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GE Tries to Allay Investor Fears About Potential Tax Liabilities

POSTED ON Nov. 8, 2018
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As its stock price has plummeted, General Electric is attempting to stanch some of the bleeding by quieting worries that its tax liabilities could be worse than disclosed.

In an investor brief sent out November 5, GE Vice President of Investor Communications Todd Ernst said that despite speculation about its liabilities, the industrial giant is standing by its tax disclosures.

“Based on current law and guidance, we believe our current accrual is a reasonable estimate for the enactment of tax reform,” the brief states, noting that additional tax guidance potentially expected from Treasury and the IRS in 2018's fourth quarter will allow the company to finalize its calculation. “GE does not expect any change in proposed or potential regulatory guidance that would cause our tax accrual to increase by billions of dollars.”

But an analyst at Gordon Haskett has predicted that GE’s tax liability could dramatically increase, as the company may owe up to $9 billion after the Tax Cuts and Jobs Act (P.L. 115-97) because of its large stash of previously untaxed offshore earnings now subject to a transition tax, according to various media outlets.

In GE’s most recent Form 10-Q, filed on October 30, the company notes that it recorded a 2017 tax expense of $4.5 billion, which included a provisional estimate for the transition tax of $1.16 billion and $3.35 billion reevaluation of deferred taxes. It estimated $1.77 billion tax benefit at GE Capital related to the transition tax and a $2.93 billion liability at GE.

“Based on our on-going analysis of the currently issued guidance on the transition tax on historic foreign earnings and related foreign tax credit impacts through the third quarter, including advice from outside advisers, we believe the provisional estimate of the impact of enactment, as recorded in the fourth quarter of 2017 and adjusted during 2018, remains a reasonable estimate of the effects of enactment, including the impact of items in the 2018 tax filings,” the filing states. The investor brief also notes that GE has $3.5 billion in tax credit carryforwards that could offset an increase in its cash income tax liability.

In August the IRS and Treasury released proposed regs (REG-104226-18) on the section 965transition tax, which subjects offshore cash earnings to a 15.5 percent tax rate and noncash assets to an 8 percent rate. Treasury has said it hopes to deliver final regs on the transition tax by the end of the year.

The filing also notes that GE has not yet accounted for deferred taxes related to the global intangible low-taxed income provision.

As the company deals with fallout from an underperforming power division, its stock price has nearly halved in 2018.

Trouble Across the Pond

Concerns over GE’s tax liabilities also extend across the Atlantic to the United Kingdom, where tax authorities are seeking to disallow some interest deductions. The deductions, claimed by GE Capital between 2004 and 2015, could affect the company to the tune of $1 billion, including tax and a reduction in deferred assets, but excluding interest and penalties, according to the Form 10-Q.

The company’s filing emphasizes that it intends to contest any assessment. And reiterating its position made there earlier, the investor brief notes that it expects that it would be successful in its challenge and that it will not owe more U.K. taxes.

“We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merit,” the Form 10-Q states, adding that the company is confident that it has a sufficient provision in place for its income tax uncertainties.