Given the recent discussion of U.S. companies sheltering earnings abroad in order to lower their tax provisions, it should come as little surprise that the number of firms reporting indefinitely reinvested earnings (“IRE”) retained in foreign countries has been growing over the past few years, as have the amount of earnings left overseas. The increasing trend towards leaving earnings abroad correlates to a significant tax rate differential between firms that have indefinitely reinvested foreign earnings balances and firms that have not.
An analysis of 10-K filings for Russell 3000 firms for the years 2008-2011 illustrates that the total balance of untaxed, indefinitely reinvested earnings rose over this period (by roughly $500 billion). Also showing an increase was the number of firms reporting IRE balances (103 firms). Foreign earnings as a percentage of total assets also increased over the four year period. What may come as a surprise is that, for each of the four years analyzed, the average effective tax rate for firms with an accumulated, indefinitely reinvested earnings balance exceeded the average for firms without an accumulated, reinvested earnings balance. In fact, for firms with an accumulated IRE balance, the average fluctuated between 35.05% and 39.70%; whereas for firms without accumulated, indefinitely reinvested earnings, the range was only 27.51% to 30.68%.
† “Total IRE as a % of Total Assets” is based upon total assets for firms with an IRE balance.
* Average effective tax rate statistics for 2011 were adjusted by disregarding the 2011 reported tax rates for Checkpoint Systems, Inc. (CKP; 2011 effective tax rate of 13,911%), Aruba Networks, Inc. (ARUN; 2011 effective tax rate of 7,568%), and Cray Inc. (CRAY; effective tax rate of -10,514%). Inclusion of the 2011 effective tax rates for Checkpoint and Aruba would skew the average effective tax rate for firms with accumulated IRE balances to a rate of 58%, roughly 20% higher than prior years’ averages. Likewise, inclusion of Cray’s effective tax rate lowered the average 2011 balance for firms without indefinitely reinvested earnings to 21.44%, which is approximately 8% lower than prior years’ averages. Each of these three firms’ 2011 effective tax rate was altered dramatically due to exceedingly large valuation allowances.