Tax, Trump & Tech: Navigating Tax Liabilities Ahead

August 2017

Where regulations are concerned, tax reigns supreme this year on tech companies’ list of risks. Nearly all (97 percent) cite exposure to additional tax liabilities as a risk in their 10-K filings, which may result from changing state and local, national and/or global tax laws. 

The other top tax issues cited include differing tax laws in domestic and foreign jurisdictions, potential U.S. tax reform, state and local tax issues, and specific global tax frameworks and regulations, among others.

This is consistent with findings from this year’s Technology Outlook Survey, in which one-fourth of the tech CFOs (25 percent) cited tax changes as the biggest challenge to their organizations in 2017. It also echoes the substantial amount of political rhetoric around tax reform in both the U.S. and abroad in recent months.


Flustered Over Foreign Taxes

The international nature of tech supply chains and markets have led many tech companies to operate in multiple countries and jurisdictions. While this opens the door to new market opportunities, it also means having to comply with a wide range of foreign regulations and guidelines, including tax policies of varying complexity.

As a result, 69 percent of companies cite compliance with differing tax laws in domestic and foreign jurisdictions as a major risk. These laws often introduce additional compliance costs, as companies prepare for regular audits under foreign tax authorities. Depending on the jurisdiction, economic and political pressures to increase tax revenue may also make favorably resolving tax disputes more difficult.

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Tax liabilities introduced by global frameworks are also high on the risk list, with one-fourth (25 percent) of companies citing risks related to the Organisation for Economic Co-operation and Development (OECD)’s base erosion and profit shifting (BEPS) rules specifically. Published in July 2013 and sponsored by the G20 countries, the OECD’s Action Plan on BEPS seeks to address perceived flaws in international tax rules, including combating tax avoidance strategies often used by companies to artificially shift profits to low- or no-tax locations.

Since the survey, there have been new developments related to BEPS that may affect tax liabilities for U.S. multinationals. On June 7, the U.S. abstained from joining the 68 countries and jurisdictions that signed the Multilateral Convention to Implement Tax Treaty Related Measures, a multilateral instrument that allows nations to quickly adopt recommendations from the BEPS treaty initiatives. 

One of the main reasons for this decision, explained in Bloomberg by Henry Louie, deputy international tax counsel at the U.S. Department of Treasury, is that the bulk of the provisions under the current U.S. tax treaty policy is already consistent with the instrument—making signing the treaty less urgent for the U.S. than for other nations. Another factor was the omission of a “robust” limitation-on-benefits provision in the treaty. Nevertheless, U.S. tech multinationals may still be affected by the changes implemented by the other signatories.


The Waiting Game: Worries Over U.S. Tax Reform

Prolonged tax talk, both during the 2016 general election and after, led 41 percent of companies to express concerns over potential changes to federal tax policy. Among the tax-related items cited include the repatriation of funds from abroad to the U.S. (63 percent), the availability of tax credits or tax holidays (39 percent), and state and local tax issues (16 percent). According to this year’s Technology Outlook Survey, 53 percent of tech CFOs worry the most about corporate tax rates as part of tax reform. 

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Whether these worries come to fruition is another story, with the future of tax reform—currently hinging on President Trump’s framework released in April—very much in the air. Should the proposal pass, the changes would include a reduction of the corporate tax rate from 35 percent to 15 percent for businesses; a shift from a worldwide tax system to a territorial tax system, which would tax U.S. businesses only on what they earn within the U.S. rather than on profits earned around the world; and a one-time tax holiday (rate unspecified) on overseas profits. 

​While these changes would affect all businesses, tech companies, with their global supply chains, will be especially sensitive to the effects. A shift to a territorial tax system, for example, could greatly benefit U.S. multinationals that produce profits overseas. On a similar note, a one-time tax holiday could also benefit companies that keep millions of dollars in cash overseas. According to the Financial Times, Apple, Microsoft, Cisco Systems, Oracle and Alphabet alone have added $314 billion to their offshore cash holdings in the past five years, bringing the total to $512 billion. A tax repatriation holiday would enable these companies to bring back billions of dollars to the U.S. and save a substantial amount in taxes.

Nevertheless, if and when these tax changes will be translated into policy is still to be determined, as the proposal continues to undergo debate in Congress. The implications of these changes for each company will vary depending on where its global supply chain and customers are based.
 

“U.S. tax reform—including potential changes to the current corporate tax rate and available tax credits, the introduction of a tax holiday and more—has major implications for tech companies. As the industry waits to see whether these policies will come to light, it is important for companies to identify possible risks that may emerge and anticipate a potential action plan for each.”
    

2017-Oil-Gas-RFR-headshot_Karampelas.jpg  David Yasukochi
  Tax Office managing partner and partner in BDO’s Technology practice