[A-List] US economy: fiscal crisis 2

["Michael Keaney" <michael.keaney@xxxxxx>]

Overseas growth helps US groups cut tax bills
By Dan Roberts in New York
Financial Times: February 2 2004

Corporate tax rates paid by multinationals based in the US will shrink this
year, despite soaring profits and a clampdown on avoidance schemes.

Although overall corporate tax receipts are rising as the global economy
recovers, international expansion by large US companies will help them pay a
smaller percentage of their overall income to the US and other governments.

Increased outsourcing of back-office services and manufacturing to countries
with lighter tax regimes is likely to have been an important factor.

The revelations, based on a Financial Times analysis of 2003 earnings
statements from the 100 largest US companies, highlight the growing struggle
to tax multinationals in an era of rapid globalisation. It comes as the US
fiscal deficit is forecast to reach its highest level in dollar terms, and
as Democratic presidential candidates attack the Bush administration about
concessions to large businesses.

The 68 profitable multinationals to have reported earnings so far expect to
pay 30.6 per cent of last year's income in tax to US and other governments,
compared with 33 per cent for 2002, enabling the companies to save a
combined $8bn.

Multinationals find tax relief abroad

Overall tax savings were so great that several companies - including
Citigroup, Merck and Altria - would have failed to meet consensus earnings
forecasts without the improved rates. "This is very difficult to repeat year
after year," said the co-head of tax at one large US bank.

In theory, it should be harder to reduce tax rates in highly profitable
years since there are fewer business losses that can be offset against the
overall bill. But the recovery appears to have spurred companies and their
advisers to make fresh efforts to lower the tax burden after years when some
paid little tax at all.

Those companies prepared to talk about tax strategies said international
growth and domestic cost-cutting played the biggest part in continuing to
reduce their average rate far below the 35 per cent federal tax rate. "The
falling tax rate reflects the changing geographic mix of our business," said
Merrill Lynch, which reduced its rate from 28 to 26 per cent in a year when
it made thousands of US job cuts. Merck, which cut its rate from 29.6 to
27.2 per cent, said: "We have seen a slow but steady increase in our sales
overseas, which was exaggerated last year by a restructuring in the US."

In October, Citigroup talked of investing more capital overseas to bring its
tax rate down to the level of rivals. Record results on January 20 showed it
succeeded in reducing its 2003 rate from 34.1 to 31.1 per cent, equivalent
to $778m in net earnings.

However, tax authorities are taking an increasingly tough line over how
multinationals allocate costs and profits between national subsidiaries,
aiming to clamp down on abuses of so-called "transfer pricing" rules.