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Saving on taxes the Cisco way

Company saved $7 billion since 2005 by stashing profits in two European subsidiaries

By Jim Duffy on Tue, 06/28/11 - 3:10pm.

Cisco saved $7 billion in income taxes since 2005 by booking half of its worldwide profits at foreign subsidiaries, according to this report from Bloomberg. This is while Cisco lobbies Congress for a tax holiday in the U.S. that would dramatically cut most federal taxes due when multinational corporations repatriate overseas profits.

According to Bloomberg, Cisco funneled more than $30 billion in profits through subsidiaries in Amsterdam and Switzerland to avoid paying US taxes on them. In Amsterdam, Cisco Systems International BV employs less than 2% of its workforce yet they "get credit for half of the company's worldwide sales," according to Bloomberg.

That money then flows to Switzerland, where Cisco Systems International Sarl employs less than 100 people but can gain an attractive tax rate of less than 5%. The U.S. tax on repatriated profits is 35%.

This practice is referred to as "transfer pricing," where expenses are sent to high-tax countries, like the U.S., while profits are stashed in tax havens overseas. This is especially lucrative and appealing to technology and pharmaceutical companies that have a lot of patents, trademarks and intellectual property, Bloomberg reports.

Cisco has expressed a desire to bring that money back to the U.S., where it not only could be invested in new facilities and jobs, but also to pay shareholder dividend and boost the company's falling share price. Cisco stock has lost over 25% of its value this year, on top of the 15% it lost in 2010.

Such erosion has sparked the wrath of consumer advocate - and Cisco investor - Ralph Nader.

Cisco has spent $42 billion on stock buybacks since 2006, Bloomberg reports. The company has about $43 billion in cash with only $5 billion of it here in the U.S. Cisco has the company of Microsoft, Google and others in pressing the U.S. for a one-time tax holiday to repatriate those overseas earnings but previous efforts by Congress in granting such a reprieve did not have the desired effect.

But given the push for a break or a change in the federal tax law, Cisco is not likely to broadly cut its U.S. workforce as it seeks to cut $1 billion in expenses following recent operational missteps. Cisco is expected to cut about 4,000 jobs, which would be the largest workforce reduction in its history.

This post on Forbes quotes a securities analyst stating that Cisco's promise of creating new jobs here through the tax break may preclude it from basing most of those cuts here.

Another virtual certainty from Cisco's expense reduction and core market refocusing and restructuring efforts is no big acquisitions, the analyst states in the Forbes post. The company is unlikely to make any major acquisitions near-term "given the company's stated desire to focus more on its core business," states Cowen's John Marchetti in the Forbes blog.

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