The tax plan President Joe Biden laid out last week will likely hit technology and pharmaceutical companies particularly hard, although the challenge for legislators will be to minimize loopholes that could diminish the impact, tax experts said.
Much of the most valuable assets at pharmaceutical and tech companies is intellectual property, like patents and algorithms — intangibles that make it easier for them to structure global operations in a way to minimize tax costs. Sectors like retail or agriculture have lots of physical assets that can’t easily be moved to lower-tax countries.
Both Republicans and Democrats have sought to bolster the U.S. tax take from companies’ overseas operations, and President Donald Trump’s 2017 overhaul did have measures to do that. Biden’s plan takes a tougher approach, with a 21% minimum tax on foreign profits and a 15% minimum levy on profits reported on financial statements. It limits companies from using credits for research and development costs and deductions for paying employees in stock.
The provisions — part of the administration’s plan to finance a $2.25 trillion infrastructure package — mean that 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 prevent gaming the system entirely,” said Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, known as ITEP. “The party does seem like it’s over.”
‘Half a Loaf’
Trump’s 2017 tax overhaul created a system where U.S. companies paid about half the taxes abroad they did at home — replacing the former regime, where corporations could indefinitely defer paying taxes on foreign profits, as long as they didn’t bring that money back to the U.S.
Lawmakers decided that getting “half a loaf was better than nothing,” Gardner said of the 2017 law.
U.S. multinational companies including Alphabet Inc.’s Google, Facebook Inc. and Merck & Co. have been particularly deft at using provisions embedded in the tax code to reduce their taxes, observers say. Spokespeople for Google and Facebook declined to comment about the potential impact of the Biden plan, while a spokesperson for Merck didn’t respond to a request for comment.
To help minimize the opportunities for tax-rate arbitrage across the globe if Biden’s plan goes into effect, Treasury Secretary Janet Yellen on Monday underscored the administration’s embrace of a global minimum tax that will end a “race to the bottom.” Even so, negotiations on achieving such a deal have already run on for years.
“Tax planning is always going to be present as long as there are differences in tax laws across different countries,” said Kyle Pomerleau, a resident fellow at the American Enterprise Institute. “Companies are going to take advantage of that.”
U.S. Top Marginal Corporate Rate
Before the Trump reform, companies even had the incentive to move their headquarters overseas, in a maneuver known as an inversion. Drugmaker Mylan NV moved to the Netherlands, while medical-device maker Medtronic Plc shifted to Ireland.
Stronger regulation by the U.S. Treasury, along with Trump’s cut in the corporate tax rate to 21% from 35% made it particularly difficult for such transactions to take place in recent years, however.
Trump’s Tax Cuts and Jobs Act “went a long way to increasing U.S. multinationals’ competitiveness,” said Loren Ponds, a former tax aide to the House Ways and Means Committee who helped develop the international portions of the tax overhaul and who’s now at law firm Miller & Chevalier. While emphasizing the success of that act, she said reforming the tax system is an iterative process, and there can always be ways to refine the code.
But Democrats argue Trump’s plan didn’t do nearly enough to prevent tax avoidance.
Some 55 companies — including Salesforce.com Inc., Nike Inc. and FedEx Corp. — that are part of the S&P 500 or Fortune 500 disclosed paying no federal income taxes in 2020, despite reporting profits 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 they made money.
Business groups and Republicans alike have come out strongly against Biden’s proposal to raise taxes, saying the changes would hurt the ability of American companies to compete with foreign competitors.
Joshua Bolten, the president of the Business Roundtable, said in a statement on Monday night that while the organization’s members welcomed “a more level playing field for globally engaged U.S. companies,” the administration’s global minimum tax proposal “threatens to subject the U.S. to a major competitive disadvantage.”
The Information Technology Institute called for Biden to keep the Trump reforms in place. “These tax policies promote growth in high-skilled, highly paid jobs, incentivize domestic investments, and enable the United States’ most innovative companies to remain globally competitive in developing and delivering products and services throughout the world,” the group said in a statement.
It’s not yet clear how effective Biden’s proposals will be, as legislation has not yet been written. Months of negotiations loom, with senior Democratic lawmakers also pitching some of their own approaches.
Umer Raffat, a senior managing director at Evercore ISI who specializes in the pharmaceutical industry, said he’s skeptical that ultimately there will be a large impact on the marginal tax rates drugmakers pay.
One big unknown about both the global minimum tax and the levy on financial statement profits is that the Biden team has yet to define the income they will hit. Lawmakers are likely to face intense pressure from lobbyists and industry groups to include carve-outs that will reduce the overall amount of taxes owed.
One key area that left 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 allowing multinationals to pay low rates on their intellectual property, where tech and pharma derive much of their profits. In Ireland, the patent box rate is as low as 6.25% and France, Spain and the U.K. advertise a 10% rate.
“It’s easy for politician to say we don’t like these companies not paying tax,” said Robert Kovacev, a partner at law firm Norton Rose Fulbright who previously litigated tax cases for the U.S. Justice Department. “It’s difficult to develop a statutory scheme that achieves that goal.”