The year wasn’t supposed to end this well for Silicon Valley.
Over the course of 2017, official Washington had expressed fury over social media’s complicity in Russia’s election tampering, deep skepticism over the tech industry’s reliance on high-skilled immigration, and bipartisan unease with the pervasive influence big tech had begun to wield in every aspect of American life.
But as the year comes to a close, tech firms are instead poised to reap huge benefits from this week’s passage of tax reform. It’s not just what’s in the bill, which slashes the price of repatriating trillions of dollars many top tech companies have stashed overseas and may still grant big tech the ability to offshore profits in the future. It’s also the abrupt disappearance of several tech-hated provisions—including a tax on stock options and the weakening of the research-and-development credit—from the final product.
“It’s clearly a gift to the tech firms in Silicon Valley,” said Lisa De Simone, a professor of corporate taxation at Stanford’s Graduate School of Business. “There is very little for them not to like about this bill.”
How did America’s besieged tech sector end up winning the most consequential policy reform of 2017? After years of benign neglect, some observers believe Silicon Valley finally realized the importance of deploying a sliver of its profits to keep Washington off its back.
“The tech industry has really developed and flexed their lobbying muscle a lot in the last couple of years,” said Matt Gardner, a senior fellow and former executive director at the Institute on Taxation and Economic Policy. “This is an industry that was always notable for not being as sophisticated as other industries in its lobbying. And pretty clearly the tech industry, and prominent tech companies like Apple, have been very vocal in expressing their views on what tax restructuring ought to look like.”
The tax bill sent to President Trump’s desk on Wednesday will finally require American multinational corporations to bring home an estimated $2.6 trillion in profits held overseas, where they were able to indefinitely avoid paying the old 35 percent corporate rate. Tech profits make up a disproportionate share of that $2.6 trillion. Apple alone is believed to have stashed $246 billion abroad—far and away the highest of any other company—and Microsoft, at $142 billion, is surpassed only by pharmaceuticals giant Pfizer. Google, Oracle, and Intel are also counted among the major firms offshoring billions in profits.
But though companies are now being forced to repatriate that money—and pay Uncle Sam a cut in the process—the rate falls far short of the old 35 percent, or even the new 21 percent benchmark for corporations. Apple, Microsoft, Google, and the rest will pay a one-time 15.5 percent fee on cash currently held in low-tax nations such as Ireland. And that number drops to just 8 percent on illiquid investments already made abroad.
While those repatriation rates did creep up slightly in the final few days of the tax-reform debate, they still represent a coup for Silicon Valley. “For these high-tech firms, the ability to repatriate at a much lower rate is probably very good news for them,” said Rebecca Lester, an accounting professor at Stanford’s Graduate School of Business who specializes in profit repatriation. Lester said the one-time reduction of the repatriation rate from 35 to 15.5 percent is “reasonable,” suggesting it was the only way to unlock cash that firms otherwise would have kept offshore in perpetuity. “Now [firms] are going to have some ability to get access to those assets, those earnings and cash, to use them here in the U.S., whether for domestic investment or—more likely, given what we’ve seen them do in the past—use it to pay down debt and also shareholder payout,” she said.
Gardner called the repatriation rate a “giveaway,” noting that firms like Apple have paid far less than 5 percent in taxes to foreign governments yet are now getting a steep cut as they send money back home. “Under the letter of the law, they ought to be paying close to 35 percent on these profits when they’re brought back,” he said. “So anything less than 30 percent is going to be a giveaway to these particular companies.”
The tax bill also purports to put some safeguards in place to prevent future offshoring, including a 10 percent tax on outbound payments to foreign affiliates and a 10.5 percent tax on “excess” foreign income. But experts worry those guardrails may be too low to prevent big tech from building a new overseas stash starting next year. “It’s all about administrative capacity for our tax collectors,” Gardner said, arguing that while the bill could crack down on offshoring moving forward, lax reporting requirements or a failure to empower the IRS would allow firms to continue stashing their profits overseas.
De Simone is even more skeptical that the bill will prevent tech companies from hiding their profits abroad. “Companies have already evolved beyond this,” she said, noting that the most sophisticated firms know how to structure their intellectual-property holdings in ways that will enable them to get around the new guardrails. “This is not going to affect them in a big way,” she said.
Silicon Valley was also able to eliminate some of the most onerous provisions of the tax bill before its final passage. In November, the Senate abandoned a plan to tax employee stock options when they vested, after top tech firms and start-ups vociferously protested. And earlier this month, another Senate provision to impose a corporate alternative minimum tax—which would have significantly weakened the research-and-development credit heavily utilized by tech firms—was dropped.
Despite facing a slew of other issues in Washington this year, Silicon Valley largely kept its eyes on the tax prize. Lobbying disclosures collected by the Center for Responsive Politics reveal that in the first nine months of 2017, Apple paid out $270,000 to Capitol Tax Partners, $170,000 to DLA Piper, $260,000 to Fierce Government Relations, $240,000 to Franklin Square Group, and $120,000 to Glover Park Group. With the exception of Glover Park—which, in addition to tax, also lobbied on technology and broadband issues—each expenditure was specifically earmarked for tax reform. And other top tech firms—particularly Microsoft—spent hundreds of thousands of dollars lobbying lawmakers on taxes.
“If the tech industry ends up getting off easy under this bill—which again, going forward is not a given—it’s plausible to say that it’s a response to, that it’s due to, their increased lobbying muscle and their increased willingness to use that muscle,” Gardner said.
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