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All-American firms benefit the most, multinationals less
IT S always a lot of fun when you win, President Donald Trump enthused after
his tax package was approved by Congress in December. Company bosses nodded
along. The centrepiece of the reform is a drastic cut to the corporate-tax
rate, from 35% to 21%, taking it below the rich-country average. Although its
impact is partly offset by some revenue-raising measures, the congressional
Joint Committee on Taxation estimates that American business will gain around
$330bn from the reform over the next ten years. Yet within that are sizeable
variations in terms of which firms and industries benefit most.
The biggest winners are more domestically oriented companies. These typically
face higher effective tax rates than American companies with a big presence
overseas, which do business in lower-tax countries. Bosses are also evaluating
other new measures. So-called full expensing , for example, helps those with
big spending plans by allowing them to deduct investment costs up front. But
using debt will become less attractive, as interest payments are no longer
fully deductible.
ome firms experienced high volatility in their earnings for the final quarter
of 2017 thanks to the treatment of so-called deferred tax assets . These are
past tax losses carried forward to set against future tax bills, and such
assets have shrunk in value because of the lower corporate-tax rate. Other
firms that hold deferred liabilities enjoyed big one-off gains.
Of the 150 S&P-listed companies that have so far released estimates of their
effective tax rate for 2018, telecoms and consumer-focused companies (which
often have a big American presence) expect to have gained the most, says
Ramaswamy Variankaval of J.P. Morgan, an investment bank (see chart). AT&T, a
telecoms giant, predicts a rise in cashflow of $3bn in 2018, or nearly a fifth
of cashflow last year.
Multinational firms do benefit from a lower American headline tax rate. They
will also pay a much lower tax rate, of 15.5%, on foreign cash that is
repatriated. Yet while they were previously taxed only when the money was
brought home, now they must cough up and pay tax on all of their $3trn
stockpile of foreign cash over an eight-year period.
Other changes to the treatment of foreign income are more controversial. The
new base-erosion anti-abuse tax , or BEAT, applies to all big firms operating
in America and targets cross-border payments to foreign affiliates, such as
royalties on intellectual property. Firms must now add such services back into
their American corporate earnings, and pay a 10% tax (after 2018, until when a
5% rate applies) on this broader base if it exceeds the standard calculation of
21% on a narrower base. Another new tax charge applies only to American firms
that have global intangible low-taxed income or GILTI returns on intangible
assets, such as patents or software, parked abroad.
Both BEAT and GILTI were intended to prevent companies from dodging tax by
stashing intellectual property and other intangibles in tax havens, notes
Jennifer Blouin, from the University of Pennsylvania. But, as drawn up, they
are much broader, she says, and could capture all foreign affiliates, even if
they already pay high tax rates, such as those in Germany. That has irked some
European firms.
With bureaucrats still transcribing the hastily drafted legislation into rules
for business, firms cannot yet be sure of their total impact. But many
technology and pharmaceutical companies, even though together they hold the
most cash abroad, anticipate slightly lower tax rates as a result of the
reforms, says Mr Variankaval. Even Apple, which booked a $38bn tax payment on
its $250bn mountain of foreign cash (it has yet actually to pay it), expects a
net benefit. In contrast, some other firms, such as IBM and General Electric,
expect slightly higher tax rates in 2018 than they paid last year, as the wider
tax base offsets the lower headline rate.
Unsurprisingly, the reforms appear to negate the benefits of inversion , or
setting up abroad for tax purposes. Valeant and Allergan, both drugmakers
domiciled abroad, expect higher tax rates. It is too early to tell, though, if
the tax changes will succeed in shifting supply chains and intangible assets
back to America.
It is also too early to gauge how the winners will spend their gains. According
to Americans for Tax Reform, a lobbying group, 377 companies have announced pay
awards linked to the tax reform, including AT&T and American Airlines. Most are
bonuses that amount to a small part of the total gains, leading sceptics to
attribute the announcements to clever public relations. A few firms have gone
further, announcing permanent wage increases or new investment projects. But
these were probably in the pipeline anyway, given improving demand, says Matt
Gardner, from the Institute on Taxation and Economic Policy, a think-tank.
That said, most analysts do expect the lower corporate-tax rate to make
investing in America more attractive in the longer term. But if the past is any
guide, argues Ms Blouin, repatriated earnings will mostly be returned to
shareholders. Last week Cisco, a tech company, said that was precisely what it
would do with most of the $67bn it was bringing home. Like Mr Trump, investors,
too, are in for some fun.
This article appeared in the Business section of the print edition under the
headline "The devilish detail"