The balances aren’t necessarily held in cash and may never realistically be subject to U.S. taxes, particularly if invested in physical assets in high-taxed foreign countries, said Susan Morse, a tax law professor at the University of California, Hastings.
“In many cases, it really is permanently reinvested and it’s not an earnings management game,” she said.
The incentive to accumulate overseas profits in cash is acute for technology and pharmaceutical companies that generate income from intangible assets such as patents. They can sell the patents to their foreign subsidiaries and then shift them to low-tax jurisdictions and book the profits there.
Intangible Income
“They’re using the law to their advantage, as all companies do,” Atkinson said. “And it’s easier to do that with intangible income.”
That pattern is evident from the filings of the minority of companies that disclose how much they would have to pay if they brought their offshore profits home.
Microsoft, for example, reported that it would owe $19.4 billion if it repatriated its $60.8 billion in offshore holdings. That 31.9 percent rate indicates that Microsoft has paid as little as 3.1 percent in foreign taxes, or somewhat more if the $19.4 billion includes state taxes and foreign withholding taxes.
In testimony before a Senate subcommittee last year, Bill Sample, Microsoft’s corporate vice president for worldwide tax, said the U.S. tax system is “outdated,” uncompetitive and provides disincentives for U.S. investment.
Global Business
“Microsoft’s tax results follow from its business, which is fundamentally a global business that requires us to operate in foreign markets in order to compete and grow,” he said. “In conducting our business at home and abroad, we abide by U.S. and foreign tax laws as written.”