With the passing of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress lowered the federal corporate tax rate to 21%[i] from its previous rate of 35%.[ii] The initial push for the TCJA was to repatriate some of the untaxed profits in U.S. corporations’ foreign subsidiaries; an estimated amount of $2.8 trillion in 2017.[iii] Some of the effects of the change in the corporate tax rate are now becoming apparent as Apple has chosen to repatriate its off-shore taxes to the United States, paying $38 billion in taxes.[iv] While there are many examples of the change in the corporate tax rate prompting companies to pay more in taxes,[v] there are also a variety of issues that have been created.
Corporate Tax Returns
Amazon has managed to go a second consecutive year without paying any U.S. corporate taxes.[vi] This is despite having profits of $11.2 billion in 2018 and $5.6 billion the previous year.[vii] Instead of paying the 21% tax rate on its 2018 income, Amazon actually reported a rebate, or return of taxes, of $129 million.[viii] That means they paid a tax rate of negative 1%.[ix] While the TCJA was enacted to incentivize better corporate citizenship, it did not close a slew of tax loopholes that enables companies like Amazon to aggressively save on their taxes.[x] Incredibly, Amazon is not the only huge United States based company that has taken advantage of the new tax laws.[xi] Netflix posted its largest ever U.S. profit in 2018, $845 million, and like Amazon reported a tax rebate; $22 million.[xii] Between 2008 and 2015, Netflix paid an average tax rate of 13.6% compared to the statutory amount of 35% indicating that it was well-prepared to take advantage of the much lower corporate tax rate.[xiii] It is easy to appreciate the irony that some of the largest corporations that, especially in the case of Amazon, were specifically targeted in the TCJA by politicians, avoiding any taxation and profiting over it.[xiv] Luckily for the United States, the European Union is also struggling to tax these corporations.
The European Union’s Response
Within the past two years, the European Union has taken an increased interest in the tax treatment of major tech companies such as Facebook, Amazon, and Apple.[xv] This has culminated in a push for a change in tax laws that would be fair and efficient in taxing digital technology.[xvi] Tech companies pose tax problems in Europe because no physical presence is required to sell goods and services into a market.[xvii] Under current European Union law, without a physical presence it is difficult to establish the tax base.[xviii] The current tax rules were originally designed for “brick and mortar businesses” that only sold goods within the physical location of the store.[xix] The modern tech companies rely on hard-to-value intangible assets, like advertising, data and automation, which promote online trading across country borders without the requirement of a physical presence.[xx] To combat this, two proposals were introduced on March 21, 2018 by the Commission.[xxi] The first proposal would enable countries within the European Union to tax profits that are generated in their territory, even if a company does not have a physical presence there.[xxii] The new rules would also change how profits are allocated to better reflect how companies create value, such as where the user is at the time of consumption.[xxiii] The second proposal is for an interim tax on certain revenue from digital activities that are currently not taxed.[xxiv] The interim tax would apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules.[xxv] These activities include selling online advertising space, digital intermediaries, and the sale of data.[xxvi] This would only be applied until the comprehensive reform was implemented and the possibility of double-taxation was alleviated.[xxvii] The Commission’s proposals would levy a 3% tax on the revenues of large internet companies with global revenues above roughly $860 million.[xxviii] The interim tax could raise $5.73 billion for the European Union.[xxix]
While not directly interacting with the TCJA, the extra attention to large American corporations from the European Union coupled with the more favorable United State’s tax rates could push these companies to continue to repatriate their income back to the United States. As far as Amazon and Netflix, however, Congress will need to look at these two companies’ tax returns to begin to fashion the laws that will close some of the loopholes. Unfortunately, tax is never that easy.
[i] 26 U.S.C. § 11(b) (2017).
[ii] Kyle Pomerleau, The United States’ Corporate Income Tax Rate is Now More in Line with Those Levied by Other Major Nations, Tax Foundation (Feb. 12, 2018), https://taxfoundation.org/us-corporate-income-tax-more-competitive/ [https://perma.cc/23V3-Z3DM] [hereinafter Pomerleau, Corporate Rate].
[iii] Austin Herrick, Estimates of TCJA Repatriation of Foreign Earnings on Investment and GDP, Penn Wharton, (Aug. 29, 2018), http://budgetmodel.wharton.upenn.edu/issues/2018/8/29/estimates-of-tcja-repatriation-of-foreign-earnings-on-investment-and-gdp [https://perma.cc/YKF3-8QGM].
[iv] Daisuke Wakabayashi & Brian X. Chen, Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to U.S., N.Y Times (Jan. 17, 2017), https://www.nytimes.com/2018/01/17/technology/apple-tax-bill-repatriate-cash.html [https://perma.cc/KWQ7-9ESF].
[v] Ali Longwell, How U.S. Tech Firms Are Spending Their Newly Repatriated Cash, sdx central, (May 20, 2018), https://www.sdxcentral.com/articles/news/how-u-s-companies-are-spending-their-newly-repatriated-cash/2018/05/ [https://perma.cc/BVN4-KZBS].
[vi] Matthew Gardner, Amazon in Its Prime: Doubles Profits, Pays $0 in Federal Income Taxes, Institute on Taxation and Economic Policy, (Feb. 13, 2019), https://itep.org/amazon-in-its-prime-doubles-profits-pays-0-in-federal-income-taxes/ [https://perma.cc/L3QG-RT54] (emphasis added).
[xi] Matthew Gardner, Netflix Posted Biggest-Ever Profit in 2018 and Paid $0 in Taxes, Institute on Taxation and Economic Policy, (Feb. 5, 2019), https://itep.org/netflix-posted-biggest-ever-profit-in-2018-and-paid-0-in-income-taxes/ [https://perma.cc/QG2E-G2HF].
[xiv] Robert McCartney et al., Facing opposition, Amazon reconsiders N.Y. headquarters site, two officials say, The Washington post, (Feb. 8, 2019), https://www.washingtonpost.com/local/virginia-politics/facing-opposition-amazon-reconsiders-ny-headquarters-site-two-officials-say/2019/02/08/451ffc52-2a19-11e9-b011-d8500644dc98_story.html?noredirect=on&utm_term=.4cbec233bf42 [https://perma.cc/AE78-ZWKM].
[xv] See generally Stephanie Bodoni & Gaspard Sebag, Amazon Hit With $294 Million Bill in EU Tax Crackdown, Bloomberg (Oct. 4, 2017), https://www.bloomberg.com/news/articles/2017-10-04/amazon-hit-with-294-million-bill-amid-renewed-eu-tax-crackdown [https://perma.cc/9NQ8-TUN2].
[xvi] Communication From the Commission to the European Parliament and the Council A Fair and Efficient Tax System in the European Union for the Digital Single Market, COM (2017) 547 final (Aug. 21, 2017) [hereinafter DSM Tax].
[xviii] Id. at 3-4.
[xix] Id. at 2
[xxi] European Commission Press Release IP/18/2041, Digital Taxation: Commission Proposes New Measures to Ensure that all Companies Pay Fair Tax in the EU [hereinafter Digital Taxation Press Release] (Mar. 21, 2018).
[xxvii] Digital Taxation Press Release, supra note 21.
[xxviii] Nicholas Earl, EU Pushes for New Technology Tax on Internet Giants Facebook, Amazon and Facebook, CityA.M. (Oct. 10, 2018) [hereinafter Earl], http://www.cityam.com/265288/eu-pushes-new-technology-tax-internet-giants-facebook [https://perma.cc/9RFK-ZJSS].
[xxix] See Kamal Ahmed, EU Pushes for new tax on Tech Giants ‘By Christmas’, BBC News (Oct. 10, 2018) [hereinafter Ahmed], https://www.bbc.com/news/business-45813754 [https://perma.cc/R2RG-AEFY].