.S. without a tax holiday (or unless some future post-Gilded Age United States somehow decides to get tough on corporate tax sheltering). So that’s an artificially inflated number. The Times terrific infographic shows what the real story is:
Here’s how the Times put the chart in the text of the story:
…G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.
Here’s GE’s third bullet point:
GE’s industrial tax rate averages well above 20% historically. In 2010, the tax rate for GE’s Industrial businesses was 17%, lower than historical levels due largely to settlements in routine tax audits that reduced our rate by almost 5 points. Excluding the benefit from audit resolutions for previously booked taxes, and restructuring and environmental charges, GE’s Industrial tax rate would have been about 23% — in line with historical averages
Again, this appears to be GE’s global industrial tax rate, not its U.S. one (I’d tell you for sure, but GE has not answered directly when I’ve asked). And it again excludes GE Capital, which was the focus of the Times story. Next:
GE’s tax rate will be higher in 2011. In 2011, we expect a higher tax rate as GE Capital continues to recover, the one-time factors that reduced 2010 are not expected to repeat, and because we expect higher taxes on the sale of NBCU.
That doesn’t have much of anything to do with the Times‘s story. Then there’s this:
GE paid almost $2.7 billion in cash taxes in 2010 on a consolidated basis (almost 19% of pretax income from continuing operations).
There they go again. Those cash taxes are how much GE paid globally, not in the U.S. Here’s its cashflow statement on Google Finance, if you want to check it out yourself.
Finally, in the sixth bullet point, GE gets around to responding to the Times on U.S. taxes.
GE paid significant U.S. income tax in 2010 and in total from 2006-2010. Over the past 10 years, GE has paid almost $23 billion of corporate income taxes to governments around the world, making it one of the highest payers of corporate income taxes. As disclosed in the cash flow statements of the 10-K, we paid over $14 billion of income taxes to governments around the world over the past 5 years.
Note how, despite, all the detail we got above on its global consolidated tax rate, the amount of cash the whole company paid—and even what its tax rate would be if you exclude the third of the company that is GE Capital—we get no numbers for U.S. taxes. Meantime, we get a $23 billion number for the amount GE paid globally over 10 years.
Sure, $23 billion is a big number in isolation. But GE has made $159 billion in net profits over the last decade, which would make its global income tax rate just 14 percent, assuming that the $23 billion figure they’re pushing is a net number—a big assumption, as we’ve seen.
More to the point, the fact that GE says it “paid significant U.S. income tax in 2010” can’t be reconciled with the Times report, which said GE’s tax rate was net negative. Either GE is misleading on a technicality (like, say, that it did paid withholding taxes but willl get them refunded) or the Times is wrong. This isn’t a jump ball. I asked GE multiple times to comment on whether the Times was wrong and it declined to answer directly. Until GE requests a correction from the Times or says publicly that it’s wrong, we’re going to assume the paper is correct.
It’s also worth noting that GE spokeswoman Anne Eisele left this comment on Henry Blodget’s post trying to figure out the GE/NYT spat:
We’ve already paid some and we expect a positive U.S. federal tax liability for 2010 when we complete our U.S. income tax filing later this year.
Eisele’s comment led Blodget to declare victory for GE. He reversed course shortly later in an update:
…the NYT sent us an AFP article in which GE spokesperson Anne Eisele–the same spokesperson who wrote the comment below–said the following: “GE did not pay US federal taxes last year because we did not owe any.”
So GE told one journalist that it didn’t pay federal taxes last year and didn’t owe any, while it told others that it did pay federal taxes and does expect to owe them. Somewhere around this time, Dow Jones filed a story reporting a third version:
General Electric Co. (GE) said Monday that it expects its U.S. income tax bill for 2010 to be completely offset by overpayments from prior years and other adjustments, although it noted that it hasn’t filed the return yet.
I got a fourth version from the company:
We will file our 2010 tax returns by September. We expect to have a small federal income tax liability. In 2010, GE paid significant federal income taxes for prior years.
GE needs multiple corrections on its own claims, but again, it hasn’t asked the Times to correct anything in the story it complained so loudly about.
Finally, I have to issue a retort to GE’s first bullet point, which says this:
GE pays what it owes under the law and is scrupulous about its compliance with tax obligations in all jurisdictions. We are committed to acting with integrity in relation to our tax obligations. At the same time, we have a responsibility to our shareholders to reduce our tax costs as the law allows.
Let’s hand that one over to David Cay Johnston, who published this investigation into GE taxes in Tax Notes International in 2008:
In 2005 the new manager of a General Electric sub- sidiary in Brazil that made light bulbs and lighting equipment got a tip, the company says. It led to his discovering something curious in the company’s records: Up to 64 percent of annual sales were re- corded as going to wholesale distributors in lightly populated regions near the Amazon River…
Moreira’s report explained that urban Brazilian states charged the subsidiary a 19 percent VAT on its bulbs, switches, and fixtures, while the rural states charged just 7 percent or none at all…
The internal documents offer a rare and candid look at how, behind closed doors, GE executives, managers, and lawyers dealt with evidence of systematic tax cheating that flourished over many years.
The internal documents show that the scheme Moreira found was no anomaly at the Brazilian lighting operation, known as GE Lighting or GEVISA. The documents discuss a second Brazilian invoicing scheme to escape state-level VAT and a separate system to evade tens of millions of dollars in Brazilian payroll taxes on compensation to the sales force, which did business in other Latin American countries as well…
The amount of Brazilian state-level VAT at issue, based on Moreira’s report and the other documents, appears to be less than $100 million. But that amount is only for the periods for which specific details can be extracted from the documents. Since the VAT scheme appears to have gone on long before the period covered in the Moreira report, the total sum could be much larger and could involve other countries supplied by the Brazil subsidiary.
It’s an interesting read, to say the least.
The second prong of the GE pushback was on Twitter, where its flacks went to help spread their “we pay lots of taxes” message. That began to backfire on Monday.
Before it suddenly quit tweeting about the issue, it pestered multiple Twitterers with its claim that GE paid $2.7 billion in cash taxes in 2010 (not mentioning to whom it paid them). GE also said that “The Times erroneously suggests GE makes use of tax ‘loopholes,'” as if GE, with its thousand-person-strong tax department, is the only big company in America that doesn’t take advantage of tax loopholes. When you say things like that, it’s awfully hard to trust anything else you say.
GE then got into something of a feud with Blodget:
Stop the misleading attacks. No Taxes?? GE paid $2.7 billion in cash taxes alone in 2010. http://bit.ly/goMKB9
Again, that $2.7 billion is what GE paid to government all around the world, not to the U.S. The Times didn’t say or imply that GE paid no taxes around the world. Blodget then wrote an account of how GE almost tricked him into believing they were right and the Times was wrong. Then he reversed course after the Eisele comment and reversed course again when the Times pointed out her previous statement that contradicted her comment. That’s not Blodget’s fault and he was quick to update when he found new information and to explain where the uncertainty lied.
Blodget circled back around to the issue a day later and wrote a second post splitting the baby. Here’s the classicly bad Business Insider headline:
THE TRUTH ABOUT THE NYT-GE TAX SPAT: They’re Both Full Of Crap!
That’s false equivalence and Blodget of all people—after getting the runaround and eventually radio silence from GE—should know that. Here’s what he says about the Times:
The New York Times is full of crap. Although we haven’t yet determined for certain that GE’s US federal income tax bill will be more than zero (neither has GE), the NYT’s statement that GE’s “American” tax bill in 2010 was “none” is, at best, highly misleading. GE paid loads of American taxes in 2010, even before you get to the federal income tax question. A reasonable New York Times reader would have no idea that the phrase “American tax bill” was supposed to mean only “federal income taxes” and this reader would therefore be surprised to learn that GE actually paid lots of local, state, and payroll taxes. We assume the New York Times aspires to be more accurate than “highly misleading,” so we think the paper should issue a correction.
I disagree. The NYT‘s “American tax bill” language is clearly referring to federal taxes, not state and local ones. The Times would have been better to have said “American income tax bill,” but that’s a minor point; a technicality at best. The story was very clearly about GE’s U.S. federal corporate-income taxes. I doubt anyone misunderstood that. And even if you accept that GE’s $1 billion-plus in payroll, state, and local taxes should count as “American taxes” there, that still leaves the company net negative. As the Times says, GE claimed a net U.S. tax benefit of $3.2 billion for 2010 in its securities filings.
But Blodget deserves applause for dogging this story and trying to get to the bottom of it. I particularly like that he published his email back and forth with GE (see the relevant ones of mine below).
As for GE, the bottom line is that its efforts to contain the damage from the Times story ended up making the company look deceptive. That’s given this story a bit more life than it would have had otherwise.
Hey, silver lining.
— Here’s my latest email to GE and its reply:
Anne, et al–I’ve still not heard from anyone on this. I’m going to run a post out in the morning regardless of whether I hear back, and as it stands now it’s not going to be favorable for you guys.
Questions again + 1 more:
— Was the Times wrong in reporting that you paid/will pay no net U.S. corporate income tax in 2010? You told the AFP that you paid none and owed none, after all. If that’s wrong, why?
— You use effective tax rates, but your real rates are actually lower because of deferred taxes on profits left overseas, right?
— And those tax rates you use are global tax rates, not just what you paid in the U.S., right?
— You guys repeatedly pointed out that GE paid $2.7 billion in cash taxes last year. On Twitter you said specifically at one point that that $2.7B went to the U.S. But that number is a total global figure for the company, right? And if that’s right, what’s the point of using the global number when the story was about U.S. taxes?I think these are straightforward questions that could be answered via a 2-3 minute email. I’d be glad to see that in my inbox when I get up in the morning. But if you need to call, please do so after 10:00 EDT–I’m in Seattle.
-R
GE’s Andrew S. Williams:
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.Ryan, thanks for your patience — here is our response:
GE is fully compliant with all tax laws. There are no exceptions.
We will file our 2010 tax returns by September. We expect to have a small federal income tax liability. In 2010, GE paid significant federal income taxes for prior years. We also paid about $1 billion in 2010 in other state, local and federal taxes in the U.S.
The main reason why our tax rate was so low in 2010, was that we lost billions of dollars in GE Capital, our financial arm, as a result of the global financial crisis. Similarly, in 2009 GE Capital’s losses were so large that the total company lost money on its U.S. operations. GE’s tax rate will be much higher in 2011 as GE Capital recovers.
The U.S. tax system is old, complex and uncompetitive. The purpose of the tax code should be that everyone pays their fair share, including GE. But it should also help to promote jobs and competitiveness. It does the opposite today.
GE favors closing loopholes, a lower corporate rate, and a tax system where overseas income is only subject to tax in the country where it’s earned. This would put us in line with every other developed country in the world.
Under any system, GE will comply and pay what it owes.
