The tax plan that President Joe Biden set last week is likely to particularly affect pharmaceutical and technology companies, 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 are intangible intellectual property, such as patents and algorithms, that make it easier for them to structure global operations so that they minimize tax costs. Sectors such as retail or agriculture have many physical assets that cannot be easily moved to countries with lower taxes.
Both Republicans and Democrats have tried to bolster U.S. tax making of companies ’overseas operations, and President Donald Trump’s 2017 review took steps to do so. Biden’s plan takes a tougher approach, with a minimum tax of 21% on foreign profits and a minimum tax of 15% on profits reported in the financial statements. It limits companies from using credits for research and development expenses and deductions to pay employees in stock.
The provisions, which are part of the administration’s plan to fund a $ 2.25 trillion infrastructure package, mean that pharmaceutical and technology companies could lose many of the tax planning tools that allowed them to pay low fees during years.
“This is with the aim of avoid gambling completely out of the system, ”said Matthew Gardner, a senior member of the Institute for Taxation and Economic Policy, known as ITEP. “Looks like the party is over.”
Read more: How Biden would fix billions in overseas profits: QuickTake
“Mig pa”
Trump’s 2017 tax review created a system where U.S. companies paid about half of the taxes they made abroad at home, replacing the old regime, where companies could defer payment of indefinitely. 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 multinational companies included Google by Alphabet Inc., Facebook Inc. i Merck & Co. they have been especially adept at using the provisions included in the tax code to reduce their taxes, observers say. Spokesmen 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 harm the ability of the biopharmaceutical sector to do its important job when the world needs it most.”
To help minimize tax arbitrage opportunities around the world if Biden’s plan goes into effect, Treasury Secretary Janet Yellen stressed Monday’s adoption by the administration of a minimum tax global that will end a “race to the bottom”. However, negotiations to reach this agreement have been going on for years.
Before: Yellen declares end to Trump’s global withdrawal, according to eye tax
“Tax planning will always be present as long as there are differences in tax laws between countries,” said Kyle Pomerleau, a resident member of the American Enterprise Institute. “Companies will take advantage of it.”
US marginal marginal corporate rate
Higher marginal corporate tax rates, 1918-2018
Prior to Trump’s reform, companies even had the incentive to move their headquarters overseas, in a maneuver known as investment. Pharmacist Mylan NV moved to the Netherlands while being a manufacturer of medical devices Medtronic Plc moved to Ireland.
However, stronger regulation by the U.S. Treasury, along with Trump’s cut in the corporate tax rate from 21% to 21%, has made it especially difficult to conduct such transactions in recent years.
Trump’s tax cuts and employment law “went a long way in increasing the competitiveness of American multinationals,” said Loren Ponds, a former aide to the House Roads and Media Committee who helped develop the international parts of the tax review and which is now in the law firm. Miller and Chevalier. While emphasizing the success of this act, he said reforming the tax system is an iterative process and there can always be ways to perfect the code.
It is not enough
But Democrats argue that Trump’s plan did not do enough to prevent tax evasion.
About 55 companies, included Salesforce.com Inc., Nike Inc. i FedEx Corp., which is part of the S&P 500 or Fortune 500, revealed that it 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. they have avoided paying taxes when they were making money.
Business groups and Republicans have been strongly opposed to Biden’s proposal to raise taxes, saying the changes would hurt the ability of U.S. companies to compete with foreign competitors.
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Joshua Bolten, chairman of the business roundtable, said in a statement Monday night that while members of the organization welcomed “a level playing field for committed US companies globally.” , the administration’s global minimum tax proposal “threatens to subject the U.S. to greater competitive disadvantage.”
The Institute of Information Technology asked Biden to keep Trump’s reforms in place. “These fiscal policies favor the growth of highly qualified and well-paid jobs, encourage national investments and allow development United States“The most innovative companies will remain globally competitive in the development and delivery of products and services around the world,” the group said in a statement.
Fighting forward
The effectiveness of Biden’s proposals is still unclear, as no legislation has yet been drafted. Months of negotiations are expected, and senior Democratic lawmakers are also presenting some of their own approaches.
Read more: Leading Democrats float an alternative to Biden’s corporate tax plan
Umer Raffat, senior executive director of Evercore ISI specializing in the pharmaceutical industry, said he was skeptical that there will eventually be a big impact on the marginal tax rates paid by drug manufacturers.
One of the big unknowns about both the global minimum tax and the corporate income tax is that Biden’s team has yet to define the revenue it will earn. Legislators are likely to face intense pressure from lobbyists and industry groups to include sizes that reduce the total amount of taxes owed.
One of the key areas left undefined is how the global minimum tax will affect the income from assets placed in patent vaults, a tax tool offered by some European countries that allows multinationals to pay low fees for their intellectual property, where technology and pharmacy derive their benefits. In Ireland, the patent cash rate is as low as 6.25% and France, Spain and the UK announce a 10% fee.
“It’s easy for the politician to say we don’t like these companies not paying taxes,” said Robert Kovacev, a partner at law firm Norton Rose Fulbright, who previously litigated U.S. Department of Justice tax cases. “It is difficult to develop a legal norm scheme that achieves this goal “.
– With the assistance of Anna Edgerton
(Updates with Merck’s statement in the eighth paragraph)