Some of the biggest names in tech stood behind President Donald Trump on Inauguration Day. Hours later, he offered a guide that took a tax headache away from them.
One of the many Executive orderAt Monday’s signing, Trump signaled that the United States would not pursue a deal among 140 countries aimed at curbing a “race to the bottom” battle over corporate income tax rates.
The first part of the order reinforces America’s policy stance on the global minimum tax treaty, and in the second half, Trump has warned that other countries will retaliate if they impose additional tariffs on American companies. Technology bigwigs.
“These are companies that could be worried about taking a hit,” said Alan Cole, senior economist at the Tax Foundation.
From left, Priscilla Chan, Meta CEO Mark Zuckerberg, Lauren Sanchez, Amazon founder Jeff Bezos, Google CEO Sundar Pichai and Elon Musk attend the presidential inauguration in the Rotunda of the U.S. Capitol, Monday, Jan. 20, 2025, in Washington. (Chip Somodevilla/Pool Photo by AP) ·Corresponding Press
In the year The agreement reached in 2021 offers a two-part plan. Pillar One requires companies to pay tax in countries where their customers are located, even if they have no physical activity.
Column two, which the executive order targets, sets the international minimum tax rate at 15 percent. Multinational corporations with revenues of more than 750 million euros (~$788 million), no matter where they work. It also allows countries that have adopted Pillar 2 to levy a tax on companies that pay taxes in countries with rates below the world’s lowest minimum tax rate.
“The purpose of this is to combat tax evasion and tax avoidance and tax base erosion, where many people shift their income from high-tax jurisdictions to low-tax jurisdictions,” said Thomas Brosi, senior research associate at the Tax Policy Center. .
For example, take the tiny island of Jersey, a self-governing dependency of the United Kingdom with its own tax jurisdiction. Currently, if a company brings in $1 billion through the island, which has a 0% corporate rate, but “only takes a small fraction of that as some kind of fee or tax,” Cole said, that’s a lot of money for the island’s small population and for the company. Major financial tax savings.
“It’s hard for a normal country to compete with that because they want to raise revenue because they have a lot of people to take care of,” Cole said.
Multinational companies can move that global income from one country to another because their operations can span multiple countries. When they have to make judgment calls for tax purposes, corporations “like to lean in the direction of lower tax jurisdictions,” Cole said.
File – In this file photo In the year In the year Wednesday 7 June 2017 at the OECD Headquarters for Economic Co-operation and Development in Paris, France. (AP Photo/Francois Mori, File) ·Corresponding Press
In fact, the example of the island of Jersey is not hypothetical. Apple Inc has revealed it has diverted some of its Irish profits to Jersey after coming under fire from a Senate inquiry. 2017 investigation.
That general situation changes under international tax treaties.
Suppose a Chinese company is storing most of its revenue on the island of Jersey, but doing very little business there. Instead, the company is selling its products or services mainly in England and Germany. Under pillar two, the UK and Germany may pay more tax in their home country as the Chinese company is taxed in Jersey. This is called the Untaxed Profit Rule, or UTPR.
This creates problems for US tech companies because of the way the International Tax Treaty calculates the amount of tax a company pays in a country.
The U.S. corporate tax rate for domestic companies is 21% — above the 15% minimum — and the research and development tax credit in the U.S. is considered a tax deduction under Pillar Two calculations. So companies that take the R&D credit — like tech corporations — cut their effective tax rate below the 15% threshold, opening themselves up to the treaty’s tax rules.
Here’s how that math works out for the biggest and most famous tech giants:
Google’s parent company Alphabet Inc. His effective tax rate in 2023 was 13.9 percent. The federal research credit is shaved 1.8 percentage points off the 21% corporate tax rate; The company’s 10-KAlong with other deductions and tax benefits. And it could still carry forward $600 million in federal R&D credits for future years.
In the year At the end of 2023, Tesla had a negative effective tax rate His 10-Kand $1.1 billion in deferred federal research and development tax credits before they begin to expire in 2036.
And Amazon is in it Third quarter report “We expect our effective tax rate for 2024 to be positively impacted by the US federal research and development credit.” The company is set to report its 2024 results on February 6.
President Donald Trump signs an executive order during an indoor presidential inauguration ceremony at Capital One Arena, Monday, Jan. 20, 2025, in Washington. (AP Photo/Evan Vucci) ·Corresponding Press
That’s why Monday’s Trump executive order is popular with tech and companies that use the U.S. research and development tax credit — like biotech, pharma and crypto companies, among others. But it may be unnecessary.
While the Biden administration supports the global minimum tax, Congress has made no move to enact it into law, and Republicans strongly oppose the deal. And Former Treasury Secretary Janet Yellen was negotiating the allowance. This does not penalize American companies for taking research and development credits in the first place. A safe harbor rule in the deal would have shielded the U.S. from the tax bill, Cole said.
In fact, American companies were under siege even before the new administration took office.
“Maybe that’s unappealing in some ways because we’re just changing the way we do things for a big, powerful country,” Cole said, “but that’s also a realistic way of doing things in the world.”
And in case any country forgets that, Trump’s promise of revenge was a reminder.
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Janna Herron is a senior columnist at Yahoo Finance. Follow her with X. @JannaHerron.
