The tax plan that President Joe Biden drafted last week is likely to hit tech and pharmaceutical companies especially hard, though the challenge for lawmakers will be to minimize loopholes that could mitigate its impact, tax experts said.
Many of the most valuable assets in pharmaceutical and engineering companies are intellectual property, such as patents and algorithms – intangible assets that make it easier for them to structure global operations to minimize tax costs. Industries such as retail or agriculture have many physical assets that cannot be easily moved to countries with lower taxes.
Both Republicans and Democrats have sought to bolster the U.S. tax on corporate foreign activities, and President Donald Trump’s 2017 revision had measures to do just that. Biden’s plan takes a tougher approach, with a 21% minimum tax on foreign profits and a 15% minimum tax on the profits reported on the financial statements. It restricts companies from using credits for research and development costs and deductions for paying employees in inventory.
The amenities – part of the government’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 afford low rates for years.
“This is aim for prevent the system from fully betting, ”said Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, known as ITEP. “The party looks like it’s over.”
Read more: How Biden Would Raise Billions in Profits Overseas: QuickTake
‘Half bread’
Trump’s 2017 tax reform created a system where U.S. companies paid about half of the taxes abroad they did at home – replacing the former regime, where companies could indefinitely delay paying taxes on foreign profits, as long as they did not return that money to the US.
Lawmakers decided that getting “half a loaf of bread was better than nothing,” Gardner said of the 2017 law.
American multinationals, including Google from Alphabet Inc., Facebook Inc. and Merck & Co. are particularly adept at using provisions incorporated into the tax code to lower their taxes, observers say. Google and Facebook spokespersons declined to comment on the potential impact of the Biden plan. Merck said in a statement that “these proposed tax increases would undermine the biopharmaceutical industry’s ability to do its important work when the world needs it most.”
To minimize the chances of tax rate arbitrage around the world should Biden’s plan go into effect, Treasury Secretary Janet Yellen on Monday underscored the government’s embrace of a global minimum tax that will end a ‘race to the bottom’ . Nevertheless, negotiations to reach such a deal have been ongoing for years.
Previously: Yellen Announces End of Trump’s Global Retreat, Eyes Tax Deal
“Tax planning will always be in place as long as there are differences in tax laws between different countries,” said Kyle Pomerleau, a resident fellow at the American Enterprise Institute. “Companies will benefit from this.”
Top marginal corporate rate in the US
Top Marginal Corporate Tax Rates, 1918-2018
Before Trump’s reform, companies even had the incentive to move their headquarters overseas, in a maneuver known as a reversal. Medicinator Mylan NV moved to the Netherlands while making medical devices Medtronic Plc moved to Ireland.
However, stricter regulations by the U.S. Treasury, along with Trump’s cut in the corporate tax rate from 35% to 21%, have made it particularly difficult for such transactions in recent years.
Trump’s Tax Cuts and Jobs Act “has come a long way in increasing the competitiveness of US multinationals,” said Loren Ponds, a former tax adviser to the House Ways and Means Committee who helped develop the international parts of the tax reform. and who now works at a law firm. Miller & Chevalier. She emphasized the success of that move, but said that tax reform is an iterative process and there could always be ways to refine the code.
Not enough
But Democrats argue that Trump’s plan didn’t do nearly enough to prevent tax avoidance.
About 55 companies – including Salesforce.com Inc., Nike Inc. and FedEx Corp. – that are part of the S&P 500 or Fortune 500 that have disclosed that they will not pay federal income tax 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.
Business groups as well as Republicans have spoken out strongly against Biden’s proposal to impose taxes, saying the changes would hurt American companies’ ability to compete with foreign competitors.
Bloomberg Intelligence: Manufacturers and multinationals can bear a higher infrastructure load
Joshua Bolten, the president of the Business Roundtable, said in a statement Monday evening that while members of the organization welcomed “a more level playing field for globally engaged US companies,” the global proposal for minimum taxation from the government “threatens to subject the US to. a major competitive disadvantage. “
The Information Technology Institute called on Biden to push through Trump’s reforms. “This tax policy promotes the growth of highly skilled, well-paid jobs, stimulates domestic investment and makes it possible United States“most innovative companies to remain globally competitive in developing and delivering products and services around the world,” the group said in a statement.
Meandering forward
It is not yet clear how effective Biden’s proposals will be, as no legislation has yet been drafted. Months of negotiations loom, with senior Democratic lawmakers pitching some of their own approaches as well.
Read more: Top Democrats float 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 there will ultimately be a major impact on the marginal tax rates that drug makers pay.
A great unknown about both the global minimum tax and the tax on financial statement profits is that the Biden team has yet to determine the income they will earn. Lawmakers are likely to face intense pressure from lobbyists and industry groups to include carve-outs that will reduce the total amount of taxes due.
One key area that has remained undefined is how the global minimum tax will affect the income earned from assets placed in patent boxes – a tax tool offered by some European countries that allows multinational companies to pay low rates on their intellectual property, where tech and pharma distract you a lot. their winnings. In Ireland the rate of patent boxes is only 6.25% and in France, Spain and the UK a rate of 10% is advertised.
“It’s easy for politicians to say that we don’t like these companies not paying taxes,” said Robert Kovacev, a partner at Norton Rose Fulbright law firm who previously litigated tax cases before the US Department of Justice. “It is difficult to develop a statute regulation with which that goal is achieved. “
– With the help of Anna Edgerton
Updates with Merck’s statement in the eighth paragraph