Experienced Tax
Accountant – Goldman Sachs Group Inc said on Friday it would take a $5
billion earnings hit in the fourth quarter for the new U.S. tax law, becoming
the first major U.S. bank to detail the law's one-time impact on corporate
profits held overseas.
Set
to take effect on Monday, the sweeping tax
code changes enacted a week ago by President Donald Trump were expected to mean
short-term pain, but long-term gain for U.S.-based corporations, like Goldman,
that do business worldwide.
Like
many such companies, Goldman has stored away billions of dollars in profits abroad.
It did so under a law that lets multinationals avoid the present 35-percent,
U.S. corporate tax rate as long as those profits did not enter the United
States.
The
new law encourages companies to repatriate those earnings and slaps a mandatory
tax on them of 15.5 percent on cash and liquid assets, or 8 percent on illiquid
assets, regardless of whether the earnings come home or not.
Scores
of large companies, including other big banks such as Citigroup and JPMorgan
Chase & Co, have socked away an estimated $2.8 trillion overseas in recent
years. The one-time tax on those earnings is expected to raise $339 billion in
federal revenues over the coming decade, according to the Joint Committee on
Taxation (JCT), a nonpartisan research arm of the U.S. Congress.
That
will hurt multinationals for a while, but they will have eight years to pay the
taxes due. Some other tax breaks for banks will be eliminated or narrowed,
under the new law, ranging from limits on deducting interest to curbs on
deducting premiums paid to the Federal Deposit Insurance Corp.
Some
U.S. financial companies have disclosed hits related to deferred tax assets
from losses they suffered during the 2007-2009 financial crisis.
Citigroup
has said it expects as much as a $20 billion charge to earnings for this, while
Bank of America has detailed a $3 billion charge to fourth-quarter profit.
But
these negatives should be more than offset in the long run by other changes
under the law, analysts said.
Foremost
among these profit-enhancing changes will be a deep cut in the overall U.S.
corporate income tax rate to 21 percent from 35 percent. That will cut U.S.
corporations' federal tax bills by more than $1.3 trillion over the next
decade, based on JCT research.
Worldwide to Territorial
The
new law will also shift U.S. corporate taxation to a "territorial"
system. Under the present, "worldwide" system, Washington taxes
active foreign profits, if they are repatriated, at the same rate as domestic
profits.
Under
the new territorial system, domestic profits will still be taxed, but profits
earned abroad by U.S.-based multinationals, within some limits, will no longer
be taxed.
This
was expected to reduce federal tax revenues by $224 billion over a decade, the
JCT estimates. A collection of new minimum and anti-base erosion taxes will
offset those losses, but for the most part, the territorial system represents a
major win for corporate lobbyists who have been pursuing such a change for
decades.
The
new law, passed by Republicans in the U.S. Congress over the united opposition
of Democrats, marked Trump's first significant legislative victory since taking
office in January.
Multinationals
had pushed for many years for a discounted rate on tax-deferred foreign
profits. Under the Republican bill, they finally got it. Analysts expect
repatriated earnings to go mostly to stock buybacks and shareholder dividends.
JPMorgan,
Wells Fargo and Morgan Stanley did not immediately respond to requests for
comments.
(Reporting
By Aparajita Saxena in Bengaluru; Writing by Lauren Tara LaCapra and Kevin
Drawbaugh; Editing by Shounak Dasgupta and Andrew Hay)
