Why the Impact of the Trump Taxes Remains Partly Hidden

Why the Impact of the Trump Taxes Remains Partly Hidden

The New York Times
December 30, 2019

New taxes should be a big expense for many companies. But they have found a way around disclosing it in annual reports.

By Peter Eavis

Armed with legions of lobbyists, companies have been pushing hard — and successfully — to weaken new federal taxes that take aim at overseas tax havens.

Many of them have managed to avoid publicly disclosing how much they owe under the new taxes. Without such figures, it becomes virtually impossible for outsiders to work out how much companies are saving from the watered down tax rules.

In theory, this opacity should not exist. United States securities regulations have long required public companies to disclose even relatively minor tax expenses. Over the past year, this requirement has led to a small number of companies revealing the effect of the new taxes on overseas income.

Yet many others — including some longtime users of tax havens — appear to have found ways around disclosing how the overseas taxes will affect them.

How the new taxes are supposed to work

President Trump’s 2017 tax law did not just cut taxes for companies. It also introduced new provisions aimed at discouraging the practice of routing income through countries with ultralow taxes.

One of those was a tax on “global intangible low-taxed income,” known as GILTI, which acts as a minimum tax on certain profits that companies earn abroad. GILTI was expected to hit corporations that appeared to be paying almost no tax on their overseas income.

In 2016, for example, Facebook’s foreign taxes were only 3 percent of its foreign profits. By taxing income that flows through offshore havens, the GILTI initiative was supposed to bring in tens of billions of dollars for the United States Treasury and to partially offset the revenue lost from the 2017 law’s deep tax cuts.

What companies should reveal

United States securities laws require publicly traded companies to provide detailed explanations of their taxes in their annual reports. Specifically, companies must reveal any individual tax expenses (or benefits) that exceed 5 percent of what is known as their statutory income tax expense.

Say a company had $100 in income. At today’s 21 percent corporate federal income tax rate, its federal income tax expense would be $21. Under the disclosure rule, that company would have to divulge any particular tax expenses that exceeded $1.05 (5 percent of $21).

For companies that were big users of tax havens before the passage of the 2017 law, the GILTI tax was expected to be a significant new expense — and one that would presumably have to be individually disclosed. A small number of companies, including Netflix and Bristol Myers, the pharmaceutical giant, did so in their 2018 annual reports.

But many of the companies that were most likely to face a large bill from the new tax — like Apple, Google, Microsoft and Facebook — have not disclosed how much the GILTI tax took out of their earnings.

Understanding the GILTI silence

The lack of disclosure may be masking the financial impact of how the Trump administration is writing rules governing how the 2017 tax package is enacted. Under pressure from corporate lobbyists, the Treasury Department has allowed multinational companies to partly or completely avoid taxes on certain overseas income.

Tax experts told The New York Times that the impact of those weakened rules, while hard to measure precisely, is likely to exceed $100 billion.

The companies’ silence about what they actually are paying under the GILTI makes it hard to quantify the true costs of the Treasury’s rules.

It’s possible that some companies did not reveal how much the GILTI tax was costing them because, after accounting for tax credits and other factors, the amount fell below the 5 percent threshold. Microsoft said that was the case with its GILTI tax in its 2019 fiscal year.

But other companies appear to have bundled GILTI together with other tax expenses and benefits in a way that makes the cost invisible. Facebook, for example, quantifies “the effect of non-U. S. operations” on its overall tax liability. And Apple provides a number for its taxes on “earnings of foreign subsidiaries.”

The cost of the GILTI tax is most likely lumped into those categories, tax experts said. Over the years, they say, corporate auditors — who have to review and sign off on companies’ financial disclosures — have adopted a loose reading of the tax-disclosure rule, enabling companies to combine items that are not directly related.

Facebook did not respond to a request for comment. Google declined to comment. Apple said in an emailed statement, “Since 2008, Apple’s corporate taxes have totaled over $100 billion. We pay all that we owe according to tax laws wherever we operate.”

https://www.nytimes.com/2019/12/30/business/corporate-tax-cuts-impact.html