Foreign Tax Credits Key to Bank of America’s Doubled Profits in 2012

A decision to “restructure” its overseas operations helped Bank of America increase its profits by more than 100% in 2012, Bloomberg recently reported. The bank’s restructuring allowed it to take advantage of the tax code’s allowance of foreign tax credits, which were central to its massive increase in profits.

The bank’s restructuring of its operations outside the U.S. churned out $1.7 billion in foreign tax credits. This number represented more than 40% of the bank’s $4.2 billion in earnings for last year. The bank’s credits are not $1.7 billion of cash value to the bank; rather, they qualify as deferred tax assets, which serve to boost its net income in accordance with accounting rules. A spokesperson for Bank of America declined to specify how much wealth the corporation had repatriated into the U.S. or whether the bank would engage in future, similar restructuring plans.

The current tax code forces multinational corporations like B of A to pay U.S. taxes on their worldwide income. The highest rate on this income sits at of 35 percent. The code, however, allows these corporations to defer taxation until they bring that income inside the U.S. Additionally, the code gives the corporations foreign tax credits for the tax payments they make to outside governments.

The downside to the current system is that it motivates companies to amass their profits in locations outside U.S. borders. Bloomberg estimates that the 83 largest multinationals based in the U.S. have almost one and one half trillion dollars in untaxed offshore assets, adding $183 billion to that number in 2012.

According to Bloomberg, major multinational corporations have lobbied Congress and the White House for a “territorial system.” This system would exempt the majority of foreign income from taxation by the IRS, and would tend to disincentivize corporations from holding massive piles of wealth offshore. A spokesperson for B of A says the bank supports this proposed system. “We believe this makes sense from a competitiveness standpoint, and we also believe reforms can greatly simplify our current international rules,” he told Bloomberg. One hurdle, though, is that the code prevents the bank from employing its foreign tax credits until its uses up all its net operating loss deductions. Additionally, corporations with foreign tax credits have a time constraint, as the tax code allows them to carryover unused tax credits for only 10 years. B of A’s clock has already begun running, as securities filings show that some of the bank’s foreign tax credits will begin expiring as soon as 2017.

If your company does business overseas, or has profits situated overseas, the foreign tax credit rules have significant import to you. Careful planning can help you maximize the benefit of your credits and minimize the financial “pain” of repatriating your assets. To establish a thoughtful, effective plan for your company’s overseas profits, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C., who have extensive knowledge and years of crafting tax plans for businesses throughout New York and New Jersey. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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