Tax Analysts Blog

A Dark Cloud Over Silicon Valley

Posted on Aug 19, 2013

House Ways and Means Committee Chairman Dave Camp (R-Michigan) and Senate Finance Committee Chairman Max Baucus (D-Montana) are in San Francisco on Monday and Santa Clara on Tuesday to promote tax reform. On July 1 the pair was in Minnesota and on July 29 they visited small businesses in New Jersey and Pennsylvania to further their cause. The Monday stop will be at Square, Inc a tech start-up (founded in 2009) that makes the app that allows you to pay for your coffee at Starbucks with your smart phone. Tuesday they head south to the headquarters of chip making giant Intel (founded in 1968).

In public, the chairmen and the tech execs will emphasize the positive aspects of tax reform for their businesses: lower rates, the possibility of making permanent and strengthening the tax credit for research and--most of all--a transition to a territorial system for the United States that would allow hundreds of billions of profits booked in foreign locales to return to the United States at a low--preferably single-digit--rate of tax. Tech companies desperately want their foreign cash back in the United States so they can pay dividends, buy back shares, and acquire domestic companies. High tech companies in particular have a great deal of "trapped" foreign profits because they own so much intellectual property, and it is easy to shift IP to holding companies in tax havens.

In private, tech execs will be urging the chairmen to not go overboard with lots of anti-abuse rules to prevent profit shifting out of the United States--the kind of profit shifting that has allowed companies like Apple, Cisco, Microsoft, and Google to save billions in taxes. Proposals to raise taxes on foreign profits have been floated by President Obama and by Camp himself. (They are also under study by the OECD.) Nobody in Washington D.C. has a wish to make enemies with tech companies that are the crown jewels of the American economy. Nobody is deliberately targeting them. But there is a basic dynamic of corporate tax reform that will be hard even for the tech sector to overcome: those who are the biggest winners under the current system have the most to lose from tax reform.

If tax reform has any chance of succeeding, players like Camp and Baucus must pay for lower rates by shutting down the biggest tax breaks. There is no bigger corporate tax benefit--neither tax credit nor deduction--in current law than the ability of multinationals to easily and legally put their profits into tax havens and out of reach of the IRS.

Read Comments (1)

John SouperAug 20, 2013

Territorial corporate taxation + increasing number of H1-B visas = goodbye tech
jobs for Americans.

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