Multinationals may cash in on loophole in Trump tax cuts

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A loophole in the new US tax law could allow multinational corporations like Apple to avoid paying billions of dollars in taxes on profits stashed overseas, according to experts.

Stemming from a Republican overhaul of international business taxes, the loophole involves the tax rates that companies must pay on $2.6trn in profits they are holding abroad.

Companies with earnings parked offshore will face a one-time tax of 15.5pc on cash and equivalents or 8pc on illiquid assets, payable over eight years.

To knock their tax bills, experts said, multinationals could have leeway to shift foreign earnings into the 8pc tax bracket and out of the higher bracket.

"Even before the legislation was unveiled in November, multinationals were planning to convert cash to non-cash assets, although it wasn't entirely clear what would constitute cash for this purpose," said Reuven Avi-Yonah, a tax expert at the University of Michigan Law School.

By manipulating their foreign cash positions, a determining factor under the new law, a US multinational could potentially save money by shifting profits to the lower rate from the higher one, according to Stephen Shay, a senior lecturer at Harvard Law School.

The savings could amount to more than $4bn in Apple's case alone, he said.

An Apple spokesman declined to speak on the record about Shay's analysis. US Treasury Department and Internal Revenue Service officials did not respond to Reuters' queries seeking comment.

"This is clearly the result of rushed legislation," said Shay, formerly a top Treasury Department tax official.

The sweeping Republican tax law was US President Donald Trump's first major legislative triumph since he took office almost a year ago.

Rushed through Congress, and approved over the unanimous opposition of Democrats, it took effect this month, delivering tax cuts and tax code changes that large, US-based multinationals had sought for years.

Companies, policymakers and investors are still trying to fully understand the implications.

Corporate results for 2017's final quarter due from this week are expected to be laden with one-time charges as US companies, and firms that operate there, begin to factor in tax code changes.

Analysts at Davy Stockbrokers in Dublin have estimated that CRH could net an extra €140m gain from the sale of its US distribution business, thanks to the changes.

Some investors expect many companies will use their tax savings to buy back shares and increase dividends, while others will look for increased capital spending or wage increases.

The changes will apply differently across sectors.

Banks and other companies will need to remeasure the value of their deferred tax assets and liabilities at the new tax rate, a note from strategists at Goldman Sachs said.

Yesterday, JPMorgan, the biggest US bank by assets and first to report financial results, said it had recorded $2.4bn in one-time charges in the fourth quarter related to the tax law changes. However, it expects its effective tax rate to drop to 19pc this year from 32pc last year, which could save it billions of dollars.

Technology and healthcare companies are sitting on the largest stash of overseas cash and are expected to post the biggest charges related to the one-time repatriation tax, Goldman strategists said in a research note.

Apple "will incur the largest tax bill of any company under the provision, owing $33bn on its $216bn of overseas cash," they wrote.

As a group, the technology sector, which led the market's rally in 2017, is expected to benefit less from the tax rate cut than most other sectors, analysts said.

Retailer Walmart announced on Thursday that it will raise entry-level wages for hourly employees, partly because of tax cuts. It also said it would lay off thousands of workers and close dozens of Sam's Club stores.

The Trump tax package, a victory that eluded his predecessors for decades, helped drive stock market gains in the last months of 2017.

The momentum has continued in 2018, and there are widespread expectations that investors will overlook fourth-quarter charges and focus on upbeat corporate outlooks.