WASHINGTON – The Biden administration says it is trying to boost investment in America – while proposing to remove a four-year-old tax break that was supposed to do just that.
The break – a deduction for intangible income from abroad – has an odd name, but in some ways it works like an export subsidy for companies.
Congress created FDII in the Tax Act of 2017 as a break with US corporations’ overseas sales. It aims to provide multinational corporations domestically and internationally with roughly equal tax rates on profits that could be shifted across borders. Legislators wanted companies to have reasons to locate intellectual property, profits, and jobs in the US rather than in low-tax overseas.
Now Biden government officials say they intend to lift the FDII deduction and replace it with unspecified research tax breaks. This decision, announced in President Biden’s infrastructure plan, marked a departure from his campaign tax plan, which did not include repeal.
“I would have thought it went pretty well with their Made in America preferences and employment policy, but obviously they don’t think so,” said David Noren, tax attorney at McDermott, Will & Emery.
FDII was worth $ 170 million to Lockheed Martin in 2020 after considering regulations clarifying foreign military sales were eligible for the hiatus.
Photo:
Andrew Harrer / Bloomberg News
Lifting the interruption could harm companies reporting significant benefits from FDII, including Qualcomm Inc.,
Nike Inc.,
alphabet Inc.
and Lockheed Martin Co.
In its securities filings, Qualcomm said it undertook a restructuring in 2018 and 2019 that saw most of its revenue in the United States and a significant portion of the FDII. The move saved the company a combined $ 800 million in 2019 and 2020.
For Lockheed, the 2020 hiatus was $ 170 million after considering regulations clarifying that foreign military sales are eligible for FDII.
The full impact of the Biden Tax Plan for these and other companies depends on what emerges from Congress and how it intersects with the other parts of the government’s proposal to completely overhaul the international tax system. The FDI cessation is only part of Mr Biden’s corporate tax agenda, which aims to raise approximately $ 2 trillion over 15 years for roads, bridges, broadband, transit and other projects.
Congress created FDII during the last international tax system overhaul in 2017. Republicans, who controlled the House, Senate, and White House at the time, lowered domestic tax rates, making it easier for businesses to make profits overseas and take them home bring to. The old system encouraged companies to book profits abroad and keep them there.
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Their system created a whip and a carrot. The stick was a new minimum tax of 10.5% on foreign income for US companies to ensure that companies could not move their profits to foreign low-tax territories without paying the US anything.
The carrot was FDII, a special allowance that effectively set a tax rate of 13.125% on domestic income generated by serving foreign markets. The idea was to encourage companies to find easy-to-move intellectual property in the US when faced with a relatively even tax decision on where to post such income.
The reference to intangible income in the name reflects the fact that such income often, but does not have to, come from highly mobile assets like patents. FDII first calculates 10% of a company’s real assets in the United States and measures the profits over that to determine the amount of the deduction. The idea was to focus the withdrawal on companies with above average profits.
However, this calculation means that companies with more tangible assets, such as factories and equipment, receive smaller deductions. This is a problem for FDII detractors, including the Biden administration officials, as businesses can get bigger deductions by moving assets overseas or building less domestically.
“You will be penalized for physical investment in the United States,” said David Kamin, deputy director of the White House National Economic Council. “That seems counterintuitive and counterproductive.”
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It is not clear whether this incentive changed investment decisions.
“I can’t think of a company that said, ‘We moved stuff out of the US because of that theoretical incentive,” said Ray Beeman, a former GOP accountant who is now a principal at accounting firm EY LLP. “They do not all for tax purposes. “
It’s also difficult to gauge whether FDII promoted a lot of domestic activity or simply rewarded companies for what they would have done anyway. The Joint Tax Committee forecast in 2017 that the disruption would cost $ 64 billion over a 10-year period. Tax Notes, a nonprofit publisher, found that S&P 500 companies had reported at least $ 3.8 billion in one year since the hiatus.
“If you lose that, it will cause some pain and adjustments,” said Thomas Horst, managing director of Horst Frisch, a consulting firm that works on international corporate transactions.
Some companies, including Alphabet, have moved intellectual property to the United States from overseas low-tax jurisdictions. FDII reduced Alphabet’s tax burden by 0.7 percentage points in 2019. According to the securities submitted, these savings increased to 3 percentage points in 2020. An alphabet spokesman declined to comment on the Biden proposal.
Alphabet’s headquarters in Mountain View, California. The tech giant was among the companies moving intellectual property from low-tax areas to the United States.
Photo:
Sam Hall / Bloomberg News
“When all it’s achieved is the legal ownership shift [intellectual property] to US companies, so what? “Said Omri Marian, professor of tax law at the University of California at Irvine.
Democrats say the break is an indirect, inefficient way to stimulate domestic jobs and investment. The Biden government would shift the money towards research but has not said how.
One option is to repeal or delay part of the 2017 Tax Act, which requires companies to spread their research costs over several years rather than making instant deductions. This is slated to go into effect in 2022, and there is already pressure from businesses and lawmakers on both sides to prevent it.
A proposal from three Democratic Senators would keep the FDII, but change some details.
FDII itself was seen as vulnerable to challenge from the World Trade Organization as an improper export subsidy. While it didn’t, the prospect may have deterred companies from relying on it.
“Overall, it has been a loser of revenue, an enforcement challenge, and a trade deal violation with no apparent benefit to the US economy,” said Marvine, Mr. Marian of the University of California. “I’m glad it’s gone.”
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Write to Richard Rubin at [email protected]
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