Silicon Valley is closely watching a lawsuit between Intel and the IRS over stock compensation paid to the US employees of multinational companies.
And Google’s parent company, Alphabet, could be a big winner if things go Intel’s way, reports the Wall Street Journal.
Alphabet has disclosed that if Intel wins it could get a potential tax benefit of $3.5 billion. That’s more than the total $3.3 billion it paid in 2015 income taxes, according Stock Analysis. (Google’s total effective tax rate for 2015 was 17%, it said.)
At issue are the cost-sharing agreements between US companies and their offshore subsidiaries in low-tax countries. The IRS says that the foreign subsidiary is supposed to shoulder some of the costs of corporate employees so that the US company can’t claim all of the employee’s compensation as a tax deduction, leaving more profit to accumulate in the offshore subsidiary.
The Intel dispute with the IRS challenges whether share-based compensation should be included in the cost-sharing agreement. The IRS said it must but in a 15-0 ruling, the U.S. Tax Court overturned the IRS regulations in July, reports the WSJ.
In Intel’s favour, is the idea that two unrelated companies wouldn’t share the expense of stock paid to employees as an incentive.
But the IRS has appealed that decision and in its favour is the argument that US companies create and fund these foreign subsidiaries, so they aren’t unrelated companies, WSJ reports.
Currently, US companies are not taxed on income earned outside the US until they bring that money back to the US to use it for things like acquisitions, dividends, other investments. At that point, it is taxed at the 35% corporate tax rate. Corporations are loath to do that, and so they have stockpiled billions of dollars offshore, spending it offshore as well.
In the meantime, Google is waiting to hear if the US will owe it a $3.5 billion tax benefit.