Article / 13 December 2016 at 15:00 GMT

Trump to talk tax to techno titans – but will they listen?

Managing Partner / Spotlight Group
United Kingdom
  • President-elect Trump has summoned US technology firm leaders to a meeting
  • Job creation and cash relocation will be at the top of the agenda
  • Leading US technology companies hold billions of dollars overseas
  • They would repatriate the money if they can get a beneficial tax rate

Trump that
 "Listen up, guys. My tax is my business and your tax is my business too." Pic: iStock

By Stephen Pope

During the full course of the US presidential election campaign there were several states that wavered in their support; firstly, leaning towards Hillary Clinton (Democrat) and then going back in favour of Donald Trump (Republican). One state that did not was California, it was always in the Clinton column and the technology area known as “Silicon Valley” especially so.

Their preferred presidential candidate was unsuccessful and the man that they opposed has summoned the leaders of the US technology industry to a round table conference tomorrow afternoon.

Those who will attend include Elon Musk of Tesla; Larry Page and Eric E. Schmidt of Alphabet, (Google’s parent); Tim Cook of Apple; Satya Nadella of Microsoft; Jeff Bezos of Amazon; Sheryl Sandberg of Facebook; Safra A. Catz of Oracle; Brian M. Krzanich of Intel; Chuck Robbins of Cisco; and Ginni Rometty of IBM.

The agenda has not been fully disclosed and yet it is not unreasonable to suggest that two key issues will dominate the discussion between “The Don” and “The Techies”, namely job creation in the US and the repatriation of the vast cash reserves held offshore.

Jobs in the news and this time...not Steve Jobs

The process of offshoring technology jobs has been keenly felt in computer programming, and it is the sector that will enjoy the least employment gain over the next four years as things currently stand in the US.

The US Bureau of Labor Statistics (BLS) said in its biennial update of employment projections released in March this year suggested that by 2020, employment in all computer related occupations was expected to increase by 22%. However, there is no homogeneous spread of growing employment across the IT space.

Demand for software developers will be the strongest over the next four years with an increase of 32% forecast whereas for programmers the gain will be just 12%.

The BLS forecasts, particularly for technology-related jobs, are often controversial because they cannot possible account for the rapid market changes and tech disruptions that are in the DNA of this industry.

They have value, however, and are frequently cited in various policy debates on issues ranging from education to immigration. The latter being a favourite Trump topic.
Tech jobs
Source: BLS

The IT employment growth rate projected by the BLS may look impressive compared to older, mature industries, however, when contrasted with hiring in the other major economies it has been classified as "anaemic".

Victor Janulaitis, CEO of Janco Associates, a research firm that analyses IT wage and employment trends said:

"...When you consider the overall demand for systems and applications in high-growth markets like China and India, the BLS projections mean the US will be doing a diminishing portion of the development and implementation work, ... If that's the case, the US will no longer be the leader in IT. ...”

One reason why there is slow growth in programming is that it proved beneficial to many US corporations to cooperate with tech-savvy nations that can speak more than passable English.

For example, in India there are many software development company’s such as Infosys Limited, Wipro Limited and Rolta India Limited. US corporations can submit their requirements overnight; the Indian programmers can work on the issue and submit a solution ready for the start of the US workday. All at wages rates that are a fraction of US programming charges.
Another reason why US IT job creation is a relative laggard on the global stage is that it is not attractive areas such as California, New York and Washington DC, that are the most active recruiters. Rather they are Minnesota, Utah and Nebraska. 

The reason why the cold and northerly state of Minnesota is the largest recruiter is that it serves as the headquarters for corporations like UnitedHealth Group, General Mills, 3M, US Bankcorp, and Target. It is often called “Medical Alley” as it’s home to device companies like Medtronic, St. Jude Medical and Boston Scientific. These firms employ vast numbers of technology workers and as they grow so do their needs for high intellect IT staff.

If the president-elect is serious about bringing jobs back to the US he should place his emphasis on IT software linked employment, as the outsourced manufacturing chain of IT giants such as Apple or HP is too deeply embedded in overseas markets and it would make no sense whatsoever for shareholder value to unsettle an already sound and established structure in an exercise that would simply eradicate shareholder value.

FDI US, COrk, Ireland
 Much US tech money has flowed into welcoming and tax-friendly environments 
like Ireland's Cork city. It's likely stay there. Picture: iStock

Follow the money

The top tech companies hold many billions of dollars overseas and to the president-elect such cash assets represent capital that could be deployed in financing his infrastructure renewal programme. Eight of the biggest US technology companies added a combined $69 billion to their stockpiled offshore profits over the past year. 

  • The top five US technology companies now hold over $500bn in cash or near cash equivalents in overseas accounts. 

The cash build has occurred as the companies are trying to avoid paying a substantial amount of tax. Given computing and IT companies have a lot of flexibility in where they declare their profits they will naturally park their cash in the most advantageous place.

Currently the US is not considered a tax efficient location. This is because if a US company makes profits elsewhere in the world then it pays US corporate income tax, minus foreign taxes paid, when it brings that money back home.

If they want to invest it in the US or undertake a stock buyback or pay a dividend, then they must return it to the US. If they park it offshore, then they do not pay that US corporate income tax.

Apple, as an example has until recently only been paying 2% foreign tax on its foreign profits. To bring that back would thus cost it some 33% of the profits in US tax. So, it is hardly a surprise it doesn't send the dollars home. If it did it, under the current tax regime it would face a shareholder rebellion.

The steps president-elect Trump must take are clear. Given the current record cash reserves and untaxed accumulated profits of US corporations are at their record offshore level the US should follow the lead of other nations.

  • Don't tax foreign profits when they are brought back into the country. 

The alternative is to simply levy the usual dividend taxes as quarterly dividends are distributed to investors. The federal government swould till receive a substantial new level of revenue and the overseas cash pile would  gradually disappear.
Source: Spotlight Indices

Since Donald Trump’s election victory the technology sector has gained 7.31%, compared with the average for the 11 main sectors at Spotlight Indices of 7.99%. If the meeting tomorrow indicates that Trump will tear up the current tax code, then I see the technology sector moving much further ahead during 2017, pushing capital goods finance and basic resources hard for a top three spot. After all, what other sector is so well poised to exploit the “internet of things” or the age of “Industry 4.0”?

— Edited by Clare MacCarthy

Stephen Pope is managing partner at Spotlight Ideas


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