The tax plan that President Joe Biden introduced last week is likely to hit tech and pharmaceutical companies especially hard, though the challenge for lawmakers will be to minimize loopholes that could lessen the impact, tax experts said.
Much of the most valuable assets of pharmaceutical and technology companies is intellectual property, such as patents and algorithms, intangibles that facilitate the structuring of global operations in a way that minimizes fiscal costs. Sectors such as retail or agriculture have many physical assets that cannot easily be moved to countries with lower taxes.
Both Republicans and Democrats have tried to bolster America’s tax collection from companies’ overseas operations, and President Donald Trump’s 2017 reform did have measures to do so. Biden’s plan takes a stricter approach, with a minimum tax of 21% on foreign earnings and a minimum tax of 15% on earnings reported in financial statements. It limits companies to using credits for research and development costs and deductions payable to employees in stock.
The provisions, part of the administration’s plan to fund a $ 2.25 trillion infrastructure package, mean tech and pharmaceutical companies could lose many of the tax planning tools that allowed them to pay low rates for years.
“This is aiming to avoid messing with the system entirely, ”said Matthew Gardner, senior fellow at the Institute for Fiscal and Economic Policy, known as ITEP. “The party seems to be over.”
Read More: How Biden Would Rake Billions In Profits Overseas: QuickTake
‘Half bread’
Trump’s 2017 tax reform created a system in which American companies paid roughly half of the foreign taxes they paid at home, replacing the previous regime, where corporations could indefinitely defer paying foreign income taxes. , as long as they did not return that money to the United States
Lawmakers decided that getting “half a loaf was better than nothing,” Gardner said of the 2017 law.
American multinational companies, including Google from Alphabet Inc., Facebook Inc. and Merck & Co. has been particularly adept at using provisions included in the tax code to lower its taxes, observers say. Spokespersons for Google and Facebook declined to comment on the potential impact of the Biden plan. Merck said in a statement that “these proposed tax increases would undermine the ability of the biopharmaceutical industry to do its important work when the world needs it most.”
To help minimize opportunities for tax rate arbitrage around the world if Biden’s plan goes into effect, Treasury Secretary Janet Yellen on Monday underscored the administration’s adoption of a global minimum tax that will end to a “race to the bottom”. Even so, the negotiations to reach such an agreement have already dragged on for years.
Previously: Yellen Declares End of Trump’s Global Retreat and Targets Tax Deal
“Tax planning will always be there as long as there are differences in the tax laws of different countries,” said Kyle Pomerleau, resident fellow at the American Enterprise Institute. “Companies are going to take advantage of that.”
US Top Marginal Corporate Rate
Maximum marginal corporate tax rates, 1918-2018
Before Trump’s reform, companies even had the incentive to move their headquarters abroad, in a move known as investing. Pharmacist Mylan NV moved to the Netherlands, while the medical device manufacturer Medtronic Plc moved to Ireland.
However, stricter regulation by the U.S. Treasury, coupled with Trump’s cut in the corporate tax rate from 35% to 21%, made it particularly difficult for such transactions to take place in recent years. years.
Trump’s Tax Cuts and Jobs Act “went a long way toward increasing the competitiveness of US multinationals,” said Loren Ponds, a former tax assistant for the House Ways and Means Committee who helped develop the international parties. of tax reform and now works at the Miller y Chevalier law firm. While he emphasized the success of that law, he said that reforming the tax system is an iterative process and there can always be ways to refine the code.
Is not sufficient
But Democrats argue that Trump’s plan did not do enough to prevent tax evasion.
Some 55 companies, including Salesforce.com Inc., Nike Inc. and FedEx Corp., which are part of the S&P 500 or Fortune 500, revealed that they did not pay federal income taxes in 2020, despite reporting earnings for the year, according to an ITEP. report released earlier this month. ITEP has also reported in recent years that Amazon.com Inc, Netflix Inc., and Zoom Video Communications Inc. have avoided paying taxes when making money.
Both business groups and Republicans have come out strongly against Biden’s proposal to raise taxes, saying the changes would damage the ability of American companies to compete with foreign competitors.
Bloomberg Intelligence: Manufacturers and Multinationals Can Bear Biden’s Infrastructure Tax
Joshua Bolten, chairman of the Business Roundtable, said in a statement Monday night that while members of the organization welcomed “a more level playing field for globally engaged US companies,” the The administration’s global minimum tax proposal “threatens to put the US at a great competitive disadvantage.”
The Information Technology Institute asked Biden to keep Trump’s reforms in place. “These fiscal policies promote the growth of highly qualified and well-paid jobs, encourage national investments and USA“The most innovative companies to remain globally competitive in the development and delivery of products and services around the world,” the group said in a statement.
Fighting ahead
It is not yet clear how effective Biden’s proposals will be, as the legislation has yet to be drafted. Months of negotiations are ahead, and senior Democratic lawmakers are putting forward some of their own approaches as well.
Read more: Top Democrats float as an alternative to Biden’s corporate tax plan
Umer Raffat, a senior managing director at Evercore ISI who specializes in the pharmaceutical industry, said he is skeptical that ultimately there will be a big impact on the marginal tax rates paid by drug manufacturers.
One big unknown about the global minimum tax and financial statement income tax is that Biden’s team has yet to define the revenue they will earn. Legislators are likely to face intense pressure from lobbyists and industry to include exclusions that will reduce the total amount of taxes owed.
A key area that remained undefined is how the global minimum tax will affect income earned from assets placed in patent boxes, a tax tool offered by some European countries that allows multinationals to pay low fees for their intellectual property, where the Technology and the pharmaceutical industry get much of the money. Your profits. In Ireland, the patent cash rate is as low as 6.25% and France, Spain and the United Kingdom announce a rate of 10%.
“It’s easy for politicians to say that we don’t like these companies not paying taxes,” said Robert Kovacev, a partner at the Norton Rose Fulbright law firm, who previously litigated tax cases for the US Department of Justice. “It is difficult to develop a scheme that achieves that goal. “
– With the assistance of Anna Edgerton
(Updates with Merck’s statement in the eighth paragraph)