After grappling with the Trump administration over the travel ban, climate change, and the rollback of broadband privacy rules, Silicon Valley may have finally had reason to cheer the White House today. The White House’s one-page outline of its tax plan includes a reduction in the corporate tax rate and a one-time tax break for companies that repatriate their profits—Apple, Alphabet, Cisco, Oracle, and Microsoft have the biggest overseas cash holdings of all corporations.
The policy staffers and lawyers at those tech giants have been paying close attention to the issue—or, more accurately, the timing of the debate—since the first days of the new administration. And while Trump spoke about tax reform on the campaign trail, and staffers spoke about it publicly after the inauguration, the one-page document released by the White House today represents the first time the White House has put anything resembling a real plan in writing.
The top lines of the coming tax bill, for tech companies, are:
- A large cut in the corporate tax rate from 35 percent to 15 percent
- A one-time tax repatriation of profits that corporations have parked overseas
- A new “territorial” approach to taxes that would minimize taxes on profits made in overseas markets
All of these policies would have a major impact on tech companies big and small, depending on the fine print, which is not available yet, and is likely being worked out behind the scenes in discussions between the administration and members of Congress.
One of the key numbers to be worked out is the exact tax rate on the trillions of dollars now parked overseas by large companies like Microsoft and Apple to avoid paying U.S. corporate income tax. Though it was previously reported that it could be reduced from 35% to 10%, today’s release was vague about the specifics, with Treasury Secretary Steven Mnuchin just saying that it would be “very competitive.”
According to estimates in late 2016, U.S. companies hold about $2.5 trillion abroad. Tech companies have long held that the tax of 35% on profits returning to the U.S. is unreasonably high, and that they’re breaking no law by avoiding it.
The administration is eager to get the foreign funds back into America, one source told me. Trump has suggested that companies will invest the repatriated money in new factories to create new jobs in the U.S., though economists say that this is very unlikely to happen on a broad scale.
The administration is painfully aware that last time such a tax amnesty was tried, U.S. companies spent the repatriated money mainly on stock buy-backs and shareholder dividends. This time the administration may try to impose rules on how the repatriated money can be spent, which is sure to draw loud protests from the tech community.
Still, chances are very high that some form of repatriation will be included in the final bill.
Apple, for one, would likely be happy about a one-time repatriation of earnings, depending on the details of the plan. In 2016, the European Union, after a lengthy investigation, ruled that Apple parking earnings at its Irish subsidiaries (to avoid paying U.S. taxes) amounts to the tech giant receiving “illegal state aid” from Ireland. As a result, Apple may be required to pay around $14.5 billion in back taxes dating back to 2004. Apple has appealed the decision, and Ireland has so far refused to collect the back taxes from Apple.
Apple would be one of many companies to bring money back, says Matt Gardner, the director of the Institute on Taxation and Economic Policy (the research umbrella for Citizens for Tax Justice) in an email to Fast Company. “Any company with substantial offshore cash will be thrilled to have the opportunity to pay a super low tax rate on this cash, and will likely be equally happy that a territorial system will give them an even lower tax rate (that is to say, zero) on profits they shift into tax havens going forward,” he writes.
If Mnuchin is able to push through a new “territorial” approach to corporate income tax, repatriation might become a moot point in the future. He gave no details about the approach, but the term “territorial” typically refers to a policy whereby the government only taxes profits generated from domestic sales.
Tax repatriation is a hot-button issue that’s connected to the overarching wealth distribution and fair taxation themes of the election cycles in both the U.S. and Europe last year. Though Trump’s populist position on the issue won out, his views on the issue appears contradictory. On the one hand, he repeatedly promised to remove tax policies that have in recent decades helped transfer billions from the middle class to the wealthy. Such populist rhetoric is included in the White House’s one-pager, with its directive to “eliminate tax breaks for special interests.”
On the other hand, he is very pro-business and wants to give large tax breaks to corporations. Those tax breaks, if passed, will almost certainly be paid for via cuts in entitlements for the middle and lower class.
It all comes down to the specifics. “An aggressive effort to eliminate loopholes would reduce the cost of this tax cut substantially, and could mean that there are specific companies that don’t enjoy huge tax breaks for this deal,” Gardner says. “But if that phrase is as content-free and toothless as it usually is when policymakers say it, then this could be a straight-up tax cut bonanza for almost every corporation,” Gardner says.
Mnuchin said he hopes to have the tax plan passed by August. The White House, however, have backed off from that goal.
One clue to the fate of tax reform is the progress of health care reform, one policy person told Fast Company, explaining that both issues are chronologically and fiscally linked. That is, the administration would like to pass a health care bill that would substantially reduce the government’s health care spend; and those savings would then be rolled into a tax bill that would significantly reduce the government’s revenue intake.
Trump hopes that his tax plan will fire up the economy, but it’s widely expected to result in a federal deficit and a deepening of the national debt. Mnuchin dodged the question of whether the plan is “revenue neutral,” saying it will “pay for itself with growth and with reduced reduction of different deductions and closing loopholes.”
Democrats are vowing a hard fight, calling the tax plan a giveaway to the wealthy, and a throwback to Reagan-era supply-side economics.