The new tax minimum

After the Inflation Reduction Act was signed into law on Wednesday, I found myself wondering why the tech sector didn’t fight harder against the new 15% minimum corporate tax rate. The long-awaited corporate tax reform should in theory be a big deal, but markets hardly flinched after it became clear the legislation would pass.

• Tech companies — which pulled out all the stops to hinder Sen. Amy Klobuchar’s antitrust bill — barely resisted the measure, even if their interest groups dutifully issued statements of opposition.
• Tim Cook didn’t swing by D.C., there were no mass fly-ins and no casting calls went out for the part of Joe America in political attack ads.

First, it’s important to understand how the new minimum works: Companies make two different tax calculations under the new minimum tax system, then pay the greater one.

• The first is the standard taxable income calculation that allows for all the existing deductions.
• The second calculation, which sets the new minimum, starts with the financial statement income — what a company reports to the SEC and investors — and allows for adjustments including research and development costs, accelerated depreciation and climate investments.
• If 15% of the second calculation isn’t larger than the original tax calculation, then corporations must pay a top-up tax to ensure they’re meeting the minimum threshold.

Many tech companies will feel no impact from the new minimum. An analysis from the Joint Committee on Taxation found that only around 30% of the Fortune 500 will be affected by the new minimum tax, and those companies are concentrated in industries such as manufacturing. Meta, Microsoft and Apple all paid more than 15% cash effective tax rates last year, according to a Washington Post analysis.

Tech got a critical deduction for research and development. R&D deductions are particularly beneficial for companies as the benefits last a long time and the resulting intellectual property can often be transferred offshore to avoid U.S. taxes.

• Companies such as Nvidia and Intel both paid estimated cash effective tax rates below 15% in recent years, but their businesses also require exceptionally high R&D costs. Those costs can still be deducted under the new plan.
• The new minimum plan could impact the offshore income aspect of R&D. “What we have here is essentially a tax on their global profits at 15%, because for book [accounting] purposes you include all their foreign operations in one big pile with their domestic ones,” Reuven S. Avi-Yonah, a law professor at the University of Michigan, told Protocol.

The biggest open question for tech companies concerns stock-based compensation. Currently it isn’t allowed as an offset in the minimum tax calculation. That could be a big deal: In 2021, for example, Amazon paid out $12.8 billion in stock-based compensation, allowing the company to reap $2.7 billion in tax benefits.

• “The biggest difference for many tech companies between their taxable income and their book income is stock option gain,” Peter Barnes, counsel to D.C. law firm Caplin & Drysdale, told Protocol.
• The stock option gain can be deducted from taxable income, Barnes explained, even as it doesn’t count against book income.

There’s still time to lobby. The Inflation Reduction Act contains no mention of stock-based compensation, but that doesn’t necessarily mean it won’t be included. The IRS and the Department of the Treasury’s Office of Tax Policy will likely spend several years translating the legislation written by Congress into the tax code. This lengthy process gives tech companies ample opportunity to make their voices heard. And by the time this process gets into full swing, companies may very well be dealing with a Republican-led House and Senate, in turn creating an easier path for winning additional concessions.

— Hirsh Chitkara (email | twitter)

In Washington

Sen. Chuck Schumer has received direct campaign donations from tech lobbyists and executives, Bloomberg reports. The timing of those donations is conspicuous, considering Schumer is supposed to be gathering votes for Klobuchar’s antitrust bill and he hadn’t previously received money from top tech lobbyists in election cycles going back to 2017, Bloomberg found.

In the states

The Alphabet Workers Union-CWA sent a letter to top company executives demanding abortion benefits be expanded to contract workers. As it stands, Google will pay for the cost of out-of-state abortion proceducres, but only for full-time employees.

And the lobbying of Google over abortion continues: A group of Republican state attorneys general, led Virginia’s Jason Miyares, wrote to Sundar Pichai complaining about Democratic efforts to get the company to take down so-called crisis pregnancy centers from search results. The facilities target people who want to terminate their pregnancies, but the centers don’t actually perform the procedures. The 17 GOP AGs said that if Google does limit the centers’ reach, they’d “act swiftly to protect American consumers from this dangerous axis of corporate and government power.”

A message from CCIA

New research sponsored by the CCIA Research Center reveals strong price competition between offline & online sales channels, with offline and online prices matching at least 95% of the time. Online prices respond quickly to changes in brick-and-mortar prices, and vice versa, resulting in lower prices for consumers.

Learn more

On Protocol

The Biden administration plans to block China’s access to a special transistor design. That transistor type, FinFET, has been used since at least 2019 in high-volume production by China’s largest chipmaker, SMIC. Under the plans, the White House will attempt to block export of tools from the likes of Applied Materials, Lam Research and KLA.

President Biden has continued a Trump-era policy requiring the nearly 15 million people who apply for U.S. visas annually to hand over all social media handles from the previous five years. Even as the administration defends the policy in a lawsuit, it’s refused to make public a report on whether the rules actually accomplish anything.

Indiana is set to receive $100 million to build out a network of EV charging stations, but advocates for communities of color say the state has left them out of planning and done too little to make sure the stations are ultimately distributed equitably.

In the media, culture and metaverse

A privacy researcher warned that TikTok can log users’ keystrokes when they’re using its in-app browser. In a statement to TechCrunch, the company flatly denied it “collect[s] keystroke or text inputs through this code” and said the function “is solely used for debugging, troubleshooting, and performance monitoring.” The same researcher recently wrote about Meta’s potential tracking of users’ activity in its in-app browsers.

Libs of TikTok claimed to have been permanently banned from Meta, only to return to the platform within a day. The popular right-wing account — which has been accused of spreading anti-trans falsehoods and getting conservative accounts to bully and threaten liberals — has been targeting the Boston Children’s Hospital.

In data

75%: That’s the estimated percentage of iPhone users with Apple Pay activated, according to Loup Ventures research cited by the Wall Street Journal. That’s a considerable increase from the estimated 10% of activations in 2016 and 20% in 2017. (Activations also don’t necessarily mean Apple Pay is being widely used.) Apple’s competitors in the payments space have long complained that the company doesn’t open its NFT technology to third-parties, and EU antitrust investigators began looking into the matter earlier this year.

A message from CCIA

New research sponsored by the CCIA Research Center reveals strong price competition between offline & online sales channels, with offline and online prices matching at least 95% of the time. Online prices respond quickly to changes in brick-and-mortar prices, and vice versa, resulting in lower prices for consumers.

Learn more

‘This is your boss speaking’

Hackers are succeeding with a new tactic: using deepfakes to clone the voice of employees' bosses. VMware’s principal cybersecurity strategist told Protocol that he’s heard from two corporate security chiefs who reported their companies were successfully attacked by that tactic. So next time you really need to end a call, maybe just hang up and say you were sure it was a deepfake. Better safe than sorry.