Yearslong Tax Dispute Could Cost Big Tech Companies Billions
September 03 2019 - 5:59AM
Dow Jones News
By Richard Rubin and Theo Francis
A long-running tax dispute is racking up a potentially hefty
price tag of nearly $2 billion and counting for dozens of big U.S.
companies, including Facebook Inc. and Alphabet Inc.
Since the most recent ruling on the case, in June, more than two
dozen companies have disclosed the potential impact on their
financial results. Facebook recorded a $1.1 billion tax expense
because of the case, while Alphabet, the parent of Google, reversed
a $418 million benefit it had previously taken. Other companies
reporting at least a $50 million impact include Twitter Inc., Lam
Research Corp. and Symantec Corp.
The case pits Altera Corp., now a subsidiary of chip maker Intel
Corp., against the Internal Revenue Service. The IRS in 2003 issued
a regulation dictating how companies must account for stock and
other equity compensation they pay to workers when they are
parceling out costs between the parent and their foreign
subsidiaries. Altera sued in 2012, arguing the IRS exceeded its
authority.
Legally, the case turns on questions of administrative law and
the government's ability to fill in the gaps in a vague statute. It
also has significant tax consequences. A federal appeals court in
San Francisco is deciding whether to give the issue another
hearing.
Multinationals benefit by allocating as much pay as possible --
including stock-based pay -- to U.S. operations, where the
companies could claim a business-expense deduction for it against
higher domestic tax rates. In foreign jurisdictions, reporting
lower costs increases profits that can be taxed at lower foreign
rates. That was especially advantageous before the 2017 federal tax
overhaul reduced the gap between U.S. and foreign corporate-tax
rates.
The government's 2003 rule requires companies to share more of
the costs with their foreign subsidiaries, reducing taxable profits
in low-tax jurisdictions and increasing them in the U.S.
Companies are supposed to determine the right foreign-U.S. split
by figuring out what the foreign subsidiaries would have had to pay
an unrelated company for the same services. The fight over the
regulation is about how that calculation happens.
Altera challenged the rule, which increased the company's
taxable income by about $80 million over four years. Intel
inherited the case when it acquired Altera in 2015. Intel declined
to comment, as did Alphabet and Facebook.
In 2015, the U.S. Tax Court ruled for Altera. In 2018, the Ninth
U.S. Circuit Court of Appeals overturned that decision -- siding
with the IRS -- then withdrew its own ruling because one of the
judges in the 2-1 majority died before it was released. A new panel
reached the same conclusion this year, upholding the 2003 rule on
the grounds that the IRS had acted reasonably and legally in
writing the rules.
Intel has asked the full Ninth Circuit to hear the case, hoping
to reinstate the trial court's ruling in its favor. If that fails,
the chip maker could still appeal to the U.S. Supreme Court.
The government filed a brief saying the judges should deny a new
hearing.
The legal questions turn on arcane corners of tax and
regulatory-procedure law. Over the past few years, courts have
begun treating the IRS more like other regulatory agencies and
making tax regulations follow more of the procedures used in other
areas.
In the original court ruling supporting Altera's treatment of
stock-based compensation, the Tax Court found the IRS hadn't
followed aspects of the Administrative Procedure Act, which governs
how agencies write regulations, and had misapplied certain
approaches to determining what an arm's-length transaction would
look like. The appellate panel disagreed.
Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis
at theo.francis@wsj.com
(END) Dow Jones Newswires
September 03, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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