Some of the biggest names in technology endorsed President Donald Trump on Inauguration Day. Hours later, he delivered a directive that relieved them of a possible fiscal headache.
In one of the many executive orders he signed on Monday, Trump signaled that the United States would not enact an agreement among 140 countries that aimed to stop the “so-called race to the bottom” in corporate income tax rates.
The first part of the order largely cements the U.S. policy stance on the global minimum tax deal, while in the second half, Trump warned of retaliation if other countries punish U.S. companies with additional taxes, a threat that may have sounded sweet to those. technology bigwigs.
“Those are the companies that might be worried about a hit,” said Alan Cole, senior economist at The Tax Foundation.
From left, Priscilla Chan, Meta CEO Mark Zuckerberg, Lauren Sánchez, Amazon founder Jeff Bezos, Google CEO Sundar Pichai and Elon Musk attend the 60th presidential inauguration in the Rotunda of the United States Capitol in Washington, Monday, January 20, 2025. (Chip Somodevilla/Pool Photo via AP) ·ASSOCIATED PRESS
The agreement reached in 2021 offers a two-part plan. The First Pillar dictates that large multinational companies pay taxes in the countries where their customers are located, even if the companies do not have physical operations there.
The Second Pillar, targeted by the executive order, establishes a global minimum tax rate of 15% for multinational corporations with revenues exceeding €750 million (~$788 million), regardless of where they operate. It also allows countries that have adopted Pillar Two to impose an undertax charge on companies that pay taxes in countries that have a tax rate below the global minimum.
“The goal of this is to fight tax evasion, tax avoidance and tax base erosion, where multinationals would shift income from high-tax jurisdictions to low-tax jurisdictions,” said Thomas Brosy, senior research associate at the Tax Policy Center. . .
Take, for example, the small island of Jersey, a self-governing dependency of the United Kingdom with its own tax jurisdiction. Right now, if a company sends a billion dollars across the island, which has a 0% corporate rate, but “only takes a small fraction of a percentage as some kind of fee or tax,” Cole said, that It’s substantial money for the island’s small population and a significant financial tax savings for the company.
“It’s hard for a normal country to compete with that because they actually want to increase income because they have a lot of people to take care of,” Cole said.
Multinational companies can move that global revenue from one country to another because their operations can span multiple countries. When they need to make a decision for tax purposes, corporations “love to lean toward the low-tax jurisdiction,” Cole said.
FILE – In this file photo from Wednesday, June 7, 2017, the headquarters of the Organization for Economic Cooperation and Development (OECD) in Paris, France. (AP Photo/François Mori, File) ·ASSOCIATED PRESS
In fact, the example of the island of Jersey is not hypothetical. Apple Inc. diverted some of its profits from Ireland to Jersey after coming under fire from a Senate investigative committee, according to a 2017 investigation.
That whole scenario would change with the global tax agreement.
Say a Chinese company hides much of its revenue on the island of Jersey, but does very little business there. Instead, the company sells its products or services mainly in the United Kingdom and Germany. Under Pillar Two, the UK and Germany can tax the Chinese company more in their own countries because it is not taxed enough in Jersey. This is called the undertaxed profits rule or UTPR.
This becomes problematic for American technology companies because of the way the global tax agreement calculates the tax rate a company pays in a country.
While the US corporate tax rate for domestic companies is 21% (well above the 15% minimum), the US R&D tax credit is counted as a tax reduction under the Second Pillar calculation. So companies that accept the R&D credit (such as technology corporations) can reduce their effective tax rate below the 15% threshold, opening themselves up to the agreement’s undertaxed profits rule.
Here’s how the math is working out for the biggest and best-known tech giants:
Meta Platforms Inc., formerly Facebook Inc., attributed the decline in its effective tax rate to 12% in the third quarter of 2024 from 17% a year earlier to “an increase in research tax credits,” according to its quarterly filing. latest. .
The effective tax rate that Alphabet Inc., Google’s parent company, paid in 2023 was 13.9%. The federal research credit shaved 1.8 percentage points off the 21% corporate tax rate, according to the company’s 10-K filing, along with other deductions and tax benefits. And it still had $600 million in federal research and development credits that it could carry over to future years.
At the end of 2023, Tesla had a negative effective tax rate, according to its 10-K, and deferred federal research and development tax credits worth $1.1 billion that it could carry forward before they began to expire in 2036.
And Amazon said in its third-quarter report that “by 2024, we estimate that our effective tax rate will be favorably affected by the U.S. federal research and development credit.” The company will present its 2024 results on February 6.
President Donald Trump signs an executive order while attending a presidential inauguration parade inside Capital One Arena, Monday, Jan. 20, 2025, in Washington. (AP Photo/Evan Vucci) ·ASSOCIATED PRESS
That’s why Trump’s executive order on Monday is likely to be popular with the tech sector, along with other types of companies that use the US R&D tax credit, such as biotech, pharmaceutical and crypto companies, among others. But it may have been unnecessary.
While the Biden administration supported the global minimum tax, Congress had not taken steps to sign it into law, and Republicans were strongly opposed to the deal. And former Treasury Secretary Janet Yellen was negotiating an allocation that would not penalize American companies for accepting the research and development credit in the first place. A safe harbor rule in the agreement would also have protected the United States from the undertax rule, Cole said.
In essence, American businesses were isolated even before the new administration took office.
“Maybe that’s unattractive in some ways because we’re changing the way we do things just for the biggest, most powerful country,” Cole said, “but that’s also a realistic way to function in the world.”
And if any country forgot, Trump’s promise to retaliate served as a reminder.
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Janna Herron is a senior columnist for Yahoo Finance. Follow her on X @JannaHerron.
