Joe Biden looks to close tax loopholes for tech and pharma firms

Washington — The tax plan that US President Joe Biden laid out last week is likely to hit technology and pharmaceutical companies particularly hard, although the challenge for legislators will be to minimise loopholes that could diminish the effect, tax experts said.

Much of the most valuable assets at pharmaceutical and tech companies is intellectual property, such as patents and algorithms — intangibles that make it easier for them to structure global operations in a way to minimise 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 US 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 US 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 US

Lawmakers decided that getting “half a loaf was better than nothing,” Gardner said of the 2017 law.

US multinational companies including Alphabet’s Google, Facebook and Merck  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 effect of the Biden plan, while a spokesperson for Merck did not respond to a request for comment.

To help minimise 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.”

Before the Trump reform, companies even had the incentive to move their headquarters overseas, in a manoeuvre known as an inversion. Drugmaker Mylan moved to the Netherlands, while medical-device maker Medtronic shifted to Ireland.

Stronger regulation by the US 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 US 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 emphasising the success of that act, she said reforming the tax system was an iterative process, and there could always be ways to refine the code.

Not enough

But Democrats argue Trump’s plan did not do nearly enough to prevent tax avoidance.

Fifty-five companies — including Salesforce.com, Nike and FedEx — 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 in April. ITEP has also reported in recent years that Amazon.com, Netflix and Zoom Video Communications have avoided paying taxes when they made money.

Amazon declined to comment.

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 organisation’s members welcomed “a more level playing field for globally engaged US companies”, the administration’s global minimum tax proposal “threatens to subject the US 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, incentivise domestic investments, and enable the US’s most innovative companies to remain globally competitive in developing and delivering products and services throughout the world,” the group said in a statement.

Wrangling ahead

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 legislators also pitching some of their own approaches.

Umer Raffat, a senior MD at Evercore ISI who specialises in the pharmaceutical industry, said he was sceptical that ultimately there would be a large effect 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. Legislators 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 UK 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 US Justice Department. “It’s difficult to develop a statutory scheme that achieves that goal.”

Bloomberg