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View Diary: 'Fix the Debt' operates as a front for corporate tax breaks and cuts in government social programs (127 comments)

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  •  What's GAAP? Also, under the deferred tax (4+ / 0-)

    liability thing, can they be deferred forever?

    •  GAAP = "generally accepted accounting (6+ / 0-)

      principles," which is the set of rules, principles, and guidelines that govern how financial statements are put together.

      Yep, they can be deferred forever as long as there's no expectation that they'll be repatriated in the future.

      •  Well, that just really pisses. (1+ / 0-)
        Recommended by:
        •  Remember, though, it has nothing to do (5+ / 0-)

          with tax.  It only has an impact on the book profit that the company discloses when it releases financial numbers to its investors.

          The reason it comes up at all in this debate is that, under GAAP, companies have to disclose how much profit they've indefinitely reinvested abroad, which in turn can serve as a reasonable basis for how much profit is out there going untaxed.

          •  Thanks for clarifying, unfortunately, you lost (1+ / 0-)
            Recommended by:
            johnny wurster


            It has nothing to do with tax because....  earnings earned oversees is not taxed?  Is this right?

            •  Sorry, it's sorta complicated. (7+ / 0-)

              Here's the set-up:

              US parent company ("Parent") owns 100% of a foreign subsidiary ("Sub").  Let's say Sub makes $100 of profit in a foreign country this year.  If it pays Parent the $100 this year in the form of a dividend, Parent will pay the IRS $35 in tax and keep the remaining $65.  For accounting purposes, Parent and Sub are "consolidated," meaning they're treated as the same entity.  So on the financial statements that Parent releases to its investors, it'll report $100 of profit, $35 of income tax expense.

              But let's say Sub doesn't pay a dividend back to Parent, and just keeps the dividend.  Maybe it'll pay the dividend next year, maybe the year after.  The IRS doesn't tax Sub's earnings*, since it's a foreign corporation; instead, it only taxes profits when they're sent back to Parent from Sub. But, on the financial statements, Parent will report $100 of profit and will still report $35 of tax expense.  The reason for that is that Sub will probably pay a dividend in the future, so Parent will probably wind up paying that $35 in tax, even if they do so in the next few years. In the jargon, this is an "accrued expense."

              So let's say Sub has a good business, and decides to plow the $100 of profit back into its business, and probably will never pay the $100 back to Parent.  That means that Parent will probably never pay the $35 to the IRS, and, under GAAP accounting rules, that means that it doesn't need to report $35 of tax expense. IOW, the Sub is telling us that the profits are indefinitely reinvested abroad, so the IRS will probably never have the chance to tax it, so they don't have to report a tax expense.

              So, for tax, the only thing that matters is when the dividend is paid from Sub to Parent.  Whether that profit is indefinitely reinvested abroad or only temporarily reinvested abroad doesn't matter a lick for tax purposes.  However, whether the profit is indefinitely reinvested abroad does matter very much for how the company reports its accrued tax expense to its investors.

              * Putting aside CFC and subpart F rules.

          •  "untaxed" (0+ / 0-)

            To clarify...he means untaxed in the US.  It was taxed in the jurisiction it was earned.

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