Joe Biden has vowed to get tough on big tech and tax breaks should he win the U.S. presidential race in November, but analysts and legal experts note current global uncertainties could hinder the Democratic challenger from shaking up Silicon Valley in the near term.
Biden has pledged to raise the corporate tax rate to 28% from 21%, undoing some of the tax cuts implemented under the Trump administration. The former vice president also aims to set a minimum tax of 15% on companies' book income, or profits reported to shareholders, and to raise taxes on foreign earnings of U.S. companies located overseas — two policies that directly impact the U.S tech sector.
Specifically, Biden has criticized Amazon.com Inc. and other large tech firms for not paying higher taxes, claiming his proposals would hold these companies more accountable by tightening current loopholes. However, while experts note tech giants are perhaps the best-equipped to absorb a future tax hike, they say that prioritizing tax reform could be difficult given the current partisan divide and the ongoing coronavirus pandemic.
A higher corporate tax rate
Biden's proposal to raise the statutory corporate tax rate to 28% stands in stark contrast to the Trump administration's U.S. tax overhaul implemented in 2017, which slashed the corporate tax rate to 21% from 35%.
But it is unclear how much Biden's proposed increase will impact tech firms, as the tech sector is notorious for having an effective tax rate that is significantly lower than the statutory rate, or the percentage set by federal law. Companies report their effective tax rate as a calculated figure that includes federal, state, local and foreign taxes, as well as various tax breaks.
All told, information technology companies in the S&P 500 reported an average effective tax rate of 14.5% for 2019, 650 basis points below the 21% statutory rate. For 2016, the companies reported a 24.0% effective tax rate, 1,100 basis points below the 35% statutory rate.
But it is the largest U.S. tech companies, the FAANG or FAAMG stocks — Facebook Inc., Apple Inc., Amazon, Netflix Inc. or Microsoft Corp., and Alphabet Inc.'s Google LLC — that have attracted the most attention for their tax rates.
Of that group, Facebook was the only company to report an effective tax rate at or above the statutory rate in 2019. Netflix and Microsoft, meanwhile, reported the lowest effective tax rates last year, at 9.5% and 10.2%, respectively.
Overseas cash and earnings
Historically, these tech companies kept their taxes low by stockpiling overseas earnings rather than repatriating those funds.
Prior to the 2017 tax reform, a 35% tax had been placed on repatriated cash with a tax credit for foreign income taxes, and foreign-held funds would only be taxed if and when companies opted to repatriate them. As a result, companies kept their cash overseas, with Apple and Microsoft having had more than 90% of their cash assets in foreign holdings.
The 2017 legislation shifted the U.S. tax statute toward a quasi-territorial system, removing the 35% tax on repatriated dividends and instituting a one-time repatriation tax on previously accrued foreign-held funds. The one-time tax charged 15.5% on cash and 8% on noncash assets, payable over an 8-year period.
Apple said it planned to repatriate the majority of its overseas cash and estimated in its 2018 Form 10-K that it would be subject to repatriation taxes totaling roughly $37.3 billion, paid in installments. Microsoft similarly recorded an estimated net charge of $13.7 billion for repatriated cash holdings in fiscal 2018.
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GILTI as charged
To discourage U.S.-based multinational corporations from shifting future profits out of the U.S into low-tax jurisdictions, the 2017 law also imposed a minimum U.S. tax rate on global intangible low tax income, or GILTI, with a policy rate of 10.5% and a high tax exclusion rate of 18.9%.
Biden has proposed raising that minimum rate on foreign earnings from 10.5% to 21% in a bid to bring "an end to the global race to the bottom that rewards global tax havens," according to the former vice president's website.
Daniel Bunn, vice president of global projects at the Tax Foundation, an independent tax policy nonprofit, said that even considering the one-time repatriation tax and GILTI, the 2017 tax reform law made the U.S. tax code "significantly more agnostic" about where companies earn their income.
"The point of a territorial system is to say, 'Multinationals, you can operate and invest wherever you want to. We care about your activities here, but we want you to be successful on the global scene against your foreign competitors,'" Bunn said.
Biden's policy, according to Bunn, takes the opposite approach.
"It's not, we want U.S. multinationals to succeed wherever they are in the world. No, we want U.S. multinationals to invest in the U.S., and if they have foreign operations, we are going to tax them more heavily than their foreign competitors and we're going to penalize their corporate offshore operations," Bunn said of Biden's proposals.
Read his lips: No 0% taxes
Biden has also proposed a 15% minimum tax on book income "so that no corporation gets away with paying no taxes," according to his website.
In a May CNBC interview, Biden was asked about antitrust action against Amazon. He responded by saying, "I think Amazon should start paying their taxes."
Amazon reported an effective tax rate of 17.0% for 2019, but that includes state and international taxes. Domestically, Amazon reported owing $162 million in current federal taxes in 2019 versus pre-tax income of $13.9 billion, working out to a tax rate of roughly 1.2%.
Biden's comment likely refers to Amazon's 2017 and 2018 tax bills, when the company received federal refunds of $137 million and $129 million, respectively, due in part to a combination of tax credits and deductions.
Reacting to previous criticism, Amazon said in a January 2020 blog post that it follows all applicable federal and state tax laws. "Our U.S. taxes are a reflection of our continued investments, compensation of our employees, and the current tax rules," the company said.
Greg Valliere, chief U.S. policy strategist at asset management firm AGF Investments, said in a recent report that while much attention has focused on regulatory and antitrust concerns around the U.S. tech industry, he sees the potential for higher tax rates to disrupt "the most successful and innovative industry in American history."
"It's difficult to envision these companies would be broken up; we think a more imminent threat to the industry is an aggressive new minimum tax that could be enacted within a year if Joe Biden wins the presidency," Valliere wrote. "That's the real threat, not an antitrust assault that could take years to produce results."
In terms of timing, Biden said in September that he will move to undo the Trump administration's tax reform on "Day 1" of his presidency.
But Eric Toder — an institute fellow and co-director at the Tax Policy Center who has held various senior-level positions in tax policy offices in the U.S. government and abroad — notes that, when considering the possibility of a continued resurgence in confirmed COVID-19 cases and Biden's desire to implement additional reforms, such as around healthcare and infrastructure investments, tax reform may not be a top priority.
"If Biden is coming into a very depressed economy, it seems unlikely that he would go through with his tax increases right away," Toder said in an interview.
Toder noted that the political makeup of Congress during a Biden presidency will further impact how easy or difficult it will be to overhaul the current tax code.
But even if Republicans were to retain control of the Senate under a Biden administration, Isaac Boltansky, analyst for Compass Point Research & Trading, believes there are key parts of Biden's tax proposals that could still become law.
"In that scenario, the book income tax that they talk about is much likelier. That is pretty simple, you just have a minimum tax for certain corporations. And I think it’s tough for even a Republican to push back on Amazon having to pay a higher tax," Boltansky said.