The News Journal
Jonathan Starkey
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Wilmington's DuPont Co. rebounded impressively in 2010 after two years of recession, with global profits soaring 73 percent to $3 billion, including $950 million in pre-tax U.S. profits.
DuPont's tax accountants deserve some of the credit. They devised a strategy that allowed DuPont to not only avoid federal income taxes altogether last year, but to accrue a $109 million tax benefit, according to year-end financial statements DuPont filed with the U.S. Securities and Exchange Commission.
DuPont is not alone in such effective -- and legal -- use of the tax code to avoid a tax liability, even when the U.S. corporate tax rate is supposed to be 35 percent of profits.
Examples abound. Neither General Electric nor Verizon owed U.S. taxes from 2008 to 2010. GE claimed a $4.7 billion tax benefit on $7.7 billion in pre-tax U.S. profits. Verizon Communications reported a $951 million benefit on $32.5 billion in pre-tax U.S. profits from 2008 to 2010.
As DuPont spokesman Mike Hanretta said this week, DuPont, like the others, complies "with all tax laws and regulations in every jurisdiction in which we operate."
The numbers illustrate how multinational corporations have become experts at tapping a series of tax credits and deductions to avoid paying taxes at rates near the statutory level of 35 percent, tax experts say.
That's the crux of a major part of a debate in Washington about tax reform: how to simplify the corporate tax code by eliminating some of the breaks that allow firms to avoid taxes in return for a lowering of the 35 percent rate.
Backed by groups like the Business Roundtable, an association of corporate chief executives, many Republicans say a lower corporate tax rate could encourage more U.S. investment. But they want the change to be "revenue-neutral," meaning that the total tax bill on corporations should not grow when the changes are made.
Many Democrats, including Sen. Tom Carper, D-Del., are willing to make such changes but want to raise additional tax revenue to help pay down the $14 trillion national debt.
Working the system
Meanwhile, corporations are deploying armies of tax accountants to avoid billions in taxes.
"It's clear that U.S. corporations, especially U.S. multinationals, aren't paying tax in the U.S. at 35 percent," said Daniel N. Shaviro, a tax professor at New York University. "There is an argument for lowering the tax rate, but it's not that companies are paying 35 percent."
Shaviro said companies like DuPont use tax breaks like credits for research and development and domestic manufacturing to lower tax bills. Many also use "transfer pricing" strategies to park income in low-tax countries overseas by shifting intangible assets like technology licensing rights to international subsidiaries. Lowering the tax rate could convince companies to reinvest in the U.S., but only if the rate is low enough on the bottom line, Shaviro said.
"They're trying to get the highest after-tax income they can," Shaviro said.
A 2008 study from the U.S. Government Accountability Office -- the investigative arm of Congress -- found that large corporations reporting domestic profits in 2004 paid an effective tax rate of 25.2 percent. Over the last 10 years, from 2001 to 2010, DuPont reported a total federal income-tax bill of $2.62 billion, or 17.7 percent of its $14.7 billion in pre-tax domestic profits over that period, according to a News Journal review of its financial statements.
A report out this month from the liberal Washington nonprofit Citizens for Tax Justice suggested that, for many large multinational corporations, DuPont's tax bill was comparatively high. CTJ's study looked at the tax rates of 12 industrial giants, from General Electric to Wells Fargo, and found they recorded billions in tax benefits over the last three years.
If the dozen companies studied by CTJ had paid the full 35 percent corporate tax rate, the U.S. government would have collected $60 billion more. Instead, the companies collectively claimed $2.5 billion in federal income-tax benefits, while reporting $171 billion in domestic profits over the three-year period.
"We did expect there would be a lot of companies that were paying a little or nothing in taxes," said Robert McIntyre, director of Citizens for Tax Justice. "They've gotten awful good at finding ways around the rules."
Visions of reform
In December, President Barack Obama's National Commission on Fiscal Responsibility and Reform proposed lowering the corporate tax rate to 28 percent and eliminating tax breaks, such as the deduction for domestic manufacturing. The commission said the tax-reform proposal would raise revenue -- $80 billion in 2015, $180 billion in 2020 -- that could be used to help pay down the $14 trillion national debt.
Obama has distanced himself from that proposal, saying any corporate tax reform plan must be "revenue-neutral" -- meaning it would generate no new tax revenues. Republican leaders have advanced their own plans. Tax reform proposed by House budget chief Paul Ryan, a Wisconsin Republican, would eliminate deductions and replace the corporate income tax with an 8.5 percent business-consumption, or value-added, tax. Republican presidential contender and former Minnesota Gov. Tim Pawlenty last week proposed lowering the tax rate on businesses to 15 percent.
Delaware's freshman Democrat in Congress, Rep. John Carney, said the parties appear to agree on broad reform principles -- lowering overall tax rates, while eliminating tax breaks -- but he worries they'll stumble on details.
"There seems to be so much support for something, and you get into the details, and you can't seem to get there," Carney said. "If it makes so much sense to everybody, why can't it get done? I do hear people agreeing on this stuff."
Carper said any efforts to reform the corporate tax code should raise revenue to help pay down the debt. That's a clear sticking point for Republicans, who are loath to raise tax revenues.
Carper said he supported the broad framework of the fiscal commission's plan but said he's not optimistic about a short-term fix.
"Given the political environment in Washington these days, the idea of us doing comprehensive tax reform this year that includes corporate tax reform is probably the triumph of man's hope over experience," Carper said.
No 'smoking gun'
DuPont, once a pure commodity chemicals firm, now makes its money on biotech soybean seeds and materials for solar panels, as well as pigments for car paint. The company employs 60,000 worldwide -- 8,000 in Delaware -- and nearly 75 percent of pre-tax profits are reported overseas. DuPont reported nearly $950 million in pre-tax U.S. profits last year.
The precise amount DuPont owed -- or was owed back -- is not available to the public, because it appears only in tax forms submitted to the government, and accounting rules that differ somewhat from those for the year-end SEC filing apply. DuPont refused to open up its tax filings.
Jennifer Blouin, an accounting professor at the University of Pennsylvania's Wharton business school, reviewed DuPont's financial statements for The News Journal and says there "isn't necessarily a smoking gun" that would explain why DuPont avoided paying so much in taxes.
In financial statements filed with the SEC, DuPont said it paid an effective income-tax rate of 17.8 percent in 2010 on its $3.7 billion in pre-tax global profits, and the company expects its bill to increase this year. DuPont's calculations include taxes paid overseas -- $454 million in 2010 -- and deferred tax expenses.
Tax experts say DuPont could have employed any number of tax deductions and credits to lower its bill.
Domestic losses can lower taxable income, and losses can even be carried forward from year to year or applied retroactively to claim refunds on taxes paid in previous years. Businesses also may write off the declining value of capital investments like a manufacturing facility or machinery. Accelerated depreciation rules designed to encourage capital spending allow companies to write off the value for tax purposes more rapidly.
DuPont's domestic income includes export sales, which the U.S. government taxes at a lower rate to encourage domestic manufacturing.
Hanretta, the DuPont spokesman, said accounting rules differ for financial statements and federal tax filings -- meaning that DuPont's financial statements do not offer a clear view of the company's true tax situation. Douglas A. Shackelford, a tax professor at the University of North Carolina, said that's generally true, though a long-term picture of a company's recorded tax expense can allow for educated guesswork.
"The key thing to focus on here is these are book numbers," Shackelford said. "They're not tax-return numbers. It's difficult to infer from book numbers what tax-return numbers would look like."
DuPont's books do help explain those accounting differences that could lead to lower tax rates. In 2009, for example, DuPont booked $340 million in severance payments, as the company eliminated 2,000 positions during the economic slowdown. But DuPont actually made $81 million of those payments in 2010. Those payments would reduce DuPont's 2010 taxable income but not its bottom line on public financial statements, which investors use to value the company.
Additional Facts
DUPONT DATA
U.S. FEDERAL INCOME TAX -- "CURRENT TAX EXPENSE"
On annual financial statements filed with the U.S. Securities and Exchange Commission, DuPont reports its federal income-tax expense during the course of that year. Actual tax payments are unknowable because tax filings, even for publicly traded companies, are private documents.
2010 -$109M
2009 $23M
2008 $14M
2007 $372M
2006 $505M
2005 $699M
2004 -$300M
2003 $14M
2002 $20M
2001 $1.38B
2001-2010 $2.62B
NOTE: Data do not include deferred tax expenses
PRE-TAX U.S. PROFIT
2010 $949M
2009 $171M
2008 $992M
2007 $1.652B
2006 $1.947B
2005 $2.795B
2004 -$714M
2003 -$428M
2002 $1.227B
2001 $6.131B
2001-2010 $14.7B
NOTE: Data include export income
Source: DuPont 10-Ks (annual reports to the SEC) http://1.usa.gov/iu2VCa
