By John Lawrence
In his final message after more than eight years as chief executive officer of Qualcomm Inc. (QCOM), Paul Jacobs on March 4 gave employees shareholders what he called a “homework assignment.” “Send your Congress people your opinion that you’d like American companies to be able to bring offshore money back to the United States to either reinvest or return to shareholders”, said Jacobs, now executive chairman of the San Diego based chipmaker, which has $21.6 billion in overseas profits.
Paul could have said, “Go home and hug your wife and children” or “It’s been a pleasure being your CEO for 8 years and thank you for your work.” Or “tell your Congressman to raise the minimum wage” or “tell your Congressman to end homelessness now”, but, no, his solipsistic exhortation was all about making Qualcomm executives and shareholders (not employees mind you!) even richer than they already are.
Funny, you’d think he’d have made that request of the shareholders who have something to gain rather than the employees who do not.
What these tech companies actually do with their extra tax free money is not to create jobs, but to buy back their own stock thus driving up the price making it that much more lucrative when execs cash in their stock. Paul Jacobs, by the way, just cashed in 70,000 shares of Qualcomm stock on Monday, March 17th. The stock was sold at an average price of $76.79, for a total value of $5,375,300.00.
Just think how much more Paul Jacobs would have made if the government had actually allowed Qualcomm to repatriate their foreign profits tax free and then used the money to buy back stock and drive up the price. Such a shame.
Paul Jacobs has been fixated on this problem of getting Qualcomm’s money back into the US tax free for a number of years. According to a 2011 San Diego Union article: “There’s $1.4 trillion that U.S. companies have so-called offshore,” [Qualcomm CEO Paul] Jacobs said at the Qualcomm annual meeting. “So you think about that with respect to the size of the stimulus package. These are real numbers, and so getting that money back into the United States would be very valuable for the U.S. economy, of course. So we’ve been out talking about repatriation.”
The tax holiday of 2004 was called the American Jobs Creation Act. It created very few jobs and in retrospect turned out to be a total scam.
Various companies did bring $362 billion back into the US under the pretense that this money would be used to create jobs. But the majority of it did not go to building factories nor did it go to research. Instead corporations bought back their own stock giving a boon to shareholders and execs and created jobs overseas. It was actually responsible for destroying jobs. In a huge disconnect from Paul Jacobs’ purported good intentions about job creation in the US, Qualcomm announced in 2011 that it planned to invest $1 billion to build a massive manufacturing facility in Taiwan.
David Cay Johnston wrote in “The Fine Print”:
“Buried in the fine print of the Jobs Creation Act is a hard truth: companies were not obliged to spend one dollar on new hiring or expanding research. If that sounds to you like an action with all the significance of moving a dollar from your left pocket to your right, your assumption is correct. The way lobbyists wrote the bill, companies could use their tax savings for virtually anything company executives said contributed to a firm’s ability to retain workers and create jobs. In other words, creating jobs was not a requirement of the American Jobs Creation Act, while destroying jobs was an authorized purpose.” As Johnston states: “Perhaps the law should have been called the 2004 Destroy American Jobs Act.”
In 2013 US corporations’ cash abroad rose by $206 billion. They parked cash in Bermuda, the Cayman Islands, Ireland, Luxembourg, Switzerland, the Netherlands and whatever other jurisdictions had little or no taxes. According to Bloomberg, multinational companies ahave accumulated $2 Trillion outside the US. That’s up 11.8% from one year ago.
The top 15 companies now hold over $795 billion outside US. But in terms of cash held abroad, Qualcomm is a relative piker compared with Microsoft ($76.4 billion) and Apple ($54.4 billion). Qualcomm’s $21.6 billion held abroad is chump change compared to the big guys. These companies are deferring hundreds of billions in US taxes which could be used to rebuild infrastructure (thus creating jobs) or to invest in renewable energy sources (thus creating jobs). They are lobbying to end the system of paying tax when they repatriate profits altogether.
US companies owe taxes up to a 35 percent rate on profits they earn around the world. Whatever taxes they do pay in a foreign country are deducted from what they owe Uncle Sam. For instance, say they paid 5% taxes on their earnings in the Cayman Islands. Then they would owe Uncle Sam 30% if and when they repatriated that money to the US. But they don’t want to pay that. Instead they lobby the Federal government to let them repatriate the money tax free.
Here’s what I wrote in 2013:
Here’s how the scam works. Corporations like Qualcomm set up subsidiaries in offshore jurisdictions with zero tax rates like Bermuda and the Cayman Islands. Then they transfer assets to those corporations. In Qualcomm’s case those assets are mainly “intellectual property” like patents. These are the kinds of assets that are very easy to transfer. They typically sell these assets to their subsidiary for a very low price. They can legitimately do this if profits have not started to really kick in like in the case of a new patent that hasn’t become a goldmine yet.
As profits from that patent start to come in, the parent US based corporation has to pay huge royalties to the offshore subsidiary for the use of its patents. Profits pile up offshore where they aren’t taxed while losses pile up onshore where they qualify for a tax deduction.
Qualcomm in its lobbying efforts has put its money where Paul Jacobs mouth is. According to OpenSecrets.org, Qualcomm spent $4,740,000 in 2012 and $6,620,000 in 2011 on lobbying. Qualcomm’s lobbying efforts have increased from a relatively modest $415,000 in 2000 to the neighborhood of $6 million a year (with the exception of 2012) starting in 2007.
In recent years Qualcomm has increased the number of properties owned or leased outside the United States from 70 to 99, according to documents filed with the Securities and Exchange Commission. Meanwhile, Qualcomm pared down its U.S. property holdings from 76 to 73. Qualcomm is one of the nation’s premier outsourcers and pioneered the practice of shipping work overseas.
Congress is balking at letting the Qualcomms, Apples and Microsofts of the world pull a second scam akin to the one they pulled in 2005. They know that the Jobs Creation Act did not create American jobs. Sure it enriched corporate CEOs and shareholders, but the only jobs created were in foreign countries. You know the old saying: “Fool me once, shame on you. Fool me – you can’t get fooled again.” Thank you, George W Bush for those words of wisdom.
Editor’s note: According to Bloomberg, Jacobs was addressing shareholders and not employees which makes sense as they stand to gain more from repatriating foreign cash than do employees. The author and editors regret this error.
John Lawrence
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Correction: According to Bloomberg, Jacobs was addressing shareholders and not employees which makes sense as they stand to gain more from repatriating foreign cash than do employees. Sorry for the confusion.
The corporate state just keeps rolling on, don’t it? Offshore tax shelters must be just one of the cylinders in its engine, along with Citizens United, the linkage between war and profits, between health care and profits, and the privatization of education and… (I’m too dumb to know what else keeps it running).
Keep it up, Mr. Lawrence. I’ll read almost anything you write, unless it comes in an envelope with no return address.
Food for thought: would you trust Qualcomm or the US government more with the 35%?
I think it’s hard to ignore the immense economic ripple effect of the technology that Qualcomm produces. Saying that they just want to pad the pockets of their executives is partly true at best. Your example of Mr. Jacobs cashing out represents a drop in the bucket (a “measly” $5M compared to $21.4B of repatriated earnings, or even 35% of that.) A large stock buyback could only drive the stock so much higher (40%, perhaps?)
On the topic of outsourcing: it makes economic sense and in a global marketplace, there is no choice. Looking at the properties owned domestically versus internationally is only one piece of the puzzle. Consider that they’ve almost doubled their domestic workforce in the last 4-6 years? Those are American jobs and $$$ into the local economy.
I know I’m playing devil’s advocate against your arguments, but I think this is a complex issue and should not be reduced to picking on individual companies. I’m not advocating for tax-free repatriation, but I don’t think painting corporations as sinister or greedy is constructive.
Cheers.
And what’s the good word?
Let’s put it this way. Is government so dysfunctional that we as citizens would all be better off if it collected little or no taxes and we just let corporations not even pay anything in taxes? Corporate tax revenues are now at historical lows as a share of the economy. As it is right now, corporations only contribute less than 10% of Federal revenues whereas in the 1950s it was around 30%. Low corporate taxes have contributed to increasing inequality. It’s not like they need additional tax breaks to have money to invest or create jobs. All these high tech corporations are sitting on piles of cash they don’t know what to do with. It’s about time they paid their fair share.
I’m not saying that Qualcomm doesn’t do good work or, as San Diego’s biggest employer, doesn’t create jobs and add to the economy, but they shouldn’t be lobbying for even additional tax breaks at a time when tax breaks for the rich are a driving factor in inequality.
You have to ignore the entire column by John Lawrence to write what you did, Mr. Burdell. For instance, you don’t address the “$1.4 trillion that U.S. companies have so-called offshore,” as the SD-UT put it, in your objections to taxing repatriated dollars. You can’t call $5 million “measly” and expect average people to believe in your argument. So, yes, frankly, I’ll trust my government over business guys who argue like this.
Mr. Lawrence, I think you make excellent points here, and again, I’m not opposed to the current taxes. I appreciate that you make these arguments now and I think they would have addressed my initial concern about targeting one company, had they been included in your article. Thanks for the follow up.
Mr. Dorn, I did not object to taxing repatriated earnings, even at the current rate: I was objecting to the one-sided analysis of Qualcomm’s actions as a large U.S. corporation. I argued that their outsourcing should be understandable given the global landscape of their sector, and that their economic impact domestically should not be overlooked. As for the “measly” $5M, I suppose my quotation marks didn’t suffice to indicate sarcasm: I’m sorry for the confusion. My point was that, while it is an immense amount to the average person like myself, $5M in stock would only become $8M or $10M if a substantial portion of the repatriated earnings were used in a buyback. $5M represents 0.067% of the tax revenue from repatriating earnings (35% of $21.4B) or 0.023% of offshore earnings, such that it seems unlikely for this to be a motivating factor for trying to repatriate earnings tax-free. You of course can argue that I underestimate the greed of the shareholders, from the executive level down, and perhaps you are right.
On a final note, any argument for repatriating offshore earnings tax-free or at a reduced tax rate under the guise of investing in America should be taken with a grain of salt: if the company is a multinational corporation, chances are that only a portion of their earnings will make an economic impact domestically. I conjecture that it might be reasonable to ease the tax rate for companies that have a very high percentage of their workforce and operations in the U.S., versus a tech company that is more than halfway gone. Just my 2 cents on changes to be considered if any.
Thanks for engaging with me in discussion.