Cut Inflation Act Will Impact Corporate Tax Evaders – Will Nike and Amazon Fall?

AAfter much delay, the US Senate recently passed the $430 billion climate, health and tax bill called the Inflation Reduction Act. If enacted, the Cut Inflation Act aims to tackle climate change and reduced healthcare costs. The significant investments provided for by the bill will be partly funded by a minimum corporate tax of 15% imposed on large corporations whose average book income exceeds $1 billion over a three-year period.

This minimal tax provision is expected to impact companies like Nike (NYSE: NKE), Amazon.com (NASDAQ: AMZN), FedEx (FDX), and several other companies that have often been criticized for paying little or no federal income tax using numerous deductions and exemptions.

Cut Inflation Act aims to close tax loopholes

Many large corporations that avoid tax typically report much lower profits to the Internal Revenue Service for tax purposes than the book profits they reveal to shareholders. According to a report released by the Institute on Taxation and Economic Policy (ITEP) in April 2021, at least 55 of America’s largest corporations paid no federal income tax in 2020.

The list includes advanced microdevices (AMD), Archer Daniels Midland (ADM), FedEx, Nike and Salesforce (RCMP).

According to the ITEP study, the 55 companies, which avoided paying taxes, generated a combined U.S. pre-tax income of $40.5 billion in 2020. ITEP estimates that these companies benefited from total corporate tax relief of $12 billion in 2020, including $8.5 billion in tax evasion. and $3.5 billion in tax refunds.

Reacting to the Senate’s passage of the Cut Inflation Act, Amy Hanauer, Executive Director of ITEP, said, “Today we made remarkable progress for U.S. fiscal and climate policy. The IRA [Inflation Reduction Act] closes corporate loopholes, collects revenue from those who defy tax law, and devotes much of that revenue to greening our economy.”

In addition to the 15% minimum corporate tax, the Cut Inflation Act would also impose a 1% excise tax on share buybacks.

Nike and Amazon could face a higher tax burden

The April 2021 study by ITEP found that athletic apparel and footwear giant Nike generated nearly $2.9 billion in pre-tax revenue in the United States in 2020, but paid none. federal income tax. Instead, the company received a $109 million tax refund. ITEP noted that Nike and several other companies used an executive stock option tax break and the federal Research and Experimentation (R&E) credit to reduce their income taxes in 2020. .

Meanwhile, amid soaring inflation and macroeconomic headwinds, the Street is cautiously bullish on Nike. The stock has a moderate buy consensus rating based on 16 buys, 10 holds and a sell recommendation. At $128.87, the mid-price target implies 13.9% upside potential from current levels.

Meanwhile, in a February 2022 report, ITEP found that if e-commerce giant Amazon had paid the 21% statutory tax rate on its 2021 U.S. earnings without any tax relief, then its taxes would have exceeded $7.3 billion. However, Amazon paid $2.1 billion in federal income taxes. ITEP noted that the company’s overall federal tax rate was just 5.1% on more than $78 billion in reported US income over the past four years.

Currently, Wall Street is very bullish on Amazon due to its leadership in e-commerce and its lucrative cloud computing platform AWS (Amazon Web Services). The Strong Buy consensus rating for Amazon is backed by 39 buys and one hold. The average price target of $176.04 implies a potential upside of 23.4% from current levels.

Overall, if the Inflation Reduction Act is enacted, it would increase the tax burden of Nike and Amazon and impact their profitability.

Will the Inflation Reduction Act actually reduce inflation?

Although it is not certain that it will actually reduce inflation, the Cut Inflation Act, once implemented, should help the US government to force companies that avoid taxes to pay the less than 15% of their income in taxes and fund climate and health initiatives. Although the minimum tax of 15% is lower than the current corporate tax rate of 21% in the United States, it would still help generate billions of dollars in government revenue over the next decade.

Indeed, the Joint Committee on Taxation currently expects the 15% minimum tax provision to raise approximately $222 billion over a 10-year period.

Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Darryl A. Chapin