In a code chock-full of burdensome and half-baked tax breaks, the deduction for foreign-derived intangible income stands out as one of the least defensible. The subsidy it provides exports is highly uneven, and its future is highly uncertain. It inadvertently favors monopolistic profits that should be taxed at higher, not lower, rates than normal profits. Any incentive it provides for domestic research could be far more easily achieved with an expanded tax credit or preventing the required amortization of research spending scheduled for 2022. And despite taxpayer-friendly final regulations issued two and a half years after enactment, the compliance burden remains significant.
But policy shortcomings are no reason for taxpayers to leave money on the table. We count a total of $3.8 billion of FDII tax benefits in the latest 10-K reports from the large U.S.-listed companies comprising the S&P 500. This is a lower-bound estimate of the national total.
Table 1 lists reported dollar amounts and reductions in effective tax rates (ETRs) for 51 companies for which hard numbers on FDII are available. The 10-K reports, filed annually with the SEC, contain income tax footnotes. These lengthy footnotes always include a table that reports amounts that must (under SEC Regulation S-X, Rule 4-08(h)(2)) include individual items that cause the ETR to change by more than 5 percent of the 21 percent statutory rate. (In other words, they must report items that affect the ETR by more than 1.05 percentage points.)
So a company with $10 billion of before-tax profit could have $100 million of FDII benefits and not separately report it. Thus, our $3.8 billion figure should be interpreted only as a lower bound, perhaps a very low bound, on the amount of tax benefits provided nationally for FDII.
Several companies reporting FDII benefits combined those benefits with the effects of other tax provisions, such as the research credit or global intangible low-taxed income. These companies, which aren’t included in the table, are Becton, Dickinson & Co., Broadridge Financial Solutions Inc., Copart Inc., Johnson & Johnson, Hanesbrands Inc., Merck & Co. Inc., Microchip Technology Inc., Mondelēz International Inc., Steris PLC, and Zebra Technologies Corp. Also excluded are Boeing Co. and Western Digital Corp. with negative before-tax profits.
Among the companies included, the largest tax benefits in the most recently completed fiscal year were reported by Microsoft Corp. ($583 million), Qualcomm Inc. ($419 million), Cisco Systems Inc. ($363 million), Nike Inc. ($234 million), and Texas Instruments Inc. ($281 million).
Through 2025, qualified taxpayers (only C corporations) get a deduction equal to 37.5 percent of FDII (but not exceeding taxable income before the FDII deduction). Given the 21 percent corporate rate, FDII can have an effective U.S. tax rate of 13.125 percent. If FDII was equal to before-tax income, its impact on the ETR would be to reduce it by 7.875 percent (that is, 21 percent minus 13.125 percent, ignoring state taxes).
On average, the companies in the table got a 2.3 percentage point reduction in their ETRs from FDII. This implies that FDII is equal to 29 percent of before-tax profits. In plain English, FDII excludes profits from foreign operations, and it is reduced by 10 percent of plant and equipment. Thus, we can infer that on average for the companies in our table, at least 29 percent of worldwide before-tax profit is attributable to the export of tangible and intangible products from the United States and the provision of services from the U.S. source to foreign users.
Company |
| Impact on Tax Expense (millions of dollars) | Impact on ETR (percentage points) |
| ||
---|---|---|---|---|---|---|
Most Recent Fiscal Year-End | Most Recent Fiscal Year (mostly 2019) | Next Most Recent Fiscal Year (mostly 2018) | Most Recent Fiscal Year (mostly 2019) | Next Most Recent Fiscal Year (mostly 2018) | Report Filed | |
Micron Technology Inc. | 09/02/2020 | -$67 | NA | -2.2% | NA | 10/19/2020 |
Cisco Systems Inc. | 07/31/2020 | -$363 | -$189 | -2.6% | -1.3% | 09/03/2020 |
Procter & Gamble Co. | 06/30/2020 | -$158 | -$134 | -1% | -2.2% | 08/06/2020 |
Microsoft Corp. | 06/30/2020 | -$583 | -$612 | -1.1% | -1.4% | 07/31/2020 |
Nike Inc. | 05/31/2020 | -$234 | NA | -8.1% | NA | 07/24/2020 |
Brown-Forman Corp. | 04/30/2020 | -$20 | -$18 | -2% | -1.7% | 06/22/2020 |
Medtronic PLC | 04/30/2020 | -$49 | -$31 | -1.2% | -0.6% | 06/19/2020 |
Tiffany & Co. | 01/31/2020 | -$28 | -$19 | -4% | -2.6% | 03/20/2020 |
L3Harris Technologies Inc. | 01/01/2019 | -$14 | NA | -1.3% | NA | 03/03/2020 |
Teradyne Inc. | 12/31/2019 | -$14 | -$8 | -2.6% | -1.8% | 03/02/2020 |
CME Group Inc. | 12/31/2019 | -$102 | NA | -3.8% | NA | 02/28/2020 |
Ansys Inc. | 12/31/2019 | -$20 | -$19 | -3.8% | -3.9% | 02/27/2020 |
Thermo Fisher Scientific Inc. | 12/31/2019 | -$111 | -$47 | -2.7% | -1.4% | 02/26/2020 |
IPG Photonics Corp. | 12/31/2019 | -$5 | -$8 | -1.9% | -1.5% | 02/24/2020 |
Colgate-Palmolive Co. | 12/31/2019 | -$43 | -$38 | -1.3% | -1.1% | 02/21/2020 |
Global Payments Inc. | 12/31/2019 | -$14 | -$9 | -2.7% | -1.6% | 02/21/2020 |
Sherwin-Williams Co. | 12/31/2019 | -$10 | -$9 | -0.5% | -0.6% | 02/21/2020 |
Zimmer Biomet Holdings Inc. | 12/31/2019 | -$41 | $1 | -4.5% | -0.2% | 02/21/2020 |
IDEX Corp. | 12/31/2019 | -$6 | NA | -1.1% | NA | 02/21/2020 |
Expeditors International of Washington Inc. | 12/31/2019 | -$2 | -$1 | -0.2% | -0.1% | 02/21/2020 |
Domino’s Pizza Inc. | 12/29/2019 | -$13 | -$12 | -2.7% | -2.7% | 02/20/2020 |
Texas Instruments Inc. | 12/31/2019 | -$281 | -$354 | -4.9% | -5.3% | 02/20/2020 |
Fidelity National Information Services Inc. | 12/31/2019 | -$14 | -$20 | -3.3% | -1.8% | 02/20/2020 |
Garmin Ltd. | 12/26/2019 | -$5 | -$5 | -0.5% | -0.6% | 02/19/2020 |
Gartner Inc. | 12/31/2019 | -$3 | -$4 | -1% | -2% | 02/19/2020 |
Corning Inc. | 12/31/2019 | -$103 | -$9 | -8.5% | -0.6% | 02/18/2020 |
Trane Technologies PLC | 12/31/2019 | -$12 | -$18 | -0.7% | -1.1% | 02/18/2020 |
Verisk Analytics Inc. | 12/31/2019 | -$7 | -$6 | -1.2% | -0.9% | 02/18/2020 |
Archer-Daniels-Midland Co. | 12/31/2019 | -$16 | NA | -1% | NA | 02/18/2020 |
IDEXX Laboratories Inc. | 12/31/2019 | -$6 | -$6 | -1.1% | -1.3% | 02/14/2020 |
Citrix Systems Inc. | 12/31/2019 | -$4 | -$5 | 0.7% | 0.9% | 02/14/2020 |
Edwards Lifesciences Corp. | 12/31/2019 | -$84 | -$50 | -7.2% | -6.6% | 02/14/2020 |
Expedia Group Inc. | 12/31/2019 | -$14 | -$38 | -1.8% | -7.8% | 02/14/2020 |
BorgWarner Inc. | 12/31/2019 | -$1 | -$15 | -0.1% | -1.3% | 02/13/2020 |
Cummins Inc. | 12/31/2019 | -$37 | -$36 | -1.3% | -1.3% | 02/11/2020 |
General Dynamics Corp. | 12/31/2019 | -$59 | -$49 | -1.4% | -1.2% | 02/10/2020 |
Lockheed Martin Corp. | 12/31/2019 | -$122 | -$61 | -1.7% | -1% | 02/07/2020 |
Regeneron Pharmaceuticals Inc. | 12/31/2019 | -$39 | -$26 | -1.6% | -1% | 02/07/2020 |
Philip Morris International Inc. | 12/31/2019 | -$118 | -$117 | -1.2% | -1.1% | 02/07/2020 |
3M Co. | 12/31/2019 | -$166 | -$91 | -2.9% | -1.3% | 02/06/2020 |
Intercontinental Exchange Inc. | 12/31/2019 | -$25 | NA | -1% | NA | 02/06/2020 |
Northrop Grumman Corp. | 12/31/2019 | -$28 | -$16 | -1.1% | -0.4% | 01/30/2020 |
Synopsys Inc. | 10/31/2019 | -$27 | NA | -4.9% | NA | 12/20/2019 |
HP Inc. | 10/31/2019 | -$58 | NA | -2.3% | NA | 12/12/2019 |
Varian Medical Systems Inc. | 10/02/2019 | -$6 | NA | -1.4% | NA | 11/25/2019 |
Walt Disney Co. | 10/03/2019 | -$153 | NA | -1.1% | NA | 11/20/2019 |
Emerson Electric Co. | 09/30/2019 | -$31 | NA | -1.1% | NA | 11/18/2019 |
Starbucks Corp. | 09/27/2019 | -$53 | NA | -1.5% | NA | 11/15/2019 |
Skyworks Solutions Inc. | 10/02/2019 | -$42 | NA | -4.3% | NA | 11/14/2019 |
Rockwell Automation Inc. | 09/30/2019 | -$14 | NA | -1.6% | NA | 11/12/2019 |
Qualcomm Inc. | 09/27/2019 | -$419 | NA | -5.6% | NA | 11/06/2019 |
Total |
| -$3,842 |
|
|
|
|
Average |
|
|
| -2.3% |
|
|
Source: Author’s calculations using data from company 10-K reports filed with the SEC. |