New corporate tax regulations proposed by President Obama could redirect more federal income tax money to education–and especially to programs such as Title I. Nonetheless, the president’s proposal generally is unpopular with companies that conduct business overseas and benefit from looser tax regulations in other countries.
Obama’s plan to impose U.S. taxes on corporate America’s overseas profits also threatens to open a large crater in the financial statements of several technology companies that sell equipment and services to schools.
Additional taxes are rarely popular, but Obama’s plan is a particularly prickly subject for technology executives, because the industry has been steadily boosting its overseas sales amid rising international demand for its products and services.
If Obama’s proposal becomes law, the hardest-hit companies would include technology companies with strong education investments, such as Hewlett-Packard Co. and Cisco Systems Inc.
Those firms and other IT companies realized a benefit of more than $1 billion from lower foreign tax rates in their most recent fiscal years–an advantage that could be lost if Obama is able to change the rules.
"It would be like an earthquake for high tech," said Carl Guardino, chief executive of Silicon Valley Leadership Group, an industry trade association. "On a Richter scale of 1 to 10, this would be a 12."
Looking at the issue from the other side, an April 15 report from the U.S. Public Interest Research Group (PIRG) illustrates how major companies avoid paying U.S. federal taxes by using offshore or foreign outfits.
The report, "Tax Shell Game," states that "the cost to taxpayers due to the use of offshore tax havens is as high as $100 billion per year–$1 trillion over 10 years."
"This report is yet another reminder that we have a tax system that systematically favors those who have, at the expense of those who have not. The flaws in our systems have huge ramifications for our schools, colleges, and universities, health-care providers, and all public services," said Edward Muir, deputy director of research and information services for the American Federation of Teachers.
Based on the percentage of federal tax revenue that is typically spent on education, Muir estimated that $3.5 billion of those lost tax dollars would have gone to K-12 spending each year.
Although PIRG’s report names technology companies such as Cisco and HP as among the biggest beneficiaries of offshore tax havens, both companies do invest heavily in education initiatives and grant programs in the United States.
"Cisco is a globally diversified business with approximately 50 percent of its revenue and cash generation occurring outside of the U.S.," said a Cisco spokesperson. "The cash generated offshore remains offshore for operations and investment. Effective tax management for the benefit of shareholders makes this the best current action."
Cisco’s education investments include Global Education Transformation, a blueprint for focusing on 21st-century skills, and the Cisco Networking Academy, which gives global learners skills and education useful for information communication technologies.
HP’s Technology for Teaching grant initiative helps put mobile technology in both K-12 and higher-education classrooms.
"At this point it’s too early to predict fully the impact to HP," said an HP spokesperson.
"We are committed to working with Congress to create a tax code that targets abusive international tax schemes, while simultaneously encouraging America’s businesses to access foreign markets and create jobs here in the US. As a U.S.-based company and major U.S. employer, HP supports international tax rules that foster the competitiveness of U.S.-based global companies. Any reforms to the current system need to make certain that our tax policies are fair and encourage innovation and economic growth that supports the global competitiveness of U.S. businesses."
Collectively, HP, IBM, Cisco, Microsoft, and Google lowered their tax bills by a combined $7.4 billion in their last fiscal years by taking advantage of lower tax rates outside the United States, according to an analysis by the Associated Press.
Through the years, these five technology companies have avoided U.S. income taxes and foreign withholding taxes on a combined $72 billion in undistributed earnings from their foreign operations.
While Obama’s proposal might not tax all the money U.S. companies keep overseas, it apparently would target a big chunk. Obama estimated his plan would raise a total of $210 billion, or an average of about $21 billion annually, in additional federal tax revenue over 10 years.
By reinvesting their earnings overseas, U.S. companies insulate themselves from the much higher tax rates that would have applied had the money been made in their home country.
Google, for instance, would have been hit with an effective tax rate of 45.2 percent instead of 27.8 percent last year if it hadn’t been able to capitalize on lower rates overseas, according to the Mountain View-based company’s annual report. Without the lower foreign rates, Google’s 2008 tax bill would have been $1.02 billion higher. Google’s income before taxes totaled $5.85 billion last year.
Obama has been strongly supported so far by Google CEO Eric Schmidt, who campaigned for the president last year and has subsequently served as a technology adviser.
Google spokesman Adam Kovacevich said May 4 it was too early to evaluate how Obama’s tax proposal might affect the internet search leader’s operations, because the idea is likely to be revised as it wends its way through Congress.
HP reaped a $1.77 billion benefit in fiscal 2008 from lower foreign tax rates, while Cisco and Microsoft each saw benefits of more than $1.6 billion, according to the companies’ annual reports. IBM’s foreign tax advantage last year totaled about $1.3 billion.
Obama reasons that U.S. companies will create more jobs in the United States if there is less of an advantage to setting up operations overseas.
But Guardino disagrees, maintaining that high-tech firms and other U.S. companies are establishing more foreign offices to take advantage of their biggest growth opportunities. And as they bring in more revenue overseas, companies are able to hire more workers in the United States as well as in other countries, Guardino said.
As it is, Google already generates more than half its revenue outside the United States, and that percentage is expected to increase as more people around the world go online and gravitate to the company’s services.
If they face higher taxes on their foreign earnings, high-tech companies will be at a competitive disadvantage that will discourage them from expanding their payrolls, Guardino argued.
By coincidence, Guardino and about 50 Silicon Valley executives already had scheduled a trip to Washington, D.C., this week. Guardino said the group plans to focus on meeting with lawmakers to explain why Obama’s idea to tax overseas profits would do more harm than good.
PIRG, of course, disagrees. "The impact of companies diverting profits to [offshore] tax havens is real, and it is both global and local in its reach," the group says. "U.S.-based individuals and corporations who pay taxes on their revenues must shoulder this burden for those who do not."
Cisco Education Initiatives
HP Technology for Teaching
U.S. PIRG "Tax Shell Game" report