U.S. Firms Keep Billions Overseas Away From US Taxes

Large US Companies Are Expanding Jobs Overseas And Shelter Income There

With sales up 5 percent last year, Merck & Co. was not satisfied: To hold down costs, the pharmaceutical giant shed 3,200 jobs as 2003 drew to a close, and announced that an additional 1,200 positions would go this year.

But Merck's picture abroad was quite different. It made 1,300 new hires in 2003 outside the United States, on top of the 900 brought on the year before. Company documents indicate that Merck had a cumulative $18 billion in foreign earnings untaxed by the end of last year, $3 billion more than in 2002. And the company said it had no intention of ever paying U.S. taxes on that burgeoning sum.

"Foreign earnings of $18.0 billion . . . have been retained indefinitely by subsidiary companies for reinvestment," Merck's annual filing with the Securities and Exchange Commission said. "No provision is made for income taxes that would be payable upon distribution of such earning."

Last week, Sen. John F. Kerry (Mass.), the likely Democratic nominee for president, made such lucrative income-tax deferrals a focal point of his campaign, asserting that they are driving companies to expand abroad. Merck's numbers appear to back that up, and so do those of several other big U.S. companies.

By the end of its 2003 fiscal year, Hewlett-Packard Co. had "indefinitely" deferred taxation on $14.4 billion of foreign earnings, according to SEC filings, a move that helped lower its effective tax rate from the statutory corporate income tax rate of 35 percent to 12 percent.

Domestic employment at Intel Corp. slipped by more than 3,300 people last year, but it grew by more than 4,300 abroad. By the end of 2003, the company had $7 billion in cumulative foreign earnings, $700 million more than it had sheltered in 2002, according to SEC filings. The semiconductor powerhouse stated that it "intends to reinvest these earnings indefinitely in operations outside the U.S."

The U.S. tax code is actually encouraging the movement of jobs overseas.

"This is a big deal," agreed Robert S. McIntyre of Citizens for Tax Justice, who has inveighed against foreign tax deferral for years. As a company, he said, "you may go to India or China or Ireland for the wage differentials -- there's nothing we can do about that. But we don't have to pay you to go there."

"This is a largely broken system, rife with abuse," said Gene B. Sperling, a former economic aide to President Bill Clinton who advises Kerry and is an architect of the candidate's plan.

"There is a real problem here," said Gary C. Hufbauer, an international tax expert at the Institute for International Economics, who is skeptical of Kerry's proposal. "U.S. firms doing business in the U.S. are taxed more heavily than many of their foreign competitors. That's demonstrably true."

Under Kerry's plan, U.S.-based companies would have to pay taxes immediately on virtually all foreign profits that are not taxed by another country. Firms could still defer taxation on profits from subsidiaries set up abroad to serve local markets, but if a U.S. company sets up overseas to ship goods back home, taxes would be due in full.