Qualcomm Technologies, Inc. could permanently avoid $10 billion in U.S. taxes it owes on its offshore profits by using those profits to buy a Dutch semiconductor company, thanks to a loophole allowing U.S. corporations to defer payment of taxes on earnings held outside the country.
Qualcomm, the San Diego-based mobile technology company, Thursday announced it will acquire NXP Semiconductor for approximately $47 billion.
In a news release announcing the deal, Qualcomm explained that the transaction will be “efficiently financed with offshore cash and new debt. The transaction structure allows tax efficient use of offshore cash flow and enables Qualcomm to reduce leverage rapidly.”
The tax efficiency comes from the fact that the U.S. taxes currently owed on its offshore profits may be deferred indefinitely on the offshore cash Qualcomm uses to purchase NXP Semiconductor.
Qualcomm holds nearly $29 billion in profits offshore on which it has reported paying no foreign taxes, according to a Citizens for Tax Justice analysis of the company’s Securities and Exchange Commission filings. That means virtually all those profits are held in tax havens, and Qualcomm owes $10.2 billion in U.S. taxes on those profits.
“Using its $29 billion in untaxed offshore cash, it appears Qualcomm can cover more than 60% of the costs of this acquisition and dodge more than $10 billion in U.S. taxes,” said Americans for Tax Fairness Executive Director Frank Clemente. “Deferral of taxes on foreign profits creates a huge financial incentive for American corporations to build businesses and create jobs offshore instead of investing in the United States. That appears to be what Qualcomm is doing here.”
“In addition to the private investment Qualcomm is pursuing outside of the United States, this move also means less revenue will be available for public investments in the United States for priorities like schools, roads or bridges,” Clemente added. “Corporate tax reform must close this misguided deferral tax loophole and ensure that big corporations substantially increase the share of federal revenue they generate.”
Despite being headquartered in California, less than 10% of Qualcomm’s cash and marketable securities are held by U.S.-based entities. Tax Notes reported that Qualcomm’s Form 10-Q filed with the SEC for the quarter ending June 26 read that “Most of our cash, cash equivalents, and marketable securities held by foreign entities are indefinitely reinvested and would be subject to material tax effects if repatriated.”
As explained in this Wall Street Journal article, claiming money is “permanently or indefinitely reinvested” abroad allows corporations to avoid U.S. taxes on those funds.
Qualcomm’s press release about the purchase noted that: “The offer will be described in more detail in a tender offer statement on Schedule TO to be filed by a subsidiary of Qualcomm and a solicitation/recommendation statement on Schedule 14D-9 to be filed by NXP.”
It is likely that Qualcomm will use one of its existing foreign subsidiaries that holds some or all of its foreign profits to make the purchase, or it could create a new foreign subsidiary to make the purchase, which could later be liquidated leaving Qualcomm to hold NXP. As long as the untaxed offshore profits are not repatriated to Qualcomm, the U.S. parent, the corporation can avoid paying U.S. taxes on the profits. Using offshore funds for foreign acquisitions presumably satisfies the permanently reinvested standard.
“Corporations are seeking a huge cut in the tax rate charged on these offshore profits when they are repatriated, as part of corporate tax reform. There is no economic rationale for the U.S. government to forgive the taxes Qualcomm owes on past profits. These profits were earned with an expectation that the maximum U.S. tax rate would be 35%,” Clemente said. “Congress intended for the taxes on these earnings to be temporarily deferred, not forgiven.”
U.S. multinational corporations now hold more than $2.5 trillion in earnings offshore, on which they owe at least $700 billion in U.S. taxes. For a collection of data and charts on the offshore profits held by U.S. multinational corporations, click here for the Corporate Tax Chartbook produced by Americans for Tax Fairness and the Economic Policy Institute.