Joe Biden has vowed to be tough on big tech and tax breaks should he win the US presidential race in November, but analysts and legal experts note that current global uncertainties could prevent the Democratic challenger from shaking Silicon Valley in the short term.
Biden has pledged to raise the corporate tax rate from 21% to 28%, reversing some of the tax cuts implemented under the Trump administration. The former vice president also wants Establish a minimum tax of 15% on corporate book income or shareholders’ reported profits and levy taxes on foreign profits of US companies based overseas – two policies that directly affect the US technology sector.
In particular, Biden has criticizes Amazon.com Inc. and others large tech companies for not paying higher taxes, claiming his proposals would tighten these companies more accountable currently Loopholes. However, while experts note that tech giants may be best equipped to absorb a future tax hike, they say that given the current partisan divide and the ongoing one Coronavirus Pandemic.
A higher corporate tax rate
Biden’s proposal to raise the statutory corporate tax rate to 28% is in stark contrast to the US tax reform implemented by the Trump administration in 2017, which lowered the corporate tax rate from 35% to 21%.
However, it is unclear how much the increase proposed by Biden will affect tech companies, given the tech sector is known to have an effective tax rate well below the legal rate, or the percentage set by federal law. Businesses report their effective tax rate as a calculated number that includes federal, state, local, and foreign taxes, as well as various tax breaks.
All in all, IT companies reported an average effective tax rate of 14.5% for 2019 in the S&P 500, 650 basis points below the statutory rate of 21%. For 2016, the companies reported an effective tax rate of 24.0%, 1,100 basis points below the statutory tax rate of 35%.
But it’s the largest US tech companies that share FAANG or FAAMG – Facebook Inc., Apple Inc., Amazon, Netflix Inc. or Microsoft Corp., and Alphabet Inc.‘S Google LLC – who have drawn the most attention with their tax rates.
Of this group, Facebook was the only company to report an effective tax rate at or above the statutory rate in 2019. Netflix and Microsoft, on the other hand, reported the lowest effective tax rates last year at 9.5% and 10.2%, respectively.
Cash and Overseas Income
In the past, these tech companies have kept their taxes low by stocking foreign profits rather than returning those funds.
Prior to the 2017 tax reform, repatriated cash was taxed at 35% with a foreign income tax credit, and funds held overseas would only be taxed if companies choose to repatriate. As a result, companies kept their cash overseas, with Apple and Microsoft holding more than 90% of their cash in overseas holdings.
The 2017 legislation shifted U.S. tax law towards a quasi-territorial system, abolishing the 35% tax on repatriated dividends, and introducing a one-off repatriation tax on previously accrued funds held overseas. The one-time tax is 15.5% on cash and 8% on property, payable over an 8-year period.
Apple said it plans to repatriate most of its overseas cash and estimated in its 2018 Form 10-K that it would be subject to repatriation taxes totaling around $ 37.3 billion, paid in installments. Microsoft also had an estimated net charge of $ 13.7 billion for repatriated cash in fiscal 2018.
GILTI as charged
To deter US-based multinational corporations from shifting future US-based profits to low-tax areas, the 2017 law also has a US Minimum Tax Rate on Global Low Intangible Tax Income (GILTI) with a base rate of 10.5% and a high tax exclusion rate of 18.9%.
Biden has proposed raising this minimum foreign income rate from 10.5% to 21% in an attempt to “bring an end to the global race to the bottom that rewards global tax havens,” according to the former vice president’s website.
Daniel Bunn, vice president of global projects at the Tax Foundation, an independent not-for-profit tax policy, said the 2017 tax reform act made the US tax law “significantly more agnostic” about where businesses earn their income, even after taking into account the one-time repatriation tax and GILTI .
“The point of a territorial system is to say, ‘Multinational companies, you can operate and invest wherever you want. We take care of your activities here, but we want you to succeed on the global stage against your foreign competitors’ “Called Bunn.
Bunn’s policy, according to Bunn, takes the opposite approach.
“It’s not like that, we want US multinationals to be successful all over the world. No, we want US multinationals to invest in the US and if they have overseas offices we will tax them more than their foreign competitors and we will punish their offshore operations, “Bunn said of Biden’s proposals.
Read his lips: No 0% taxes
Biden has also proposed a minimum 15% tax on book income, “so no company can get away with not paying taxes,” according to his website.
In a CNBC interview in May, Biden was asked about antitrust measures against Amazon. He responded by saying, “I think Amazon should start paying its taxes.”
Amazon reported an effective tax rate of 17.0% for 2019, but that includes state and international taxes. Domestically, Amazon reported $ 162 million in current federal taxes in 2019, versus $ 13.9 billion in pre-tax profit, a tax rate of roughly 1.2%.
Biden’s comment likely relates to Amazon’s 2017 and 2018 tax bills, when the company received government refunds of $ 137 million and $ 129 million, respectively, due in part to a combination of tax credits and withholding.
In response to previous criticism, Amazon said in a January 2020 blog post that it complies with all applicable federal and state tax laws. “Our US taxes reflect our ongoing investments, employee compensation and current tax regulations,” the company said.
Greg Valliere, senior US policy strategist at asset management company AGF Investments, said in a recent report that while much attention has been focused on regulatory and antitrust concerns in the US technology industry, he sees the potential for higher tax rates “to be the most successful.” “and Innovative Industry in American History.”
“It’s hard to imagine that these companies would break up. We believe an imminent threat to the industry is an aggressive new minimum tax that could be enacted within a year if Joe Biden wins the presidency, ”wrote Valliere. “That is the real threat, not an antitrust attack the results of which could take years.”
In terms of timing, Biden said in September that he will reverse the Trump administration’s tax reform on “Day 1” of his presidency.
However, Eric Toder – a fellow institute and co-director at the Tax Policy Center who has held various senior positions in tax policy offices in the U.S. government and abroad – notes that given the possibility of another resurgence of confirmed COVID cases and Bidens If there is a desire to implement additional reforms, for example in the area of health and infrastructure investments, tax reform may not be a top priority.
“If Biden gets into a very depressed economy, it’s unlikely that he’ll pull off his tax hikes right away,” Toder said in an interview.
Toder noted that the political makeup of Congress during a Biden presidency will further affect how easy or difficult it will be to revise the current tax law.
But even if Republicans were to retain control of the Senate under a Biden administration, Compass Point Research & Trading analyst Isaac Boltansky believes there are important parts of Biden’s tax proposals that could still become law.
“In this scenario, the book income tax you are talking about is much more likely. This is pretty simple, there is just a minimum tax for certain companies, higher tax “, said Boltanski.