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The Disturbing Reason the Recent Wave of Earnings Beats Is No Surprise


Microsoft is only one example of the large US multinational corporations that use methods to lower taxes and thus "beat on earnings."

Not to pick on Microsoft (MSFT) but they typify the method that large US multinationals use to lower taxes, and thus "beat on earnings." Below is MSFT's income tax discussion. It lowers its effective tax rate a full 7% by taking foreign income to $19.2 billion from $15.4 billion, and by lowering US income (and expenses) from $9.6 billion to $8.9 billion. Today MSFT is effectively a 68% foreign operation. In return it gets all the benefits of stimulus and minimizes the costs of supporting the US system.

Twelve months ended June 30, 2011 compared with twelve months ended June 30, 2010:

Our effective tax rates for fiscal years 2011 and 2010 were approximately 18% and 25%, respectively. Our effective tax rate was lower than the U.S. federal statutory rate and our prior year effective rate primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico, which are subject to lower income tax rates. In fiscal years 2011 and 2010, our U.S. income before income taxes was $8.9 billion and $9.6 billion, respectively, and comprised 32% and 38%, respectively, of our income before income taxes. In fiscal years 2011 and 2010, the foreign income before income taxes was $19.2 billion and $15.4 billion, respectively, and comprised 68% and 62%, respectively, of our income before income taxes. In fiscal years 2011 and 2010, the reduction of the U.S. federal statutory rate as a result of foreign earnings taxed at lower rates was 16% and 12%, respectively.

One of the big economic winners, Apple (AAPL), is even worse, hardly paying a thin dime to a US government tottering toward insolvency. Here is the big picture of this foreign company getting US benefits going back a few years. Little wonder so much largesse flows into the hands of so few. (Matt Taibii gets into some of the particulars here.) Bloomberg's Jesse Drucker estimated that Google (GOOG) all by itself has saved $3.1 billion in taxes in the past three years by shifting its profits overseas. If the US is looking for a source to close its out-of-control deficits I have some suggestions.

Click to enlarge

Looking at the Daily Treasury Statement for the calender year through July 20, one can easily view the impact of these loopholes and deals that have been cut with the corporation sector at large. When one hears talk of tax reform and closing tax loopholes, prepare to duck and cover if you are an ordinary American. Taxes collected for CY 2011 for the corporation year to date were $131.5 billion, versus $167.2 billion for the same period in CY 2010, down nearly 17% YoY. Little wonder there are so many earnings beats from the corporate sector. Often taxes paid is a good measure of the reason. Works great as long as you ignore the fiscal blowback.

Editor's Note: This article was originally posted on The Wall Street Examiner's Winter (Economic and Market) Watch.
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No positions in stocks mentioned.

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