Google, Apple, Facebook, Amazon and a host of other tech giants will have to pay billions of dollars in extra tax after the Supreme Court refused to hear an appeal on a stock-option case.
America’s top court said [PDF] on Monday it will not review a decision by the Ninth Circuit of Appeals that stock-based compensation should be considered a US taxable asset.
The case concerns the tax years 2004-2007 and Intel-owned tech company Altera, which provided its employees with the ability to buy company shares at a set price in future – a common practice in the tech industry. But that benefit was not included in an accounting of an Altera subsidiary based in a Cayman Islands tax haven just prior to Intel’s purchase.
The shifting of intangible assets has become a common tax-reducing tactic by large tech companies and saves those companies billions of dollars every year that they would otherwise pay to US tax authorities.
However, the Internal Revenue Service (IRS) insisted that Altera’s stock-option compensation be taxed under US tax rules. Facing a massive tax bill- Altera refused to accept the rule and challenged it in court, arguing that “the amount of money at stake is enormous.”
The company accused the IRS of over-reach and claimed it had not provided sufficient evidence to prove its case. And Altera won with a unanimous decision in tax court.
But the IRS appealed and the Ninth Circuit then found in the IRS’ favor, arguing in its 2-1 decision [PDF] in June 2019 that it was “uncontroversial” that stock options should be treated as accounting costs. It then refused a request for the whole court to rehear the case. So Altera appealed the decision to the Supreme Court.
Big Tech weighs in
Among the companies that urged the Supreme Court to take up the case were Apple, Google and Facebook – all of which now face massive tax bills for having done exactly the same thing.
The tech giants argued that the Ninth Circuit decision threatened to ruin “the hard-won but fragile international consensus on treatment of hundreds of billions of dollars of intercompany payments.” In other words, land them with massive, unexpected tax bills.
Ranged against the tech giants were a clump of law professors who argued that the IRS was right to make stock-option compensation a taxable asset.
It’s hard to know the true impact on those companies but the bills are expected to run to billions of dollars, possibly tens of billions. But in a sign of just how big those companies have become the Supreme Court judgment had no impact on share prices this morning – Wall Street knows quite how much cash these companies are sitting on.
If that news wasn’t bad enough however, there is a bigger tax issue hovering over Big Tech: the so-called digital tax threatened by the European Union, which is also fed up with companies like Google, Apple and Facebook paying almost no tax in their countries because of creative accounting through subsidiaries.
That digital tax became more likely this month after the US walked away from discussions at the Organisation for Economic Co-operation and Development (OECD) that were focused on developing a global tax agreement for digital companies.
With the OECD approach faltering, the EU has already made it clear that it will introduce its own version of a digital tax that is likely to make tech giants pay much more to countries in which they operate. Those new taxes are expected to kick in at the start of 2021.