Even after Biden tax hike, U.S. firms would pay less than foreign rivals

By Tom Bergin

(Reuters) – U.S. companies pay less income tax than their overseas competitors and would likely continue to do so under a tax hike proposed by President Joe Biden, according to a Reuters analysis of filings by hundreds of U.S. and international firms.

The analysis undercuts arguments by some company executives and trade groups that Biden’s plan would leave U.S. firms paying some of the world’s highest taxes and struggling to compete against foreign rivals. Industry representatives have aggressively lobbied against the proposal, which would increase the corporate tax rate to 28%, from the current 21%. The president also wants a minimum tax of 21% on overseas income, up from 10.5%.

U.S. corporations typically pay less – sometimes much less – than those statutory rates because the U.S. tax code is unusually generous with tax breaks and deductions, and in allowing overseas tax planning, according to the Reuters analysis. The analysis was reviewed by four academics with experience in measuring corporate tax payments.

Reuters examined the effective tax rates – reflecting the actual tax payments companies reported – of 52 of the largest U.S.-based multinational firms, and then compared them to the rates paid by these companies’ main overseas competitors. The U.S. companies paid an average effective tax rate of 16% in 2020 compared to an average rate of 24% paid by 200 foreign companies that the U.S. firms named as their competitors in filings.

If Biden’s proposed tax rates were applied to the U.S. firms’ 2020 earnings, the companies would have paid effective rates averaging about five percentage points higher, or 21%, the Reuters analysis found.

That’s still lower than the average rate paid by their overseas competitors. Moreover, U.S. firms would likely retain a bigger tax advantage over their foreign rivals than the analysis shows, for two reasons. First, the Reuters calculations do not account for the impact of new tax breaks for U.S. firms that Biden proposes to encourage domestic manufacturing and clean-energy investments. Second, the Biden plan would also require foreign companies with U.S. operations to pay higher taxes on their U.S. income.

Business lobby groups have argued that the Biden proposal, which requires congressional approval, would leave domestic firms at the mercy of their foreign rivals.

“Such tax increases would make the United States uncompetitive as a place to do business and make U.S. companies uncompetitive globally,” said Joshua Bolten, chief executive of the Business Roundtable, which represents about 200 large U.S. companies, when the measures were first announced on March 31.

The trade group said comparisons of effective tax rates, as in the Reuters analysis, can be “informative” but are only one of many valid ways to analyze how taxes impact the global competitiveness of U.S. firms. The organization said that simpler comparisons of statutory tax rates among nations – without considering deductions, credits and overseas tax planning – also accurately reflect the incentives for firms to locate in one nation versus another.

Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, declined to comment on Reuters’ findings but said: “Higher taxes will hinder investment and competitiveness for U.S. businesses, ultimately hurting U.S. workers.”

Senator Ron Wyden, an Oregon Democrat and chairman of the Senate finance committee, dismissed such arguments. “The data are clear: U.S. mega-corporations are contributing far too little to federal revenues, particularly in comparison to foreign counterparts,” Wyden told Reuters.

Reuters ran its findings by Biden’s Treasury Department and the White House. The White House said in a statement: “This reporting highlights that the corporate tax code is broken. The largest corporations don’t pay their fair share in the United States, and pay less in other competitor countries.” Biden’s proposal, the White House said, is designed to address “the tax games and giveaways that underlie the rock-bottom tax rates described by this reporting.”

Republican leaders who have said the proposed hikes will damage U.S. firms’ competitiveness, including Senator Pat Toomey of Pennsylvania and Congressman Kevin Brady of Texas, declined to comment on the Reuters analysis. Senate Minority Leader Mitch McConnell, a Kentucky Republican, did not respond to requests for comment.

Democrats in Congress are pushing a bill to implement Biden’s plan. It could come up for a vote any time in the divided Senate. Its success may rely on the support of one Democrat Senator, Joe Manchin of West Virginia, who has pushed for lower tax rates than Biden wants. All Republican senators are expected to oppose it.

All of the 52 U.S. firms Reuters examined, and in most cases their overseas rivals, published detailed reconciliations explaining the deviation between their actual tax bill and the statutory tax rate in their home countries. These disclosures show that the U.S. firms’ relatively low effective tax rates stem from business-friendly provisions unique to the United States.

For example, U.S. tax breaks to encourage research and other activities generate bigger savings than similar breaks in other nations. The U.S. allows tax deductions for many expenses – such as client entertainment, stock-based compensation and certain legal costs – that are not typically deductible elsewhere. And U.S. companies can save far more money by shifting profits into tax-haven nations than, for instance, their rivals in Japan, Germany or France, whose governments limit such maneuvers.

RIDDLED WITH LOOPHOLES

Analyses cited by several business groups have said U.S. businesses currently face an average combined state and federal statutory tax rate of nearly 26% and that Biden’s plan would raise their rates to 32%.

Consultancy PricewaterhouseCoopers noted the average nominal tax rate among developed countries was 23% – lower than Biden’s proposed rate of 28% – and urged companies to lobby against the increases. Johnson & Johnson’s Chief Financial Officer Joseph Wolk told analysts in April that Biden’s plan would make the U.S. rate the highest among developed countries.

Such simplified comparisons, however, do not reflect actual taxes paid after deductions, credits and other advantages enjoyed by U.S. firms. Johnson & Johnson, for instance, paid an effective tax rate of less than 11% in 2020, according to the company’s annual report. The pharmaceutical giant did not comment on Reuters findings but said tax policy should create a “level playing field” for U.S. firms internationally.

PricewaterhouseCoopers declined to comment.

In another typical example, Activision Blizzard Inc – the California-based publisher of hit video games such as Call of Duty and World of Warcraft – reported paying an effective tax rate of 16% last year. Two of its main competitors, Sony Corporation and Nintendo Co Ltd, are based in Japan and paid effective tax rates of 22% and 28%, respectively, according to their annual reports.

Activision declined to comment for this story.

The company slashed its tax payments through tax breaks and deductions and by operating subsidiaries in tax-haven nations. Activision has, for instance, saved hundreds of millions in taxes over the past decade, company filings show, by reporting billions of dollars in profits through a subsidiary based in Bermuda, an island with no corporate tax. Activision reported that it reduced its overall effective tax rate in 2020 by 4 percentage points because of the low tax rates paid by its foreign subsidiaries.

Activision rivals Sony and Nintendo each generate about three-fourths of their revenues outside of Japan, compared to about half for Activision. And yet Nintendo reported that taxes on overseas income reduced its effective tax rate by just 0.6 percentage points, while Sony reported a decrease of 2.4 percentage points.

Tax havens such as Bermuda don’t provide the same benefit to Japanese firms. Japan has a law that allows authorities to levy Japanese corporate taxes of about 30% on any income reported from operations in foreign jurisdictions with a tax rate of less than 20%. Similar rules are common in industrialized nations other than the United States.

STATE TAX BREAKS

Another reason Activision paid a relatively low effective tax rate is that its tax payments to U.S. states only increased the company’s total rate by 2 percentage points. That’s typical: On average, the effective rates of the 52 U.S. multinationals examined by Reuters were raised by just 1 percentage point by state tax payments. Business groups often cite 4% or 5% as the typical state tax burden, based on averages of statutory state rates that usually do not equate to actual taxes paid.

A host of factors lower companies’ state tax payments. States often lure companies with tax breaks, and compete with one another to offer the most generous incentives. Also, companies only pay state taxes on their U.S.-based income. And they can lower the bill further by apportioning earnings to relatively low-tax states.

At the federal level, companies drive down their tax bill through a host of deductions or credits that are often unavailable or limited in other nations. U.S. firms, for instance, can deduct the cost of share grants as compensation to executives and staff. Activision reported lowering its effective tax rate by 1 percentage point through such deductions. On average, the U.S. firms examined by Reuters reduced achieved savings of 2.6% from that provision.

The video game firm shaved an additional 3 percentage points off its tax bill by collecting tax credits for research and development spending. Its competitors Nintendo and Sony reported smaller tax savings from research credits.

Such credits are available to an array of U.S. firms, and not just in research-intensive sectors such as pharmaceuticals. Sport apparel giant Nike Inc, for instance, lowered its effective tax rate by 2 percentage points in 2020 through R&D credits. Two-thirds of the 52 U.S. companies Reuters examined reported similar benefits, with an average tax reduction of about 3 percentage points.

Research tax credits are common outside the United States, but typically worth less, often not enough to warrant company disclosure. Just 18 firms of the 200 foreign competitors to U.S. firms examined by Reuters reported benefits from research or other tax credits.

Some U.S. companies, to be sure, will take a bigger hit than others from Biden’s tax plan. But even if U.S. companies collectively sustain a bigger tax hit than foreseen, they would still be well-placed to compete, the analysis shows. On average, the 52 U.S.-based companies examined by Reuters had profit margins of 24%, well above than the average margin of 14% among their 200 foreign competitors.

“The argument on ‘competitiveness’ is code for ‘corporations should pay no taxes’,” said Senator Wyden, “and it doesn’t hold water.”

(Reporting by Tom Bergin; editing by Brian Thevenot)

U.S. House gives final approval to tax bill, delivers victory to Trump

President Trump celebrates with Congressional Republican on the South Lawn of the White House.

By David Morgan and Amanda Becker

WASHINGTON (Reuters) – The Republican-controlled U.S. House of Representatives gave final approval on Wednesday to the biggest overhaul of the U.S. tax code in 30 years, sending a sweeping $1.5 trillion tax bill to President Donald Trump for his signature.

In sealing Trump’s first major legislative victory, Republicans steamrolled opposition from Democrats to pass a bill that slashes taxes for corporations and the wealthy while giving mixed, temporary tax relief to middle-class Americans.

The House approved the measure, 224-201, passing it for the second time in two days after a procedural foul-up forced another vote on Wednesday. The Senate had passed it 51-48 in the early hours of Wednesday.

“We are making America great again,” Trump said, echoing his campaign slogan at a White House celebration with Republican lawmakers. “Ultimately what does it mean? It means jobs, jobs, jobs.”

Trump, who emphasized a tax cut for middle-class Americans during his 2016 campaign, said at an earlier Cabinet meeting that lowering the corporate tax rate from 35 percent to 21 percent was “probably the biggest factor in this plan.”

It was uncertain when the bill would be signed. White House economic adviser Gary Cohn said the timing depended on whether automatic spending cuts triggered by the legislation could be waived. If so, the president will sign it before the end of the year, he said.

The administration expects the waiver to be included in a spending resolution Congress will pass later this week, a White House official told reporters.

BUSINESS FRIENDLY

In addition to cutting the U.S. corporate income tax rate to 21 percent, the debt-financed legislation gives other business owners a new 20 percent deduction on business income and reshapes how the government taxes multinational corporations along the lines the country’s largest businesses have recommended for years.

Millions of Americans would stop itemizing deductions under the bill, putting tax breaks that incentivize home ownership and charitable donations out of their reach, but also making tax returns somewhat simpler and shorter.

The bill keeps the present number of tax brackets but adjusts many of the rates and income levels for each one. The top tax rate for high earners is reduced. The estate tax on inheritances is changed so far fewer people will pay.

Once signed, taxpayers likely would see the first changes to their paycheck tax withholdings in February. Most households will not see the full effect of the tax plan on their income until they file their 2018 taxes in early 2019.

In two provisions added to secure needed Republican votes, the legislation also allows oil drilling in Alaska’s Arctic National Wildlife Refuge and removes a tax penalty under the Obamacare health law for Americans who do not obtain health insurance.

“We have essentially repealed Obamacare and we’ll come up with something that will be much better,” Trump said.

Democrats were united in opposition to the tax legislation, calling it a giveaway to the wealthy that will widen the income gap between rich and poor, while adding $1.5 trillion over the next decade to the $20 trillion national debt. Trump promised in 2016 he would eliminate the national debt as president.

“PILLAGING”

“Today the Republicans take their victory lap for successfully pillaging the American middle class to benefit the powerful and the privileged,” House Democratic leader Nancy Pelosi said.

Opinion polls show the tax bill is unpopular with the public and Democrats promised to make Republicans pay for their vote during next year’s congressional elections, when all 435 House seats and 34 of the 100 Senate seats will be up for grabs.

“Republicans will rue the day they passed this bill,” Senate Democratic leader Chuck Schumer told reporters. “We are going to continue hammering away about why this bill is so unpopular.”

U.S. House Speaker Paul Ryan defended the bill, saying support would grow for after it passes and Americans felt relief. “I think minds are going to change,” Ryan said on ABC’s “Good Morning America” television program.

A few Republicans, a party once defined by fiscal hawkishness, have protested the deficit-spending encompassed in the bill. But most voted for it anyway, saying it would help businesses and individuals while boosting an already expanding economy they see as not growing fast enough.

In the House, 12 Republicans voted against the tax bill. All but one, Walter Jones of North Carolina, were from the high-tax states of New York, New Jersey and California, which will be hit by the bill’s cap on deductions for state and local taxes.

Despite Trump administration promises that the tax overhaul would focus on the middle class and not cut taxes for the rich, the nonpartisan Tax Policy Center, a think tank in Washington, estimated middle-income households would see an average tax cut of $900 next year under the bill, while the wealthiest 1 percent of Americans would see an average cut of $51,000.

The House was forced to vote again after the Senate parliamentarian ruled three minor provisions violated arcane Senate rules. To proceed, the Senate deleted the three provisions and then approved the bill.

Because the House and Senate must approve the same legislation before Trump can sign it into law, the Senate’s late Tuesday vote sent the bill back to the House.

Graphic: Republican tax bill’s tax brackets and rates – http://tmsnrt.rs/2BJnrIV

Graphic: U.S. debt level since 1950 – http://reut.rs/2B3Yl3C

(Reporting by David Morgan and Amanda Becker; Additional reporting by Richard Cowan, Roberta Rampton, Gina Chon and Susan Heavey; Writing by John Whitesides; Editing by Jeffrey Benkoe and Bill Trott)

An update on winners and losers on the U.S. tax scorecard

A man walks the campus of the City College of New York in the Harlem borough of New York, U.S., December 16, 2017. REUTERS/Eduardo Munoz

By Beth Pinsker

NEW YORK (Reuters) – In the lead-up to the conference agreement for the U.S. Tax Cut & Jobs Act released on Friday, there were too many moving parts for most Americans to know how it would affect them.

Until the bill is voted into law, the various provisions are still a moving target, but taxpayers now have a better sense of the real math of what it means to them.

Here is an update on what some of the key issues would mean to your wallet:

* EDUCATION

Graduate students pleaded with Congress not to adopt the U.S. House of Representatives’ proposal to make tuition waivers count as taxable income. In the end, the conference bill left that provision out.

The final bill still allows for individuals to deduct up to $2,500 in student loan interest and retains the current selection of higher education tax credits.

Teachers can continue to deduct up to $250 in supplies. Employees can still receive tuition without claiming it as income.

However, the bill changes the rules for the use of contributions to 529 college savings plans. In the past, the funds could only be distributed for higher education expenses. The final bill allows for $10,000 a year to be taken for each child’s K-12 expenses.

* CHARITABLE DEDUCTIONS

The charitable deduction was never going to go away, but experts predict many fewer people will itemize deductions under the new rules, which almost double the standard deductions and get rid of personal exemptions.

People who expect not to itemize their taxes in the future should think about making major donations before Dec. 31 to capture as many tax advantages as they can.

The compromise in the tax bill to double the estate tax exemption also would affect charitable giving because fewer wealthy people will need to donate assets to avoid going over the limit and sticking their heirs with a tax bill.

* CHILD TAX CREDITS

The conference bill settles on a $2,000 per child deduction, with $1,400 of it refundable to people with no income tax liability. The deduction is now phased out at a much higher income level.

These credits will help offset the tax bill’s removal of personal exemptions, which would hit families with children hard.

* MEDICAL DEDUCTIONS

There is good news for those worrying that the tax overhaul will do away with the itemized deduction for medical expenses.

The conference bill not only keeps the deduction, it also makes it available for expenses above 7.5 percent of adjusted gross income for the next two years, rather than the recently established 10 percent threshold.

* ALIMONY

Get ready for a flood of divorces in 2018. The final bill does away with a tax deduction for paying alimony and with the need for those receiving alimony to claim it as income, but it delays this until 2019.

Those who were rushing to get divorced by Dec. 31 can take a deep breath. But as the news sinks in, expect couples where one spouse is anticipating alimony to file for divorce sooner rather than later, or face tough negotiations on how much he or she might get.

* STATE AND LOCAL TAXES

The compromise in the final bill is that filers will be able to claim $10,000 in some combination of state and local taxes, including real estate taxes. The cap on mortgage interest was bumped down from $1 million to $750,000.

There has been a lot of worry that the proposed changes would dampen home sales because it will change the math on affordability. While the final bill ended up better for homeowners than expected, there are still lingering questions about its impact.

* BRACKETS AND AMT

For those on the lower end of the income scale, the change in brackets will probably not be top of mind, at least until the Internal Revenue Service sorts out the final tax tables and starts to adjust withholding rates, probably sometime in late winter.

Wealthy Americans are getting somewhat of a mixed bag, however. The top rate is dropping to 37 percent, but the Alternative Minimum Tax remains.

While this sounds like something to mourn, the AMT might not have as big an impact as people generally believe.

* RETIREMENT SAVINGS

When the tax overhaul process started, the way we save for retirement was on the table for big changes, including to workplace 401(k) retirement savings plans. In the end, however, Congress left it all pretty much alone.

(Editing by Lauren Young and Lisa Von Ahn)