Where do you stand on the issue of taxing profits earned overseas by American companies?
I ask because Caterpillar (CAT) found itself on the U.S. Senate hot seat last week.
There, what should have been an information-gathering hearing about offshore earnings turned into a full-blown attack on Caterpillar and its profitable foreign operations.
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A little background first.
Lots of American companies go to great effort to sell their products in foreign countries. After all, it makes solid business sense to expand your market reach beyond just the 50 states that make up our great country.
I believe we can all agree that there is nothing wrong with McDonald’s (MCD) selling Big Macs in Mexico, Procter & Gamble (PG) selling Pampers diapers in Poland, Apple (AAPL) selling iPhones in Australia, Boeing (BA) selling jets in Brazil, or Caterpillar selling backhoes in China.
The issue is how to tax those profits earned on overseas sales fairly.
Dollars from Farther Away,
Go a Shorter Distance Here
Remember, the foreign countries where those offshore sales occurred tax those profits first. After all, you don’t think France, Argentina or Japan let American companies do business in their countries without paying taxes, do you?
Of course not. But that means a U.S. multinational company, like General Electric (GE) or General Motors (GM), may be taxed TWICE on the same profit — once in Germany (for example) and again in the U.S.
Ouch, double taxation!
And many of those countries don’t take kindly to the profits made within their borders leaving the country, either.
Many want those dollars to stay where they are and be reinvested locally … or else place a heavy exit tax if the money is repatriated back to the U.S.
How do you feel about the profits Toyota (TM) earns on all those cars it sells in the U.S.? How do you feel about all the profits that Sanofi-Aventis (SNY) of France makes on the drugs it sells in the U.S.? How about the profits that Airbus makes on the jets it sells to American airline companies?
We’re Talking BIG Numbers
A Wall Street Journal analysis of 60 large U.S. multinational companies found that they collectively have a total of $166 billion sitting outside (offshore) the U.S. The U.S. tax code allows companies to defer tax payments on overseas income indefinitely if they don’t bring the proceeds back to the U.S.
The Joint Committee on Taxation estimates fully taxing all those overseas dollars would raise an additional $42 billion in taxes.
Hence, the arrival of Caterpillar in the Senate’s crosshairs for its vast foreign operations.
Caterpillar does business all over the world. Senator Carl Levin (D-Mich.) tersely accused Caterpillar of immorally cheating the U.S. out of $2.4 billion on its foreign earnings over the last 15 years.
There is no question that Caterpillar has minimized its bite by keeping a big chunk of its foreign profits offshore. However, Caterpillar is still paying a mountain of taxes to the IRS.
Caterpillar has an average effective tax rate of 29%. The company paid about $700 million in income, property, and sales taxes in 2013.
"I want to emphasize, Caterpillar complies with the U.S. tax laws and we pay everything we owe," said Caterpillar V.P. Julie Lagacy.
A 29% tax rate and $700 million may sound like reasonable numbers, but some of our elected officials, perhaps even you, think Caterpillar should pay even more.
Perhaps you’re on the other side and agree with the tax minimization and profit maximization strategies that Caterpillar is using and side more with Senator Rand Paul (R-Ky.). He said Caterpillar should get an award, not hostile treatment, for the American success story it has become.
The issue is complex but one thing is sure: American companies will continue to maximize profits and do what is in the best interests of their shareholders.
As an investor, there is one company that is making big bucks by helping American companies minimize their tax obligation on foreign profits: global consultant Accenture (ACN).
I’m not saying to rush out and buy Accenture, but it’s worth some research. All those offshore dollars are worth real money to someone!
P.S. Speaking of big global profit opportunities … I’ve come across something that, using history as a guide, could result in every $1 into $6.23 within 12 months. In fact, the last time something like this happened, it created nearly 53,000 new millionaires. I’ve put the full details into a special video presentation. Click here to view it now.