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S&P 500 Companies Report $3.8 Billion in FDII Benefits

Posted on Nov. 9, 2020

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.

Table 1. FDII Impacts on S&P 500 Companies Reporting FDII Amounts

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.

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