Tax Paradise by Parking Profit Offshore

There was a heated debate flowing among the headline of mainstream media about General Electric's 2010’s tax position. It was first published by the Times and pointed out that General Electric, by its aggressive strategy and “innovative” accounting, paid nothing in federal taxes in the year 2010, even it made billions in profit.

Generally speaking, it has become increasingly common for those gigantic multinationals to take advantages of the tax regulations by keeping those “geniuses” in their tax department and, at the meantime, exerting their powerful lobbyist skill. But how is it possible that such a giant American business with a profit of 14.1 billion paid not a penny in U.S. federal tax? In general, GE was using a strategy called holding profits overseas — by stating that it reinvested most of its profits in foreign business operations and does not intend to bring any of those profits back to the U.S, GE was able to avoid paying the U.S. tax even if it has been earning billions in profits.

More specifically, what GE did for its low tax payment in 2010, if there was any, is due to two reasons. The first one was quite straightforward and did not trigger much controversial. GE capital, which is GE’s financing subsidiary, lost billions of dollars during the financial crisis. In order to avoid the unnecessary tax burden, the US tax law allows companies to use those losses to reduce its tax bill. This is known as a net operating loss carry-forward.

The second tax break, though, called the active financing exception, is a whole different story. According to Robert Willens, a corporate tax expert, this tax break was first enacted in 1997 and it allows companies to avoid paying U.S. taxes on overseas profits — if those profits were derived by “actively financing” some activity or deal. Therefore, by intentionally