In this episode of Cherry Bekaert's Technology podcast, International Tax Leader Brian Dill and Technology Industry Leader Michael Valerio discuss the potential impacts of the new U.S. administration's policies on tech companies with global operations.
Listen to learn more about:
- How tariffs will affect the technology industry and why leaders should pay careful attention to Pillar One of the OECD’s two-pillar tax model.
- The potential U.S. response to digital services taxes.
- International political dynamics and the broader implications for the U.S.
- Anticipated M&A activity in the tech sector due to deregulation.
Related Insights:
- Article: Exploring 'America First': The Impact of Tariffs and OECD Pillars
- Podcast: Balancing Intellectual Property and Research Investments Across Borders
- Webinar Recording: 2024 Election Outcomes and Tax Policy: Strategic Insights
View All Technology Podcasts
HOST: Welcome to the Cherry Bekaert Technology Podcast. My name is Michael Valerio, and I lead the firm's tech and life sciences practice. I am joined today by Brian Dill, who leads our international tax practice; we will discuss the potential impact the upcoming administration may have on tech businesses with global operations.
BRIAN DILL: Glad to be here.
HOST: What areas should we be paying attention to with the new administration? We assume new tax policies will affect U.S. tech companies with global operations or employees overseas.
BRIAN DILL: You are hearing a lot about tariffs. People often associate tariffs with manufacturing, but the tech industry needs to monitor tariff policy and its indirect effects.
BRIAN DILL: From a global tax perspective, the OECD has a two-pillar model. Pillar Two is the 15% global minimum tax, and Pillar One represents a fundamental shift in where companies would pay tax—more toward the location of the consumer.
BRIAN DILL: Politically, the view is that Pillar One and Pillar Two allow other governments to claim a larger share of technology revenue. Under Pillar One, companies could be required to pay tax in market jurisdictions based on where consumption occurs, allocating a share of profits to those markets. For example, if a U.S. technology company had 15% of its sales in Italy, Italy could potentially be entitled to tax up to a comparable share of the company's profits.
BRIAN DILL: Under the prior administration, Pillar One was a nonstarter in the U.S., and Pillar One required about 30 major countries to sign on. After the recent election, Pillar One appears unlikely to move forward. However, governments still want to raise revenue and believe tech companies are not paying enough tax, which is driving the increase in digital services taxes.
BRIAN DILL: We expect the new administration to use tariffs as a negotiating tool. Digital services taxes or elements of Pillar One could become bargaining chips; for example, the U.S. could respond to a country’s digital services tax by increasing tariffs on imports from that country. That type of negotiation could be on the table given the current policy environment.
HOST: Historically, Europe has had conflicts with U.S. big tech over revenue collection. Is the push for digital services taxes likely to be Europe-wide, or will certain countries be more aggressive?
BRIAN DILL: Political dynamics across the EU and the UK suggest the issue is broad-based, but larger economies—Germany, the UK, and France—are most likely to be aggressive with digital services taxes. China and India have not moved as quickly on Pillar One and remain cautious.
BRIAN DILL: In China, policy shifts such as running deficits to spur domestic demand could create new opportunities for U.S. tech companies to serve Chinese markets. The broader issue is market access: the U.S. seeks greater access when other countries create regulatory or indirect barriers that disadvantage U.S. firms.
HOST: There is also conversation about deregulation, job creation, and reopening the IPO market, which could increase capital flows and mega deals. How will M&A activity affect taxes domestically and internationally?
BRIAN DILL: If deregulation spurs M&A activity, tech companies must be prepared. Taxes are often the largest issues in transactions. Buyers and sellers need to address IP location and IP planning and understand tax liabilities and exposures; these factors can drive significant purchase price adjustments.
BRIAN DILL: Structuring cross-border deals is critical. Choosing between a stock purchase and an asset purchase, allocating tax exposure, and determining financing structure all matter. Financing placement and deal structure from a tax perspective are very important; transactions cannot be closed quickly without considering these elements.
HOST: Section 174 is another major topic affecting small and mid-sized tech companies. If you are not familiar, Section 174 requires capitalization of R&D expenses and became effective a few years ago. We will cover Section 174 in more depth on another episode.
BRIAN DILL: Section 174 has been a significant issue for many tech companies.
HOST: We recently published an article that goes into more detail; we will provide a link to the article and encourage listeners to read it for more information on potential tax policies under the new administration.
