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For chip design giant Nvidia, the boom in artificial intelligence has coincided with a useful period of unusually low tax rates. A decade ago the company’s effective tax rate was 17.4 per cent. Last year it was 12 per cent. The previous year, the company set aside nothing at all. Now, rates are rising.
Varying global tax rates alter investment returns for US multinational companies. Nvidia, for example, counts the US, China, Germany, Hong Kong, India, Israel, Taiwan, and the UK as significant tax jurisdictions.
Tax incentives and other concessions mean that, even in countries with the same tax rates, companies do not face the same bills. Research by Dr Javier Garcia Bernardo at Utrecht University found that while Luxembourg and Norway have similar levels of statutory tax, multinational companies in Luxembourg paid as little as 1 per cent of gross income in taxes, while those in Norway paid up to 67 per cent.
The main reason Nvidia’s tax rate has fallen so sharply recently is US federal benefits. In 2017, the Tax Cuts and Jobs Act lowered the top rate of corporate tax from 35 per cent to 21 per cent. There were other changes too, including alterations to the way foreign income is recognised. The company also receives a US R&D tax credit.
Across the US, the effective tax rate paid by large profitable companies is far lower than the statutory rate. It fell from 16 per cent in 2014 to 9 per cent in 2018, according to the US Government Accountability Office. Many companies paid nothing on 2020 profits according to analysis by the Institute for Taxation and Economic Policy.
For Nvidia, this made a significant difference. If its tax rate were the same as in 2016, income tax expense last year would have been closer to $6bn than $4bn. That would have trimmed the net income margin from close to 49 per cent to 45 per cent.
This appears to be where things are headed. The company says that the impact of tax benefits is falling. It expects its effective tax rate to be back up to 17 per cent in the current quarter. It could rise further. President Biden has proposed raising the corporate tax rate to 28 per cent.
The AI juggernaut remains on course to report another record annual profit this year. But rising tax bills will trim future profitability.
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