Procter & Gamble Co. builds its overseas earnings stash

Why $49 billion in offshore profit never returned

CINCINNATI - There are millions of them, stranded overseas by a U.S. policy that many view as misguided.

Immigrants?

No. They are dollars.

Procter & Gamble Co. added $4 billion to its overseas stash in 2016, bringing to $49 billion the total amount of foreign profits that P&G is shielding from U.S. tax collectors.

The amount has nearly doubled since 2009, when P&G disclosed $24 billion in “undistributed earnings of foreign subsidiaries” in its annual report to shareholders. Much of the money will never return. P&G says it’s already re-invested in foreign subsidiaries. About $11 billion in cash is held offshore, the majority of it in Western European countries.

“We’re an international business,” said P&G Spokesman Damon Jones. “More than half our sales are outside the U.S. We’re investing in growing the company. It’s invested in plants, buildings, research and development.”

P&G ranks 14th on a list of companies with the largest amount of foreign profits that have not been repatriated to the U.S., where they would be subject to a corporate income tax of up to 35 percent.

The list, compiled by Citizens for Tax Justice, shows Apple with the largest offshore holdings, at $200 billion.  Fortune 500 companies had a combined $2.4 trillion overseas at the end of 2015.

“Everyone agrees that it’s a big problem,” said Robert Pozen, a senior fellow at the Brookings Institution, where he’s written extensively on corporate tax reform.

“It’s clearly not good for the U.S.," Pozen said. "It’s up to 2 1/2 trillion dollars now that’s overseas and it’s not coming back where it could help economic growth. I think most people would agree that the current system, from a public policy point of view, does not make sense.”

Still, Pozen said companies can’t be blamed for keeping profits offshore.

“They are optimizing their situation,” said the former SEC lawyer who held leadership posts at Fidelity Investments and MFS Investment Management.

“These companies have a lot of good investment opportunities overseas,” he said. “And they avoid a 35 percent tax by not bringing it back.”

P&G said the U.S. is unique among industrialized nations in seeking to fully tax income earned outside its borders.

“Our tax burden is substantially higher than our competitors overseas,” Jones said. “We think that provides an unfair advantage for our competitors. We support reforms that would create a more stable tax environment.”

'The problem is what we can do about it'

President Barack Obama has proposed lowering the U.S. corporate tax rate to 28 percent and requiring companies to pay a 19 percent global tax on all foreign profits, whether or not the money returns to the U.S. The proposal also includes a one-time 14 percent tax on foreign profits from past years. A divided Congress has ignored the plan, but Pozen thinks it offers a workable framework for a compromise next year.

In the meantime, P&G has increased its borrowing in the U.S. to pay for share buybacks and other short-term cash needs. It’s a practice that other multinational companies have used, a practice that some criticize as a tax dodge.

"It’s hard to see any justification for that other than to dodge taxes,” said Robbie Silverman, senior advisor for Oxfam America, a nonprofit advocacy group for global policy changes that reduce poverty, hunger and injustice.

“What you’re describing is something called earnings stripping,” he said. “Companies will do an intra-company loan where basically the subsidiary in a high-tax jurisdiction will take out a loan so the interest will flow to the low-tax jurisdiction and the tax deduction remain in the high-tax jurisdiction. So, companies artificially lower the earnings in high-tax jurisdictions and push them to low-tax jurisdictions. It’s definitely a tax dodge."

Pozen said it’s not a dodge because U.S. tax law allows it.

“Everyone agrees it’s a bad system,” he said. “You have a very high rate, but you don’t pay it unless you bring it back to the U.S. So, it’s incenting people not to bring it back. We all know that. The problem is, What we can do about it?”

P&G has promoted an international approach to corporate taxation that allows companies to pay taxes in the jurisdictions where the profit is earned. But that doesn’t help the U.S. collect taxes on the $2.4 trillion already earned overseas. Pozen thinks the Obama plan could work if the tax rates were lower. Silverman thinks greater disclosure would help.

“We’re pushing for country-by-country reporting, which says companies need to disclose for every country in which they operate what the profits are, what the revenues are, what the tax payments are any public subsidies they receive in that jurisdiction,” he said. “There are legitimate reasons for large companies to have operations all over the world, and P&G is a perfect example of that. It’s selling in dozens of countries all over the world. There’s no question there are legitimate reasons for a company to do that. Our argument is that companies need to disclose more to be able to assess whether all of its operations are legitimate or not.”

Silverman’s research on the 50 largest U.S. companies found hundreds of subsidiaries operating in countries known as tax havens. P&G has 38 such business units.

“It may be that those are totally appropriate,” he said. “But without more disclosures, it’s impossible to assess."

 

Even without public disclosures, governments around the world are challenging P&G’s tax-avoidance strategies. The company has paid $686 million in tax settlements in the last three years and has another $857 million set aside for “uncertain tax positions,” which are explained this way in P&G’s annual report:

“The Company is present in approximately 140 taxable jurisdictions and, at any point in time, has 50-60 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable.”

P&G paid $3.3 billion in taxes last year and had an effective tax rate of 25 percent, higher than many multinational companies and well above the 16.9 percent average rate that a 2013 Government Accountability Office study said U.S. companies paid in 2010.

Cincinnati impact?

P&G argues its global tax strategy is not impeding growth in Cincinnati, where the company has eliminated about 2,000 jobs since 2012.

“The job reductions we’ve made in the Cincinnati area are consistent with the reductions we’ve made around the world,” Jones said. “Global reduction has happened as well.”

New factories in China and Africa make it easier for P&G to ship goods profitably to new consumers. Research centers in Singapore and Latin America put scientists closer to the consumers who will be asked to buy the products they’re developing.

“When our business does well internationally, it helps our business here, in the U.S. and specifically in Ohio,” Jones said. “Two out of every five jobs in Ohio actually support our international business.”

But here’s a potential long-term problem: Now that P&G is close to completing a global restructuring that shed 105 brands and 24,000 jobs, CEO David Taylor has signaled a renewed interest in acquisitions. Unless U.S. tax law changes, Pozen said P&G has an incentive not to look for deals in America.

“Clearly, it’s better for them to look for outside the U.S.,” he said. “If they do acquisitions in the U.S., they’re either going to have to borrow or pay that tax.”

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