President Biden likes to single out Amazon (AMZN) for not paying federal taxes. That may have been on Jeff Bezos’ mind when he put out Wednesday’s statement that the e-commerce behemoth supports a higher corporate tax rate. Yet Amazon has paid taxes the past two years and may have less to lose from Biden’s tax plan, at least in the near term, than Google parent Alphabet (GOOGL), Facebook (FB), Apple (AAPL) and Microsoft (MSFT).
Biden’s Tax Plan Targets Foreign-Earned Income
That’s partly because Biden’s tax plan could take a somewhat bigger bite out of foreign income, and Amazon earnings feature much less of that, with 84% of pretax income generated in the U.S. Both Apple and Microsoft generated a bit more than 50% of pretax income overseas in their latest fiscal years.
A new analysis of the Biden tax plan by the Wharton School at the University of Pennsylvania finds that two key provisions aimed directly at taxing foreign income would raise $987 billion over 10 years. That tops the $892 billion projected to be raised by hiking the base corporate tax rate to 28% from 21%.
Politics might reinforce that emphasis on taxing foreign-earned income. So far the biggest pushback to Biden’s tax plan has come from Sen. Joe Manchin, D-W.Va., who has said he thinks a 25% corporate tax rate is about right and won’t back a rise to 28%.
Shortcomings Of Trump Corporate Tax Cuts?
President Trump’s 2017 tax plan already reformed international taxation. Before 2018, foreign income was taxed at the U.S. rate, but only once companies repatriated their earnings. That led to stashing profits overseas to avoid taxes. The GOP sought to fix that latter problem, but the Biden administration argues that its fix increased incentives for offshoring and profit-shifting to low-tax countries to avoid paying the U.S. rate.
One thing seems pretty clear: Corporate taxes are generating a lot less revenue than predicted when the Trump tax cuts passed at the end of 2017. In early 2018, the Congressional Budget Office projected $276 billion in corporate tax revenue in 2019, down from a projection of $344 billion based on prior law. Yet companies paid just $230 billion.
This Could Cut Google Earnings By $1.45 Billion
The Biden tax plan targets one Trump tax feature for elimination: the foreign-derived intangible income deduction, or FDII. The provision offers a lower tax rate of 13.125% for exports stemming from intangible assets, such as patents and copyrights, that are held in the U.S. While giving companies a nudge to hold intangible assets in the U.S., the Biden Treasury Department argues that the FDII deduction doesn’t incentivize new investment in the U.S. and actually rewards companies for moving tangible assets, such as factories, offshore.
Here’s what elimination of the FDII deduction would mean for big tech. FDII added $1.45 billion to Google earnings in 2020, according to its 10-K. Facebook earnings reflected an FDII benefit of $630 million, Microsoft about $584 million, and Amazon earnings $372 million. Apple doesn’t break out its savings.
Interestingly, both Google and Facebook shifted intangible income to the U.S. in 2020. Facebook’s pretax domestic income jumped to $24.2 billion in 2020 from $5.3 billion, while foreign income fell to $8.9 billion from $19.5 billion.
Wharton projects that killing FDII would raise $260 billion over 10 years.
The second big international change in the Biden tax plan is a doubling of the 10.5% minimum tax on global intangible low-taxed income, or GILTI. That could raise $728 billion, Wharton says.
The Trump tax reform established GILTI as a disincentive for companies to hold intellectual property overseas to avoid U.S. taxes. However, the global 10.5% rate can still create incentives to hold intellectual property in tax havens such as Bermuda. The country of 64,000 accounts for 10% of U.S. multinationals’ foreign profit, Treasury says.
Biden wants to double the GILTI rate to 21% and apply it across the board. It’s hard to know precisely what this would mean for Amazon earnings and those of other big techs, but the 10-K reports offer some clues.
How Much Do Lower Foreign Tax Rates Help Apple, Microsoft?
While Apple doesn’t break out its FDII benefit, it disclosed that reduced tax rates on earnings of foreign subsidiaries saved it $2.5 billion in the fiscal year through Sept. 30. Overall, Apple had a 14.4% effective tax rate. That includes both current taxes and tax liabilities that it recognized but whose payment is due at a later date.
Amazon, which had an 11.8% effective tax rate, said it received a $538 million benefit from tax treatment of foreign earnings, excluding FDII.
Microsoft said the lower tax on foreign earnings cut its effective tax rate by 3.7 percentage points to 16.5%. Microsoft highlighted lower rates “from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico.” The latter U.S. territory has had a protected tax-haven status.
Facebook paid a 12.2% effective tax rate. FDII reduced that by 1.9 percentage points, while tax rates on other foreign income cut it by another 2.4 percentage points.
Google paid a 16.2% effective tax rate, with only modest benefit from lower tax rates on foreign income outside of FDII.
Digital Tax Wild Card
Amazon’s support for a corporate tax rate hike grabbed headlines, but the fine print — if the package maintains or enhances U.S. competitiveness — may prove significant.
Treasury Secretary Janet Yellen is making the case for advanced economies to agree on a global minimum tax to avoid a race to the bottom for tax rates. That’s a hard sell, even though Biden’s tax plan threatens penalties for companies based in foreign countries that don’t play ball. Still, it’s not clear how much those penalties would do to keep a level playing field if the U.S. hikes corporate tax rates.
While European Union leaders pledged to work with the U.S., one possible condition of cooperation might be agreeing to let EU countries impose a digital tax on advertising and e-commerce from U.S. tech giants.
Megacap Tech Stocks Faring Well
So far, investors don’t seem to concerned about the impact of Biden’s tax plan on megacap techs.
Microsoft stock, Facebook and Google are at record highs, in buy zones. Apple and Amazon stock are building the right side of bases, shaking off months of sideways action.
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