Some of the biggest names in tech stood behind President Donald Trump on Inauguration Day. Hours later, he delivered a directive that took one potential tax headache off their plate.
In one of the many executive orders he signed Monday, Trump signaled the US wouldn’t enact an agreement among 140 countries that aimed to stem a “so-called race to the bottom” on corporate income tax rates.
The first part of the order largely solidifies where the US stands policywise on the global minimum tax deal, while, in the second half, Trump warned of retaliation if other countries punish US companies through extra taxes, a threat that may have sounded sweet to those tech bigwigs.
“Those are the companies that might be worried about a hit,” said Alan Cole, senior economist at The Tax Foundation.
From left, Priscilla Chan, Meta CEO Mark Zuckerberg, Lauren Sanchez, Amazon founder Jeff Bezos, Google CEO Sundar Pichai and Elon Musk attend the 60th Presidential Inauguration in the Rotunda of the U.S. Capitol in Washington, Monday, Jan. 20, 2025. (Chip Somodevilla/Pool Photo via AP) ·ASSOCIATED PRESS
The deal reached in 2021 offers a two-part plan. Pillar One dictates that large multinational companies pay taxes in countries where their customers are located even if the companies have no physical operations there.
Pillar Two, which the executive order targets, sets a global minimum tax rate of 15% on multinational corporations with revenue above €750 million (~$788 million), no matter where they operate. It also allows countries that have adopted Pillar Two to levy an undertax charge on companies that pay taxes in countries that have a tax rate below the global minimum.
“The goal of this is to fight tax evasion and tax avoidance and the erosion of the tax base where multinationals would shift income from high-tax jurisdictions to low-tax jurisdictions,” said Thomas Brosy, a senior research associate in the Tax Policy Center.
For instance, take the tiny island of Jersey, a self-governing dependency of the UK with its own tax jurisdiction. Right now, if a company routes $1 billion through the island, which has a corporate rate of 0%, but “just takes a tiny fraction of a percent of it as some sort of fee or tax,” Cole said, that’s substantial money for the island’s small population and major financial tax savings for the company.
“It’s hard for a regular country to compete with that because they actually want to raise revenue because they have a lot of people to take care of,” Cole said.
Multinational companies can shift that global income from one country to another because their operations can span multiple countries. When they need to make a judgment call for tax purposes, corporations “love to lean in the direction of the low-tax jurisdiction,” Cole said.
FILE – In this file photo dated Wednesday, June 7, 2017, The Organisation for Economic Co-operation and Development (OECD) headquarters in Paris, France. (AP Photo/Francois Mori, File) ·ASSOCIATED PRESS
In fact, the example of the island of Jersey is not hypothetical. Apple Inc. rerouted some of its profits it had in Ireland to Jersey after coming under heat from a Senate investigative committee, according to a 2017 investigation.
That entire scenario would change under the global tax deal.
Let’s say a Chinese company is stashing a lot of its income in the island of Jersey, but doing very little business there. Instead, the company is selling its products or services mostly in the UK and Germany. Under Pillar Two, the UK and Germany can tax the Chinese company more in their own countries because it’s being undertaxed in Jersey. This is called the undertaxed profits rule, or UTPR.
This becomes problematic for US tech companies because of the way the global tax deal calculates the tax rate a company pays in a country.
While the US corporate tax rate for domestic companies is 21% — well above the 15% minimum — the research and development tax credit in the US is counted as a reduction in tax under Pillar Two’s calculation. So companies that take the R&D credit — like tech corporations — can reduce their effective tax rate below the 15% threshold, opening themselves up to the deal’s undertaxed profits rule.
Here’s how that math is working out for the biggest and best-known tech giants:
Meta Platforms Inc., formerly Facebook Inc., attributed the decrease in its effective tax rate to 12% in the third quarter of 2024 from 17% the year before to “an increase in research tax credits,” according to its most recent quarterly filing.
The effective tax rate that Alphabet Inc., Google’s parent company, paid in 2023 was 13.9%. The federal research credit shaved off 1.8 percentage points from the 21% corporate tax rate, according to the company’s 10-K filing, along with other deductions and tax benefits. And it still had $600 million in federal R&D credits that it could carry forward to future years.
At the end of 2023, Tesla had a negative effective tax rate, according to its 10-K, and $1.1 billion worth of deferred federal research and development tax credits that it could carry forward before they begin to expire in 2036.
And Amazon said in its third quarter report that “for 2024, we estimate that our effective tax rate will be favorably impacted by the US federal research and development credit.” The company is set to report its 2024 results on Feb. 6.
President Donald Trump signs an executive order as he attends an indoor Presidential Inauguration parade event at Capital One Arena, Monday, Jan. 20, 2025, in Washington. (AP Photo/Evan Vucci) ·ASSOCIATED PRESS
That’s why Trump’s executive order on Monday is probably popular with the tech set, along with other types of companies that utilize the US research and development tax credit — such as biotech, pharma, and crypto firms among others. But it may have been unnecessary.
While the Biden administration supported the global minimum tax, Congress had made no moves toward legislating it into law, with Republicans staunchly against the deal. And Former Treasury Secretary Janet Yellen was negotiating an allowance that would not penalize U.S. companies for taking the research and development credit in the first place. A safe harbor rule in the deal also would have shielded the US from the undertax rule, Cole said.
In essence, US companies were insulated even before the new administration took office.
“Maybe that’s unappealing in some ways because we’re changing the way we do things just for the biggest and most powerful country,” Cole said, “but that’s also a realistic way of functioning in the world.”
And if any country forgot that, Trump’s promise to retaliate served as a reminder.
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Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on X @JannaHerron.
