How are the silicon six minimising their tax liabilities and how the regulators are trying to keep pace?

Abstract

The past five year 10-K filings and taxation details of the Silicon Six companies - Facebook, Apple, Amazon, Netflix, Google, and Microsoft were analyzed, with a special focus on the contingent liabilities. The cash tax percentage, the foreign tax rates, and the effective overall tax rate were compared to understand the past 5-year trend. Tax Cuts and Jobs (TCJ) Act, 2017, had a positive impact on the cash tax percentage for the US government with the apparent increase in the cash tax percentage in the post-TCJ period despite the reduction in the domestic corporate tax rate. However, the sustainability of the impact will be observed after the last of the eight installments of deemed repatriation tax are paid in 2025. The effective tax rates have reduced over the last 5 years because of domestic tax rate cut from 35% to 21%. We have looked at the tax management techniques used by Apple and Amazon in depth and then extrapolated our learnings to the other corporates. The various tax loopholes, tax benefits, and tax management strategies deployed are examined in detail. We have estimated the impact of changes in regulations on future profits and valuation of Apple, this includes the impact of the abolition of "Double Irish, Dutch Sandwich" BEPS tool, and the impact of research and development amendment under TCJ Act, 2017. We estimate a sustainable impact on profits of ~2.03% from FY 2021. Amazon has tripled the revenues in the past 5 years but its tax burden reduced to half. Further, its foreign tax rates are inconsistent, and there are tax benefits from foreign operations that might not continue to be available in the future. Amazon enjoys huge tax credits by availing deductions for R&D expenditure, accelerated depreciation, cost of stock-based compensation, and carryforward losses. The other Silicon Six companies also follow the tax management strategies mentioned above. The regulations are likely to become more stringent in the developing countries and the existing tax-havens and the changing regulations and increased scrutiny may lead to an increase in the tax liabilities of Silicon Six in the foreseeable future. The regulations are likely to become more stringent in developing countries and the existing tax-havens, this may lead to an increase in the tax liabilities of Silicon Six in the foreseeable future.