The Supreme Court denied to hear the petition issued by Altera Corp, now owned by Intel, on Monday regarding the now infamous Altera case. This case rolls back into effect the 2003 IRS regulation on corporate stock based compensation. With this decision tech giants like Facebook, Google, Twitter, and Alphabet could be on the line for billions in taxes since they cannot – as previously established – keep those costs in the US, which is a higher tax jurisdiction. This is a low blow for many tech companies that utilize stock options as part of employee compensations plans for US employees.
The 2003 IRS Regulation Regarding Stock-Based Compensation
The 2003 Treasury Regulations under Internal Revenue Code Section 482 stipulate how a company is to share costs with foreign subsidiaries. Since many tech companies rely on stock-based compensation, they were forced to allocate a lot of this expense to their foreign subsidiaries. These subsidiaries are often located in low tax jurisdictions (countries such as the Netherlands or Ireland which sometimes have 0% corporate tax rates). This allocation negates a lot of the tax benefits of offering such compensation packages from a US perspective.
The Challenge To The Tax Rules
Many companies had issues with the new set of regulations as the effects of the Altera case ripples through corporate board rooms. As it stands, many companies would prefer to allocate more of their stock-based compensation (SBC) into their US operations, lowering their taxable income. By requiring them to allocate a large bulk to their foreign subsidiaries, most of which are in low tax jurisdiction or tax havens, the full potential of the deduction isn’t realized because the IRS rule reduces the amount under higher US tax rates. The rationale behind allocation is that since profits are shifted to regions where the IP is owned (not coincidentally in low-tax regions), then also costs would need to be allocated accordingly. Tech companies had hoped that the standing case would continue to allow them to keep SBC costs home, however, the recent Supreme Court ruling now eliminates this this tax strategy.
The Effects Of The Recent Ruling
As a result of this week’s ruling, the 2003 regulation stands. This means that tech giants like Facebook, Twitter, and Google could owe millions even billions in taxes. This could affect other industries as well, as many large corporations relay on stock-options to entice new talent and facilitate passion and innovation. While it seems like the brunt of this is going to be felt by the larger tech companies, it could impact smaller tech companies as well who still rely on stock-options as compensation.
Get Help With Your Taxes
The tax code is constantly being updated and changed. It is a lot to keep up with. Which is why you either need to stay on top of new rulings and regulations or risk not being compliant. The latter could have pretty steep consequences.
To get a better sense of tax strategies using transfer pricing and stock based compensation, subscribe to our newsletter or get connected with us.