Global technology company Intel spends more on research and development than any other publicly traded company in the United States, according to CFO Stacy Smith -- a situation that makes the research tax credit particularly valuable to the company.
But the research credit, along with all of the other credits, deductions, and tax expenditures in the code, is "on the table" -- as Senate Finance Committee Chair Max Baucus, D-Mont., likes to say -- for possible changes or even elimination as a part of tax reform.
Baucus and House Ways and Means Committee Chair Dave Camp, R-Mich., visited Intel on August 20. The visit, along with an August 19 visit to the San Francisco headquarters of Square Inc., the company whose innovations have made it possible for businesses to use smartphones and tablets to process customers' purchases, was the pair's third stop in their Simpler Taxes for America Tour.
The lawmakers kicked off the tour with visits to two Minnesota businesses and then headed to the Philadelphia metropolitan area to visit two more businesses and a taxpayer who submitted ideas to Baucus and Camp through their website, taxreform.gov.
At Intel's headquarters in Santa Clara, Calif., Baucus and Camp had a closed-door discussion with company executives over breakfast, toured the Intel museum, and took questions from Intel employees. One employee asked how tax reform will provide incentives for companies like Intel to continue to invest in U.S. manufacturing.
The committee chairs did not say which incentives will stay and which will go as a part of reform, or whether they would propose new incentives. Instead, they talked about the goal of lowering tax rates for all companies.
U.S. companies, which pay taxes at a top corporate rate of 35 percent, are at a disadvantage compared with companies that operate in countries with lower tax rates, Camp said. That disadvantage has stymied the U.S. economy, he said, noting "a lower tax rate overall solves a lot of those problems."
Baucus said he understands that the section 199 manufacturing deduction and the research credit help lower Intel's effective tax rate and that other companies use those and other incentives to minimize the amount of taxes they pay. But Baucus said he plans to approach tax reform with a clean slate in order to lower tax rates while minimizing the number of tax expenditures in the code.
"We're looking at which of these provisions do we add back," Baucus said, explaining that reform presents an opportunity for some tax incentives to be changed so that they are more effective.
"For example, I believe that the [research] tax credit has made good sense for America, and over the years [we] have tried to make it permanent so we're not looking at it on an annual basis," Baucus said. "But if we make it permanent, we also have an opportunity to change it in a way so it's less complex" and so that it "makes more sense to companies" and is more efficient, he said.
But what tax reform really comes down to is a trade-off, Baucus said. "The trade-off is the degree to which we totally eliminate all of these provisions for the sake of very low rates," he said. "A lot of companies would like those very low rates. On the other hand, if we add back, say, section 199, then that lower rate is going to go up a little bit."
Camp said one thing reform would eliminate is what is known in Washington as "tax extenders" -- provisions that expire every year or so and are only renewed for limited periods of time. One of the problems with the research credit is that it is not permanent, he said, noting that Congress often lets the research credit and other tax extenders expire and has to retroactively reinstate them.
"We're the only nation in the world that does that with major tax policy," Camp said. "Then, you wonder why businesses don't take advantage of that."
Smith, who is also Intel's executive vice president, told Baucus and Camp that their courage and the work they are doing on reform will allow U.S. companies to be more competitive in the global market and encourage innovation and job creation in the U.S.
"Our effective tax rate is about 10 points higher than the people we compete with that are based in Korea or Taiwan and an even bigger gap to the people that we compete with in China," Smith said. "Over time that just means less dollars available for investment, less dollars available for job creation and for our business -- it's all about innovation."
But Intel, which conducts most of its manufacturing in the U.S., also faces competition from U.S. technology companies that conduct more work overseas and whose foreign profits are not subject to U.S. taxes unless they are repatriated.
"I think companies like Intel will really benefit from reform," Baucus said. "I think other companies who maybe have proportionately more foreign-source income know and believe that the code is way out-of-date. They're following the law as it is today, but they know that the code should be changed . . . so the United States as a whole is more competitive. And I don't hear much resistance at all from those companies in going down this road."
Baucus added that tax reform is also an opportunity, as Camp too has said, "to lead in the world because other countries are facing the same problem with respect to foreign-source income."
Square Visit Highlights Need for Modern Code
Baucus and Camp also talked tax reform during a closed-door meeting with Square executives before touring the company's San Francisco headquarters.
Square co-founder and CEO Jack Dorsey issued a statement after the visit saying Square was pleased to have Baucus and Camp stop by the office so the company could share with them the challenges the tax code presents for the millions of merchants that use Square's products.
"All of us here share the same goal: making it easier for America's entrepreneurs to innovate so they can start businesses, create jobs, and grow our economy," Dorsey said. "By making credit acceptance and tax laws simpler, we give time back to our merchants."
Baucus said Square is "a very good example of how the United States could maintain its competitive edge and lead in developing new technologies." He said simplifying the tax code will benefit fast-growing companies like Square as well as the small businesses that work with Square.
The world has changed since the tax code was last overhauled in 1986, and tax reform is needed to help companies continue to innovate and grow, the chairs said.
"This idea of innovation and intangibles and intellectual property, it's really the U.S. commodity, if you will," Camp said. "And we need to make sure that we have a modern tax code that allows that to continue."
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