By Lynnley Browning, Bloomberg News
Multinationals are in line for a windfall from President Donald Trumps call to cut the tax rate on U.S. companies stockpiled overseas earnings, but a select few would do better than others.
Apple Inc. and Pfizer Inc. may enjoy an extra earnings bump because of their previous accounting maneuvers, while companies including Microsoft Corp., Merck & Co. Inc. and Exxon Mobil Corp. might have to log a one-time earnings hit, data recorded in their public filings suggest.
The difference, which could mean a bookkeeping boost of as much as $7.9 billion for Apple and $5.3 billion for Pfizer, can be found on both companies balance sheets. Both have created multibillion-dollar deferred tax liabilities to reflect the U.S. taxes they expect to owe on their accumulated offshore income.
Those liabilities are based on the current U.S. corporate income tax rate of 35 percent but Trump and congressional Republicans have proposed slashing the rate on accumulated foreign earnings to just 10 percent or lower. If they succeed, Apple and Pfizer would be able to pay their lower-than-anticipated tax bills and then adjust their balance sheets, with one-time additions to their earnings worth billions, tax experts say.
These companies will be happy campers, said Bret Oliver, a tax partner at PricewaterhouseCoopers.
The bookkeeping adjustments wouldnt be tied to actual business growth, so from an investors point of view, theyd drive a lower quality rise in earnings per share, said Ronald Graziano, a director and global accounting strategist at Credit Suisse Group AG. Still, companies that have created large tax liabilities for their offshore earnings wouldnt have to come up with cash for their tax bills because theyve already accrued for it, he said. Its a massive benefit.
Its impossible to discern the precise effect on companies they generally disclose only portions of their tax planning to shareholders every year. Also, its unclear how extensively companies could lower their U.S. repatriation taxes further by claiming credits for foreign taxes theyve already paid on overseas income the congressional plan and Trumps plan have been silent on that question.
If the goal is to raise revenue, we would assume that they will limit the use of foreign tax credits, said Eric Toder, co-director of the Urban-Brookings Tax Policy Center and a former Treasury tax-policy economist.
To arrive at its estimates, Bloomberg used public disclosures from a number of companies that report large offshore earnings, along with calculations endorsed by three tax and accounting specialists.
Microsoft created a relatively small deferred tax liability for its offshore income, so it may have to take a one-time earnings hit of as much as $11.7 billion for its repatriation tax bill. For Merck, the tab could be as much as $5.1 billion, and Exxons could be as much as $5.4 billion. A spokesman for Microsoft declined to comment, while a spokeswoman for Merck didnt respond to emailed requests and calls for comment.
Scott Silvestri, a spokesman for Exxon, said the oil company doesnt have any deferred tax liabilities for unremitted foreign earnings, but does have foreign tax credits that could help to reduce its tax bill.
Differences in corporate tax planning stem from some quirks of the U.S. tax code that Trump and congressional Republicans want to end. Unlike other developed countries, the U.S. taxes its corporations on their global income not just their domestic earnings. However, companies can defer paying tax on their foreign income until they decide to return it, or repatriate it, to the U.S.
The deferral provision has incentivized U.S. companies to amass more than $2.6 trillion in untaxed profit overseas, according to an estimate by Congresss Joint Committee on Taxation. Thats more than the annual gross domestic product of California, the worlds sixth-largest economy, based on data from the International Monetary Fund.
Trump and House Speaker Paul Ryan have proposed ending the global approach to corporate taxation. As part of the transition to a system that would tax only domestic economic activity, they propose reduced tax rates for companies accumulated foreign earnings. During his campaign, Trump called for a 10 percent rate though the tax-plan outline he released in April didnt specify a rate. Ryan and others have proposed taxing foreign earnings held as cash at an 8.75 percent rate, and all other foreign earnings at 3.5 percent.
Both plans call for deemed repatriation taxes. That means companies would owe the tax regardless of whether they actually repatriate the income. Thats an important distinction and it helps explain why some companies would see bookkeeping benefits and others wouldnt.
Under the current system, companies can choose to classify at least some of their foreign income as permanently reinvested offshore, meaning they plan to leave it where it is and dont plan to owe any U.S. taxes on it. For that portion of their income, theres no need to book a deferred tax liability. As a result, investors arent always provided with enough detail about what kind of hit a company would take from bringing money back, according to Thomas Selling, a retired accounting professor and a former academic fellow at the Securities and Exchange Commission.
But a few companies choose not to label large amounts of their offshore earnings as permanently reinvested because they may need to tap that money in the future. In such cases, they have to book a deferred tax liability as Apple and Pfizer have.
The strategy that both companies used now looks prescient, said Robert Willens, a tax and accounting expert in New York. These companies, unlike most other multinationals, will see substantial benefits from the enactment of a deemed repatriation tax rule.
Apple Chief Executive Officer Tim Cook said during an exclusive interview with Bloomberg Television last week that he supports the deemed-repatriation approach, and he thinks the resulting tax revenue should be spent on upgrading U.S. infrastructure.
In their public filings, companies often disclose the amount of a deferred tax liability, but not the amount of earnings to which it applies. To estimate different companies positions, Bloomberg News assumed that their tax liabilities anticipated a 25 percent tax rate thats the current 35 percent statutory rate, reduced by credits companies can claim on foreign taxes theyve paid. Willens, Selling and John Robinson, an accounting professor at Texas A&M University, endorsed that approach.
Apple had $109.8 billion of permanently reinvested offshore earnings at the end of its 2016 fiscal year. The company also booked a gross deferred tax liability of $31.4 billion almost all of it attached to a separate pot of untaxed foreign income, according to regulatory filings.
At a 25 percent rate, Apples DTL would cover earnings worth $125.6 billion. Combining that total with the companys permanently reinvested earnings yields a total estimate of $235.4 billion that would be subject to a deemed repatriation tax.
Applying a 10 percent tax rate to that amount leads to a tax bill of $23.5 billion about $7.9 billion less than the deferred tax liability on Apples books. For accountants, that amount would morph into a so-called negative tax expense and shift from the companys balance sheet to its income statement, according to Edward Maydew, a tax and accounting professor at the University of North Carolina at Chapel Hill. Functionally, its a one-time addition to the companys after-tax income.
In response to a request for comment, Josh Rosenstock, a spokesman for Apple, said: We dont have anything to add.
Pfizer disclosed having $86 billion in permanently reinvested earnings at the end of its 2016 fiscal year, along with a $23.1 billion gross deferred tax liability for a separate chunk of unrepatriated foreign earnings.
Applying a 25 percent rate to that tax liability yields estimated earnings of $92.4 billion. Combined with the permanently reinvested income, the companys total estimated offshore earnings would reach $178.4 billion and a 10 percent repatriation tax on that amount would be about $17.8 billion.
Thats $5.3 billion less than the deferred tax liability that Pfizer has booked. Joan Campion, a spokeswoman for Pfizer, didnt respond to requests for comment.
Companies with big DTLs really, really want a repatriation, Texas A&Ms Robinson said. Its like getting something for nothing.
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Trump's offshore tax plan may mean extra perk for Apple, Pfizer - The Denver Post
