The existing tax law in the United States allows some of the country’s largest businesses to avoid paying any federal corporate income tax. However, it all seems to be changing with an upcoming 15% global tax on corporations imposed by OECD.
As per the Taxation and Economic Policy Institute, at least 55 of America’s largest establishments paid no federal corporate taxes on their 2020 revenues. Whirlpool, FedEx, Nike, HP, and Salesforce are among the companies described (1).
“We have a genuine fairness problem if a large, highly profitable firm isn’t paying the federal income tax,” Matthew Gardner, a senior scholar at the Institute on Taxation and Economic Policy (ITEP), told CNBC (2).
Furthermore, it is perfectly permissible and within the confines of the tax system for firms to pay no federal corporate income tax, resulting in billions of dollars in lost revenue for the US government.
“There is a bucket of corporate tax loopholes deliberately put in the tax code. Overall, they cost the federal government about 180 billion USD every year. And to compare, the government earns about 370 billion USD of revenue from corporate tax each year,” said Chye-Ching Huang, an executive director at NYU Tax Law Center, citing findings from the Tax Foundation (3).
ITEP estimates that the 55 companies would have paid 8.5 billion USD taxes. According to the institute, they instead collected 3.5 billion USD in tax rebates, dampening 12 billion USD from the US government. And not all of these taxes paid by corporations are included in the figures.
“I believe the fundamental issue here is that there are two ways in which businesses book their profits,” said Garret Watson, A senior policy analyst from the Tax Foundation (4). “The number of profits that establishments may report for financial purposes could be entirely different from those reported for tax purposes.”
Some companies use many tax expenditures that come in different forms to their advantage and lower their effective tax rates.
For instance, Gardener’s research into Amazon’s taxes from 2018 to 2021 highlighted a 79 billion USD of pre-tax US income. The ecommerce giant paid a collective 4 billion USD in federal corporate income tax in the last four years, equating to an effective 1.5% annual tax rate, said Gardner’s ITEP reported (5). These figures are about a quarter of the total 21% of the federal corporate tax rate.
One of the most controversial forms of federal tax expenditure includes the offshoring of profits. The overseas corporate income tax, anywhere between 0 to 10.5%, can incentivize shifting profits to tax havens.
For instance, Whirlpool, a home appliances manufacturer from the US, operates in both the US and Mexico. The company was cited in a recent case focused on the US and Mexican taxes (6).
“Whirlpool did it by having the Mexican operation owned by a Mexican company and no employee, and then having a Mexican company owned by a Luxembourg holding company with one employee,” said Huang. “Then, it also tried to claim that because of the combination of tax rules from the US, Mexico, and Luxembourg. It was trying to avoid tax and take advantage of the disconnect between these tax systems. These countries said no, this goes too far (7, 8).”
Of course, both companies, Amazon and Whirlpool, defended themselves in statements to CNBC (9). However, the recent developments suggest that the salad days are ending for these big tech giants.
Kenya’s Double Digital Service Tax
According to recent reports, Kenya plans to double its DST digital service tax to 3% by July. The government taps the growing digital economy to increase its revenues and narrow its fiscal deficit (10).
The updated rates proposed in the Finance Bill by Kenya’s Treasury department are expected to be passed by the regulators. The development came about over a year after the DST came to Kenya, affecting tech companies like Netflix, Amazon, Spotify, and Uber.
“The expression is deleted from the Income Tax Act’s Third Schedule. 1.5% appearing in paragraph 12 of the digital service tax rate and substituting it to 3%,” wrote Ukur Yatani, a Treasury cabinet secretary of Kenya, in the Finance Bill 2022.
The DST is a tax imposed on the gross transaction values of tech enterprises inside a certain country. Companies or people (non-residents) in Kenya, East Africa’s largest economy, are required to pay it if they “supply or enable the provision of a service to a user based in Kenya.”
According to the country’s revenue authorities (11), over-the-top services such as video streaming and podcasts, subscription-based media such as news, digital marketplaces, and downloadable digital content such as e-books and films are among the taxable services.
Other services include:
- Electronic data management
- Electronic ticketing
- Online distance learning
- The selling
- The licensing or monetization of any data obtained about Kenyan users from locations like digital marketplaces
Companies with no offices in Kenya must register electronically or hire a tax agent to file returns and make payments on their behalf.
The COVID-19 pandemic and attempts by the Paris-based OECD, Organization for Economic Co-operation and Development, to ensure that governments enhanced taxing rights over corporations with operations in their countries have expedited the adoption of DSTs (12).
Global Tax Impact on Tech Giants
While technology behemoths like Google and Amazon may not be required to pay US corporate income taxes, they may soon be forced to pay more to international tax authorities.
Last year, the OECD agreed to impose a 15% global corporate tax on businesses above a certain size with international operations.
Only four out of 140 OECD countries, including Kenya (which had already introduced DST) and Nigeria, voted against a deal that set a minimum corporate tax rate of 15% for multinational corporations.
According to the OECD, this step will ensure that multinational corporations pay a fair amount of taxes in their nations.
The global minimum tax agreement doesn’t aim to eliminate tax competition. Instead, it establishes multilaterally agreed limits with a two-pillar solution. The new development will see countries collecting roughly 150 billion USD in new revenue each year (13).
Pillar One advocates for a more equitable distribution of revenues and taxing rights among countries when it comes to the world’s largest and most successful multinational corporations. It will reallocate some of these corporations’ taxing capabilities from their home nations to areas where they conduct business and earn money, regardless of whether the companies have a physical presence there.
The new laws will apply to multinational corporations with global sales of more than 20 billion EUR and earnings of more than 10%, dubbed “globalization winners,” with 25% of revenues above the 10% benchmark to be allocated to market authorities.
Pillar One is projected to reallocate taxing rights on over 125 billion USD in earnings to market jurisdictions every year. Revenue growth in emerging countries is expected to be higher than in advanced countries as a percentage of existing sales.
Pillar Two establishes a minimum global corporation tax rate of 15%. Businesses with over 750 million EUR revenues will be subject to the new minimum tax rate, which is estimated to generate an additional 150 billion USD in annual tax revenue worldwide. Additional benefits will come from stabilizing the international tax system and increased tax certainty for taxpayers and tax authorities.
In 2022, countries hope to sign a worldwide convention, with implementation starting in 2023. The convention is already in the works. It will be used to establish the newly agreed-upon taxing right under Pillar One and standstill and remove provisions for all existing Digital Service Taxes and other unilateral acts. (14).
It will increase predictability and help to alleviate trade tensions. The OECD will release model instructions for implementing Pillar Two in domestic legislation in 2022, with implementation beginning in 2023.
The new tax is expected to impact some of the household names of the tech industry. And since the agreement would also tax all digital services of big tech giants in every country they do business in, it is set to affect their bottom line.
Global Tax Affect on Tech Stocks
Reformers and watchdogs frequently target tech businesses because of their enormous revenues but negligible tax contributions (15).
Because of the easy ride they have gotten from the government, these companies have become popular with institutional and retail investors, as huge profit margins boost their stock values. However, many of these high-flying tech stocks, including names like PayPal, have entered bear market territory this year (16), and there is no relief in sight.
Since the six big tech companies have only paid income tax on 3.6% of their 6 trillion USD revenue, almost 100 billion USD less in taxes over the last decade, we expect investors to become even varier (17).
The analysis from the Fair Tax Foundation prompted a response from both tech giants, Facebook, and Amazon, which The Guardian reported (18).
We can expect world leaders to engage with the global tax reform more positively and offer the benefit to public services worldwide.
It would have a huge influence on the likes of Amazon, Facebook, and Google, who, in the words of Paul Monaghan, CEO of Fair Tax Foundation (19), have tax-dodging hard-wired into their organizational structure.
As discussed, the OECD’s global tax is planned to go into force in 2023 after the multinational agreement concludes in 2022.