Massive Tech $ 100 billion abroad income focused by the tax plan

Technology giants, led by Apple Inc. and Microsoft Corp., posted profits of more than 100 billion US dollars in recent fiscal years outside the United States. This makes them the main target of President Joe Biden’s proposals to increase taxes on profits held overseas.

The tax proposals released this month to clear the bill for massive infrastructure plans target common tactics used by U.S. multinational corporations, such as keeping income generating assets in offshore countries with low taxes. The tech industry is particularly adept at shifting profits to tax-friendly areas because its most important assets – software code, patents, and other intellectual property – are relatively easy to move around compared to factories and other physical assets.

Andrew Silverman, a tax policy analyst at Bloomberg Intelligence, said former President Donald Trump’s 2017 tax cuts and jobs bill was intended to crack down on offshore tax maneuvers, but Republicans have neutralized the rules with additional deductions and other benefits.

Big Tech will have a harder time dodging Biden’s plan, as if it were turned into law it would fill most of the loopholes left by Trump’s 2017 legislation. The move threatens to leave the industry at odds with Washington, where lawmakers are already examining the spread of misinformation on online platforms and regulators are launching antitrust investigations against large technology companies.

Read More: Trump Tax Bill Can’t Kill Corporate America’s Award Winning Dodge

“Biden’s proposals could do what the Tax Cuts and Jobs Act promised but failed to achieve: higher taxes for large US tech companies,” said Silverman, who previously advised companies on these strategies. “The impact will be huge for some companies.”

Tax day

Apple’s overseas income consistently outperformed the US earnings

Source: Apple Inc. 10K filings

According to Silverman, a benchmark for assessing a possible risk is examining the approval applications of large US technology companies such as Apple, Microsoft, Inc., Facebook Inc., Intel Corp. and Alphabet Inc. These six companies have announced more than $ 100 billion in pre-tax revenue overseas in recent years. On Thursday, the first of these companies, Intel, reported first-quarter earnings that are expected to exceed $ 4 billion.

Read More: How Biden Would Correlate Billions In Overseas Profits

The tax plan has shared the opinion of executives: Jeff Bezos, chairman of Amazon, says he supports higher corporate taxes, while Intel CEO Pat Gelsinger criticized Biden’s plan after a recent White House meeting to encourage the return of semiconductor manufacturing to the United States discuss. “We’re trying to move forward in a dramatic way, in a way that will mark a decade,” said Gelsinger. “Now is not the time to tell me I’ll give you a dollar here and take two dollars there.”

Tax burden

Intel earned almost 40% of its income overseas in 2020

Source: Intel Corp. 10-K registrations

Three specific Biden proposals have the potential to add billions of dollars in annual tax burdens to U.S. tech companies based on analysis of regulatory filings. All companies declined to comment on the proposed tax measures when contacted by Bloomberg.

Global minimum rate

Trump’s U.S. tax law of 2017 included a levy on global low intangible tax income (Gilti), which is used to tax profits made in many countries from intangible assets such as intellectual property and software code.

This was aimed at a common tactic by large tech companies: they transfer their intellectual property to Bermuda or other low-tax locations, and then the companies’ subsidiaries in high-tax locations like France are charged by the Bermuda entity for using the intellectual property. In this way, the company’s “high tax” units make no technical profit and therefore pay very little tax.

Bye Bermuda

Google’s share of domestic income rose after it began licensing intellectual property in the United States

Source: Alphabet Inc. 10-K filings

“It’s easier to move your intangible asset than machines,” said Daniel Bunn, vice president of global projects for the Washington-based Tax Foundation.

According to Silverman, Biden plans to increase the Gilti tax rate from 10.5% to 21% and limit the use of foreign tax credits. The Tax Foundation, a right-wing think tank, estimates the proposed changes to Gilti could increase corporate taxes by nearly $ 300 billion in a decade. Much of this cost would likely fall on the technology sector.

For example, Biden’s proposal would potentially more than double Microsoft’s annual Gilti tax burden to $ 2 billion, Silverman estimates. In fiscal 2020, Microsoft generated 86% of its overseas pre-tax income from operations in Ireland and Puerto Rico, which have lower corporate tax rates than the United States, according to the company’s annual report.

Offshore profits

Microsoft’s share of overseas income has shrunk in recent fiscal years

Source: Microsoft Corp. 10-K submissions

Cancellation of the deduction

The 2017 Tax Act also provided for a tax deduction for Foreign Foreign Intangible Income (FDII). It is designed to encourage American companies to keep intangible assets such as intellectual property in the U.S. or to bring those assets home from overseas. Alphabet did just that in late 2019 when it began licensing IP in the US that had previously been licensed in Bermuda. Facebook made a similar change.

International business

Prior to 2020, Facebook booked most of its pre-tax profits overseas

Source: Facebook Inc. 10-K submissions

Now Biden is proposing to repeal FDII, which Bunn said would likely increase the tax burden on tech companies. According to its most recent annual report, Amazon recorded nearly $ 500 million in FDII prints in 2018, 2019, and 2020. “Some companies may reconsider holding US intellectual property if this tax break is removed,” said Bunn.

Minimum book tax

Finally, there is a proposal in Biden’s plan to introduce a “minimum book tax” of 15% on large companies that have high profits but low taxable income. Large US technology companies often have low effective tax rates because there are a number of available deductions available for items such as research and development, foreign loans, and stock-based payments.

Earned in the US

Almost 84% of Amazon’s pre-tax income is generated in the United States

Source: Inc. 10-K filings

“The biggest impact for tech companies is this minimum tax on book income,” said Bunn. “This would likely hit some companies much harder than the current tax system.”

If Biden’s book tax had existed in 2020, Google’s bill would have been $ 847 million higher. Silverman estimates that Amazon owed another $ 1.2 billion and Apple another $ 3.8 billion.

Read more: Amazon’s taxation becomes the sticking point in global levy talks

Tech companies are also being audited from outside the United States. Global talks, led by the Organization for Economic Co-operation and Development, seek to dispel concerns in many countries that tech giants – and other multinational corporations – are not properly taxed in the current system. The OECD’s efforts are aimed at replacing the digital services taxes that more and more countries are enacting in order to generate more revenue from companies like Google and Facebook. However, Amazon, which would likely evade the new rules because its margins are so small, becomes an obstacle to these negotiations.

– With the support of Laura Davison and Tom Contiliano

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