Cisco tax rate dives as offshore profits pile up

First Microsoft, then Google - now Cisco. A whopping 20 percentage point fall (or a 53% absolute fall) in its tax rate in just 13 years. Courtesy of the always excellent Marty Sullivan of Tax Analysts. The article is here, courtesy of TaxProf. This is happening across the board.

We recently blogged about deferred tax - and this is a big part of the story. Companies only get taxed on offshore income once they repatriate it home, say to pay dividends. What doesn't get brought home sits, deferred indefinitely, offshore (OK: it's a bit more complicated than that, but the basic point is valid.) Bloomberg estimated in May that there was US$1 trillion of these deferred taxes sitting offshore, not subject to U.S. taxes. Cisco CEO John Chambers estimated it at US$1.2 trillion (though this does depend a bit on what we mean by deferred tax).

George W. Bush approved a one-off loophole in 2004 that set a low five percent tax rate on repatriated income: and US$360 billion of deferred taxes whooshed back into the United States through that loophole. Citizens for Tax Justice estimated then that it did not create a single job in the U.S. - though it did fatten CEO paychecks dramatically. Now take a look at this latest academic research on the effects of that loophole it led to U.S. companies shifting ever more money offshore, in eager anticipation of the next one:

"Statistical analysis of the data shows that there has been a dramatic increase in the rate at which firms add to their stockpile of foreign earnings kept overseas. Further analysis shows that this change has been driven both by an increase in the fraction of foreign earnings that remain permanently invested abroad and also, in the case of some categories of firms, by an increase in foreign earnings relative to domestic earnings. These findings are consistent with the hypothesis that the temporary holiday conditioned firms to anticipate future such holidays and to change their behavior by placing more earnings overseas than ever before. Thus, although the AJCA was a short-term success in getting foreign earnings repatriated, it may have been a long-term failure by creating a long-term net increase in total earnings kept overseas."

We hope they don't allow this again. However, as tax expert David Rosenbloom noted in 2007:

Congress can swear on two stacks of Bibles that it’ll never do it again,” Mr. Rosenbloom said, “but they’ve lost their virginity.

Chambers said something similar, just a few days ago:

‘I’d be very surprised if repatriation does not happen,’’ Chambers told Bloomberg television on November 11.

The Republicans have made a comeback. Chambers could well be right.

Caution: reading TJN blogs may cause depression.