Will QCOM and Other US Semi Companies Benefit from the Proposed Territorial Tax System?
Tax bill proposes territorial tax system for the US
The US currently uses a worldwide tax system, in which US-based companies are liable to pay taxes on income earned anywhere in the world. However, they’re also allowed to defer their US tax on overseas earnings until it’s repatriated to the home country.
This system, many argue, has put US companies at a disadvantage to its competitors that enjoy territorial tax systems, in which overseas earnings are not subject to domestic tax.
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Congress’s tax reform framework proposes a territorial tax system in which dividends from foreign subsidiaries would be completely exempted from domestic taxes. Dividends are passive income, which doesn’t present a significant impact on a company.
What US companies are apparently looking for is 100% tax exemption on active earnings from abroad. The Senate’s version of the bill doesn’t give details on which overseas earnings would be exempted in the territorial tax system. It could probably support the Republican’s version of the territorial tax system. In either case, the other overseas earnings would be taxed at 20% rate.
US tech companies (QQQ), many argue, have a tax disadvantage when compared with its foreign competitors and have been using loopholes in the tax system to keep from paying heavy taxes. Many have stacked their cash overseas and are using it to invest in other countries.
In order to encourage these companies to bring cash back and invest in the US, Republicans in Congress have proposed a mandatory one-time repatriation tax of 14% for of all overseas cash assets and 7% tax for all overseas non-cash assets held by US companies. This tax applies whether or not a company brings its assets back to the home country. Notably, the Senate increased this tax rate by 50 basis points to 14.5% and 7.5%, respectively.
By proposing a minimum tax instead of a complete tax exemption, the government is trying to protect US tax revenues. This proposal would bring a one-time tax burden for these companies, which they could spread over several years. As the one-time tax of 14.5% is lower than the maximum 35% tax rate, it could very likely reduce the deferred tax liabilities of many companies, thereby strengthening balance sheets.
Notably, as semiconductor companies like Qualcomm (QCOM), Broadcom (AVGO), and Micron (MU) earn most of their income overseas and have huge amounts in deferred tax liabilities, such companies would stand to benefit the most from repatriation tax.