Tech Firms Effective Tax Rates Are Going Up Thanks To Court Ruling
The ruling will affect a widespread method of top executive compensation - paying them in stock versus cash. Now companies like Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) will no longer be able to claim the full value of the stock compensation as an expense to help deduct from their corporate tax bill.
The gist of the ruling is that now they'll be forced to allocate some of the stock compensation charges to foreign subsidiaries, usually in places like Ireland or the Cayman Islands already don't have much tax liability - making the deductions worthless.
For Facebook especially, their corporate tax rate could be as high as 30 percent, a steep increase from the new American corporate rate of 21 percent.
Facebook will be on the hook for previous quarters' stock compensation deductions and this could potentially erase up to a $1 billion in deductions per quarter, according to Robert Willens who runs an independent tax consultancy in New York. He said this in regards to Facebook's upcoming tax bill for the third quarter:
It’s going to be a huge number. This also means the loss of certainly several hundred millions of deductions each quarter going forward. It could even be $1 billion.
Technology and other high growth industries typically prefer stock-based compensation as it gives the recipients a chance to capitalize on the growth of the company while allowing much-needed cash to stay in company coffers. It also incentivizes employees to think about the company's overall performance in their personal career efforts at said company.
The court ruling actually came from an ongoing case against Intel subsidiary Altera Corp and its cost-sharing contract with another subsidiary in the Cayman Islands, a notorious tax haven.
We've previously looked at tax havens and tax schemes corporations like to employ if you are interested.
The Ninth Circuit Court of Appeals ruled against Intel and its subsidiaries by overturning a previous ruling that had been favorable to the company, providing the precedent that resulted in today's headline.