By John Lawrence / Will Blog for Food / March 22, 2011
In an article March 18, 2011 in the San Diego Union Tribune, Qualcomm said “it would spend $975 million to build a factory in Taiwan to manufacture low-power Mirasol display screens for e-readers and smart phones.”
However, there is a caveat. Qualcomm would like to imply that, if it could repatriate the $9.8 billion in cash it is holding offshore without paying taxes or at a sufficiently reduced tax rate, it would build the factory in the US instead thus creating jobs.
Qualcomm is going on a campaign along with other firms such as Microsoft, Apple, Cisco, Pfizer and Oracle – no doubt employing the services of well paid lobbyists – to convince the government and anyone else that needs convincing that it would be in the best interests of the US to let these corporations bring this cash that is sitting offshore home. This is called repatriation. But the only thing that is standing in the way of bringing the cash home is the fact that Qualcomm will have to pay a 15% tax on it. This is because the US tax rate for corporations is 35%.
Qualcomm has already paid a 20% tax in the country where the cash is being held. The US charges the difference between the local tax rate and the US tax rate on profits earned overseas, but only when that cash is brought back into the country or repatriated. Qualcomm and these other giant corporations are trying to bribe the US government into letting them bring the cash home tax free and are holding out the carrot that that would create jobs in the US. They say that this cash being brought home would provide an economic stimulus to the US economy. But would it?
According to the Union article:
“While some economists say it led to investments and jobs, others contend that nearly all of the repatriated offshore cash [from a previous tax holiday in 2005] flowed to shareholders through stock buybacks and dividends — creating a windfall for investors instead of the spending on factories, equipment, research and job creation that lawmakers wanted.
“Moreover, many multinational companies find themselves with stockpiles of offshore cash in part because they set up foreign subsidiaries to avoid paying high U.S. corporate taxes on their domestic operations, said Adam Looney, a senior fellow at the Brookings Institution in Washington, D.C.
“‘They have clearly found this is a way to reduce the amount they’re paying in taxes,’ he said. ‘But one of the disadvantages is you end up with a rising amount of income that is stored abroad.'”
So is Qualcomm committing itself to creating jobs in the US if it could bring the cash home tax free? Of course not. First of all that cash consists of profits it made by selling merchandise offshore plus perhaps some profits made in the US that by devious legal means it shifted offshore to avoid paying taxes in the first place. Qualcomm3Smart corporate lawyers advise their clients on how to shift profits by means of subsidiaries to jurisdictions with low tax rates and to shift expenses to jurisdictions with high tax rates in order to offset taxes there.
So how “good” would giving these corporations a tax break be for the US economy?
Well not very if it just goes mainly into the pockets of CEOs and shareholders. If it really were so profitable to build a factory in the US, don’t you think Qualcomm would find the money to do it out of the $7.9 billion they’re sitting on here? They imply that they are trying to make up their mind whether to build the factory in Taiwan where there is a 17% tax rate or to build it here where there is a 35% tax rate as if this is the only consideration.
They build factories overseas not only to take advantage of low tax rates but also to take advantage of cheap foreign labor. There is also a growing foreign market to take advantage of. Also the cost of plant and equipment abroad is cheaper. Furthermore, environmental regulations are lax increasing profits even more. So it would only make sense to build a factory in the US if it were profitable to do so regardless of whether or not they got a tax holiday for repatriating foreign held cash. What it boils down to is that corporations will use any excuse to cheat American taxpayers out of money. Then they blather about budget deficits and how they must be accounted for on the backs of the poor and middle class.
Quoting the San Diego Union article again:
Qualcomm and other multinational companies think it would be good for the economy if this money could be repatriated without such large tax consequences.
“There’s $1.4 trillion that U.S. companies have so-called offshore,” [Qualcomm CEO Paul] Jacobs said at the Qualcomm annual meeting. “So you think about that with respect to the size of the stimulus package. These are real numbers, and so getting that money back into the United States would be very valuable for the U.S. economy, of course. So we’ve been out talking about repatriation.”
Last time there was a repatriation tax holiday, companies could bring home their offshore cash at a tax rate of 5.25 percent for one year in 2005. About 840 multinational companies took advantage of the holiday. The amount repatriated surged from an average of $62 billion during the previous five years to more than $300 billion in 2005, according to studies by economists.
Supporters of repatriation say the federal government collected taxes that it otherwise wouldn’t have. They also claim $187 billion of repatriated funds went to create or retain jobs, buy new equipment or pay down domestic debt. Qualcomm says it brought home about $500 million at the time and used it for acquisitions and hiring in California, North Carolina and Nevada.
But economists C. Fritz Foley of Harvard, Kristen Forbes of MIT and Dhammika Dharmapala of the University of Illinois found in a joint academic study that every $1 increase in repatriations during the tax holiday was associated with a 60- to 92-cent increase in payouts to shareholders, even though shareholder distributions were not a permitted use of repatriated funds under the legislation.
[The report was titled “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act.”]
Please note that Paul Jacobs doesn’t say how giving Qualcomm an immense tax break at a time when the government is running a huge deficit would be “very valuable for the US economy.” And he doesn’t commit to the proposition that the cash Qualcomm is sitting on here wouldn’t be used for stock buybacks or CEO salary padding once the foreign cash entered the US tax free. After all money is fungible. Would Qualcomm be in favor of a law which would require them to invest all the money in factories here employing X number of people? And would those jobs be guaranteed to stay here for say 10 years? And would Qualcomm commit to no stock buybacks (which raise the value of existing stock) for a period of 10 years. Or would they commit to no executive salary padding for 10 years? Mum is the word on those issues.
This just goes to show how screwed up the tax laws are in general. The way to encourage corporations to invest in factories here instead of overseas is not to give them tax breaks to repatriate profits. The way to do it is to not let them sell into the US market from abroad with out paying the piper at the border. Last year more than 50% of the profits of US corporations were made from their investments abroad. The US market is becoming one of diminishing returns. The main reason Qualcomm wants to repatriate the money is not to build factories here but to line the pockets of CEO Paul Jacobs and other US based investors. You can’t blame them for that. These corporations are out to make a buck, and one of the main ways they do that is to not pay taxes. And this has resulted in huge deficits for the US government.
According to Yahoo finance :
Paul Jacobs, the chief executive of Qualcomm Inc., was given a $17.6 million compensation package last year, about 1 percent more than in 2009, as the wireless chipmaker continued to benefit from the rise of smart phones and tablet computers and the spread of high-speed networks.
Jacobs’ pay package included $1.1 million in salary, a 19 percent increase from 2009, when he took a voluntary pay cut in conjunction with other cost-reduction measures at the company. At the time, it was planned that the CEO’s salary would return to the $1.1 million level.
The CEO received a $7,500 bonus related to the company’s patent award program, comparable with past years.
Qualcomm gave Jacobs $3.4 million in cash incentive pay. This is 6 percent lower than the amount in 2009, but the company said in a Securities and Exchange filing Wednesday that it reflects mathematical rounding, not poorer performance.
The company noted in the proxy filing that Jacobs’ pay is based on his leadership in accomplishing strong operating performance for the year, returning $4.2 billion to shareholders in dividends and stock buybacks and adding $700 million to the company’s cash pile, plus various strategic expansions and partnerships.
Now Paul Jacobs isn’t the only US investor who would profit from repatriating as much cash as possible from overseas while paying as little as possible in taxes. His father, Qualcomm founder Irwin Jacobs, is a billionaire and is without a doubt still invested in Qualcomm stock. Paul has three brothers, one of whom works for Qualcomm, but all of whom (and their extended families) are probably highly invested in Qualcomm stock. So they would obviously like to repatriate all that cash sitting overseas and to do so with the minimum tax liability. This is the situation that many corporate CEOs find themselves in. The cash is there and their major investors including families and close friends are here.
So how would you encourage corporations to invest and create jobs in the US rather than creating them abroad and then selling their products by importing them into the US market. The obvious answer is to make them pay a price for their access to the US market, but this goes against the prevailing modus operandi of free trade. Tariffs used to accomplish this goal by equalizing costs here and abroad making it more profitable to build factories and create jobs here. If corporations had to pay a 20% tariff or VAT tax like they do in Germany when their products hit US shores, that would tend to equalize the difference in tax rates between Taiwan, for example, and the US. The other advantage corporations get from building factories abroad is that in many cases, not only are the workers cheaper, but also the environmental regulations are more lax. This results in greater profits.
Corporations will only invest in the US when it is profitable to do so. Instead of letting them bribe the US, state and city governments to get tax giveaways, which results in a race to the bottom and gives right wing Republicans an excuse to bust unions and balance budgets on the backs of the poor and middle class, the government needs to take the bull by the horns in such a way that corporations cannot any longer get away with what amounts to highway robbery of the American taxpayer.
Again from the Union article:
“Qualcomm has about a dozen foreign subsidiaries. Its overall corporate tax rate for its 2010 fiscal year was 20 percent, according to its annual report. The main reason it didn’t pay a higher rate was much of its income was generated at foreign subsidiaries in countries with low tax rates.”
Qualcomm is a good example of how corporations maximize shareholder value and CEO pay packages by shifting factories abroad in order to take advantage of low paid workers and also shifting profits abroad in order to take advantage of low taxes. Their only problem is getting the money back here without paying taxes on it as well.