Zoom paid $0 in federal taxes on $664 million in pandemic profits, mostly by paying executives stock options

GettyImages 1137877413 NEW YORK, NY - APRIL 18: Zoom founder Eric Yuan make a toast after the Nasdaq opening bell ceremony on April 18, 2019 in New York City. The video-conferencing software company announced it's IPO priced at $36 per share, at an estimated value of $9.2 billion. (Photo by Kena Betancur/Getty Images)
Zoom paid $0 in US federal income taxes last year despite making $663.9 million in US pre-tax profits. Kena Betancur/Getty Images

Zoom emerged as one of the biggest beneficiaries of the pandemic as millions became dependent on video calls to stay connected.

The video-conferencing platform raked in $663.9 million in pre-tax profits in the US alone during its last fiscal year, which ended in January, compared to $16.3 million the previous year.

But the company paid $0 in federal income taxes on those profits, it disclosed Friday in a filing with the Securities and Exchange Commission, even though the corporate tax rate was 21% for 2020.

A Zoom spokesperson told Insider in a statement the company "complies with all applicable tax laws" in countries where it does business and that it "has invested heavily in research and development activities to build and enhance its communications technology - development activity that is specifically encouraged under current law."

But research and development credits accounted for just 1% of Zoom's tax bill reductions, while around 99% of its savings were a result of paying executives $302.4 million in stock-based compensation, compared to $32.1 million the year before.

Zoom paid just $5.7 million total in taxes last year for an effective tax rate of 0.8%. But $3.9 million of that was paid on the company's $14.1 million in foreign profits, for an effective rate of around 28%, highlighting major discrepancies in how the US tax system treats corporations.

Zoom's (legal) use of stock payments to executives to reduce its tax bill reignited criticism from lawmakers and advocates who argue in favor of closing loopholes that allow massive, profitable corporations to pay less in taxes than millions of Americans.

"If you paid $14.99 a month for a Zoom Pro membership, you paid more to Zoom than it paid in federal income taxes even as it made $660 million in profits last year - a 4,000 percent increase since 2019. Yes. It's time to end a rigged tax code that benefits the wealthy & powerful," Sen. Bernie Sanders tweeted Sunday.

"Companies that compensate their leadership with stock options can write off, for tax purposes, huge expenses that far exceed their actual cost," Matthew Gardner, a senior fellow at the Institute for Taxation and Economic Policy, wrote in a post breaking down Zoom's tax strategy.

"This is a strategy that has been leveraged effectively by virtually every tech giant in the last decade, from Apple to Facebook to Microsoft. Zoom's success in using stock options to avoid taxes is neither surprising nor (currently) illegal," Gardner said, adding that along with its use of accelerated depreciation and R&D credits, is the same "recipe that Amazon and Netflix have used with such success to reduce their federal tax bills during the Trump corporate tax era so far."

Amazon has also drawn the ire of Sanders and others for paying $0 in federal income taxes. Many companies, including Amazon, Delta Airlines, IBM, JetBlue, and Netflix, have even managed to achieve negative effective tax rates - meaning taxpayers paid those companies more via subsidies than the companies paid the government in taxes.

President Joe Biden has proposed raising the corporate tax rate to 28% - higher than the current rate, but lower than the 35% companies were taxed at before former President Donald Trump took office. However, simply raising the tax rate doesn't necessarily close the loopholes allowing companies like Zoom to pay $0 to the federal government.

Other proposals, like the Treasury Secretary Janet Yellen's plan to get countries to agree on a global minimum tax rate so companies won't just seek out low-tax countries, or Biden's plan to eliminate Trump loopholes that let companies move profits offshore to avoid paying taxes on them, may help to raise corporation's effective tax rates.

Read the original article on Business Insider