Following up on yesterday’s story about Applied Materials moving to the Netherlands, the following is a look at just how much taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue the U.S. stands to lose in the deal. The Wall Street Journal reports that the company expects to reduce their tax rate from 22 percent to 17 percent, due to lower taxes in the Netherlands, making everyone a winner except the U.S. Treasury and the revenue departments of California and other states in which the company operates.
The table below shows Applied Material’s earnings and taxes paid over the last six years. The company earns on average about one third of their profits from abroad, $417 million per year. As a U.S. company, Applied Materials owed U.S. tax on all foreign earnings. That tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. just disappeared entirely, for U.S. purposes. It is hard to say how much lost tax revenue this represents for the U.S., since it depends on the amount of foreign taxes paid and how the company ordered their affairs. Since the company had a foreign tax rate of about 27 percent on average, and they were given a foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer’s tax bill directly. for that amount against the U.S. federal tax rate of 35 percent, the U.S. probably was getting about 5 to 10 percent of any repatriated foreign earnings. So, roughly speaking, that amounts to about $20 to $40 million in lost U.S. tax revenue per year as a result of this deal, assuming the company would eventually repatriate their foreign earnings.
Further, for the most part this tax revenue is not shifted to the Netherlands, since the Netherlands largely exempts foreign earnings from domestic tax. This is probably the biggest source of tax savings in this deal. It also explains why so many U.S. companies with foreign earnings have been merging with foreign companies and moving abroad. Virtually every developed country outside the U.S. exempts foreign earnings to a large degree.
Another source of tax savings is that some of the U.S. earnings will shift to the Netherlands. Although the CEO is moving from California to Tokyo, apparently, many other headquarters jobs will likely move to the Netherlands, as well as other operations such as R&D, supply chain and logistics, marketing, etc. This doesn’t mean everyone packs up and leaves, necessarily, but it could mean layoffs in California and new hires in the Netherlands. As well, much of the intellectual property will likely find its way to the Netherlands, and perhaps some of the manufacturing.
There are substantial tax reasons for doing this. The Netherlands has a) a statutory corporate tax rate of 25 percent, compared to 39 percent in the U.S., b) the most generous write offs for plant and equipment in the developed world, and c) various R&D incentives, such as an “innovation box.” These likely add up to tremendous tax savings. If we assume the company eventually moves half its earnings to the Netherlands, or about $411 million per year, it means the U.S. will lose about $111 million per year in corporate tax revenue, bringing the total loss of corporate tax revenue (including from foreign earnings) to about $130 to $150 million. This doesn’t count the loss of payroll and personal income tax revenue from the lost jobs, or the loss of sales and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. revenue for state and local governments, which likely far outweighs the corporate tax revenue losses.
In short, this is the type of corporate tax base erosion that should be most worrying, from a U.S. perspective. We can directly address it by reducing our corporate taxes to something approaching the average among developed countries.
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Applied Materials: Earnings and Income Taxes |
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All amount are in Millions of $ |
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Year |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
Total |
Average |
|
Earnings before Income Taxes |
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|
US |
381 |
1,257 |
787 |
-555 |
1,022 |
2,047 |
4,939 |
823 |
|
Foreign |
-65 |
1,121 |
600 |
70 |
387 |
392 |
2,505 |
417 |
|
Combined Earnings |
316 |
2,378 |
1,387 |
-486 |
1,409 |
2,440 |
7,444 |
1,241 |
|
(Provision for) Income Taxes |
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|
US |
126 |
195 |
303 |
-171 |
310 |
573 |
1,335 |
223 |
|
Foreign |
71 |
183 |
138 |
33 |
139 |
116 |
681 |
113 |
|
State |
10 |
74 |
8 |
-42 |
-1 |
40 |
89 |
15 |
|
Combined Tax Burden |
207 |
452 |
449 |
-180 |
448 |
729 |
2,105 |
351 |
|
Net Income |
109 |
1,926 |
938 |
-305 |
961 |
1,710 |
5,339 |
890 |
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