Bank Of America Finds Profit In Foreign Credit Maneuvers

“We believe this makes sense from a competitiveness standpoint, and we also believe reforms can greatly simplify our current international rules,” he said.

Territorial System

Under a territorial system, companies would have little or no tax incentive to hold earnings offshore and thus would be less likely to end up in the situation that Bank of America encountered.

Without changes, the U.S. tax system creates an incentive for companies to stockpile untaxed profits outside the country. Over the past year, 83 large U.S.-based multinational corporations added $183 billion to their untaxed offshore profits, which now total $1.46 trillion, according to data compiled by Bloomberg on U.S. companies with the largest accumulated foreign assets.

The system encourages companies to find ways to bring back their income and tax credits when they can do so with little or no cost or when they must repatriate earnings for other reasons.

‘Highly Taxed’

“What you want to do is somehow find a way to bring the foreign tax credits without bringing the income that would be highly taxed in the U.S.,” said Douglas Shackelford, a tax professor at the University of North Carolina’s Kenan-Flagler Business School.

Among the 83 U.S.-based multinationals with overseas stockpiles exceeding $4 billion in recent years, Bank of America was one of 12 that had a declining balance of offshore profits, according to Bloomberg data. As of the end of 2011, Bank of America had $18.5 billion in untaxed offshore profits. The company reported that repatriating all of the money would have cost $2.5 billion in taxes.

By the end of 2012, after the transactions, the company had $17.2 billion in accumulated offshore earnings, which would cost $4.3 billion in taxes to repatriate.

Bank of America almost tripled its stockpile of foreign tax credits to $6.2 billion in 2012. The credits sit on its books as deferred tax assets. They can be used to reduce future U.S. tax bills only after the company generates enough taxable income to exhaust $4.9 billion in U.S. deductions for losses.