That Crazed Fair Tax Mark Report About Big Tech Taxes

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A thought occurs about the Fair Tax Mark and their complaint that big tech isn’t paying enough in tax.

Recall how they do their calculation. Here’s the reported tax for the period. Here’s the reported tax paid in that period. Obviously that’s already going to be wrong because of timing issues. But it’s also wildly wrong for a different reason.

The tech companies pay their staff in shares and stock. And they’ve not adjusted for the tax implications of that. Here, again, is the basis of their calculation:

Our analysis of the long-run effective tax rate of the
Silicon Six over the decade to date has found that
there is a significant difference between the cash taxes
paid and both the expected headline rate of tax and,
more significantly, the reported current tax charges (as
summarised in Figures 1 (opp.) and 2 (p. 17)).

I’ll not attempt to give the correct names for all of this, just a pencil sketch.

The effect of paying the staff in stock comes after the declared profits and before the profit number that produces the tax bill.

So, if you pay the workers in cash then that’s something that comes off revenues before you delcare your profit. If you pay the workers in shares, turning them into mini-capitalists, that isn’t so. Instead, the profit is declared without the effect of that stock issuance (or options, restricted stock grants, whatever).

But, clearly, paying the staff is a cost of doing business before we declare the profit that is to be taxed. So, that cost of that stock comes off the declared profits to give us the number which is the profits to be taxed.

So, if you compare the reported profits to the taxes paid you’re entirely missing this deduction that needs to be made for the payment to the workers in the form of stock.

Note, tax paid is calculated on profits after stock awards, headline profits are before the stock awards. This does indeed make a difference:

According to Twitter’s most recent annual filing, the company racked up $682 million in stock-based compensation last year. By comparison, the company’s adjusted earnings before interest, taxes, depreciation and amortization — which also excludes stock-based compensation — for the year was $557.8 million.

So, congratulations to the Fair Tax Mark, entirely missing the basic taxation issues they claim to be revealing to us all.

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Michael van der RietJimWackEstebanSpike Recent comment authors
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jgh
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jgh

How *DARE* big companies pay lots to their staff! The guvmt should be getting that, not the staff.

Spike
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Spike

In other words, if you do what the government wants you to do (as evidenced by the tax break), you pay lower taxes. Investors who loan money to the US Treasury at below-market rates pay no tax at all on the interest, and those targeted with super-high tax rates come out ahead.

Now how is any of this scandalous? except: It’s Sunday and we need a new scandal

Esteban
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Esteban

This issue seems to pop up quite regularly. A question – why do the rules (accounting, I presume) report profits before share costs? What is the point of declaring a profit of $558M that excludes the share costs?

Wack
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Wack

As an accountant I don’t know for sure but my guess is that most share awards are related to achieving certain level of profitability and as such they are viewed as more of a distribution of profits than an underlying cost. The P&L is therefore more useful when judging whether loans are affordable, chances of going bust.

I am not sure about how far in arrears the tax is paid. My belief was that tax was paid quarterly based on estimates of the years profit

Jim
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Jim

Any company with more than 1.5m in taxable profits will be paying by instalments, on a quarterly basis, gaining at most about 3 months grace for the last payment after the accounting period end. Any company with over 20m in taxable profit will be paying all its instalments within its accounting period. Companies with under 1.5m in taxable profits get to pay 9 months after their tax year end. Which incidentally is just another another reason why limited liability companies are a scam on honest hard working folk – I as a sole trader have to make payments on account… Read more »

Michael van der Riet
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Michael van der Riet

Murph ran into the convenience store to buy condoms. The salesperson said, “That’ll be twelve pounds fifty plus tax.” Murph said, “Never mind the tax, I’ll just screw them on.”