Early Numbers Show Repatriation Tax Haul Likely to Miss Estimates (1)

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By Allyson Versprille and Alison Bennett

The top 55 companies on the 2017 Fortune 500 list, including corporate giants like Apple Inc., Alphabet Inc., and Pfizer Inc., expect to pay about $131 billion in taxes on their earnings stockpiled overseas, a Bloomberg Tax analysis found.

The amounts those companies—excluding the ones that are private or government-sponsored—are disclosing in their annual and quarterly earnings reports show that the revenue from the law’s repatriation tax will likely fall far short of lawmakers’ and the Trump administration’s expectations, said Andrew Silverman, a Bloomberg Intelligence tax analyst. “Trump was saying, ‘We’re going to get $5 trillion in cash held abroad,’ and I suspect it’s going to be a heck of a lot less than that” based on the taxes companies expect to owe.

Under new tax code Section 965, U.S. multinationals are required to pay a one-time “transition tax” on income accumulated overseas since 1986. The law treats the income as repatriated and imposes a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on illiquid assets, such as factories and equipment. Under the prior tax system, companies could defer U.S. income taxes on foreign earnings until they returned the income to the U.S., which incentivized companies to shift earnings to low-tax jurisdictions overseas. This is sometimes referred to as the “lock-out effect.”

The Joint Committee on Taxation estimated that the deemed repatriation measure would generate $338.8 billion in tax revenue over 10 years, more than two and half times the amount currently being reported by the Fortune 500’s top 55 companies.

Thomas Barthold, the JCT’s chief of staff, said the committee’s estimate isn’t based on the deemed repatriation measure alone. The estimate includes “effects that would be attributable to short-term increases in qualified dividends or share buybacks or deleveraging that would be facilitated by movement of money around in response to the deemed repatriation,” he told Bloomberg Tax. Incrementally, it’s a question of what impact undoing the lock-out effect might have “in terms of both individual tax receipts and some corporate tax receipts due to changed financial structure,” he said.

“Putting aside Apple and Microsoft, most companies don’t seem to be paying the large amounts that most legislators thought they’d be paying,” Silverman said. Apple and Microsoft Corp. said they expect to pay $38 billion and $17.8 billion, respectively, in deemed repatriation taxes, which combined amounts to about 43 percent of the Bloomberg Tax analysis’s $131 billion total. The total figure was calculated by compiling the repatriation amounts companies have disclosed in their annual and quarterly earnings reports, as well as associated earnings calls and news releases.

Not All Bad

Some companies may have been able to lower their repatriation tax bills by netting the tax against other income items, Silverman said. For example, banks that should have had large repatriation amounts may have been able to balance them out against net operating losses and foreign tax credits “that, in some cases, were a hangover from the Great Recession,” he said.

Scott Greenberg, a senior analyst with the conservative-leaning Tax Foundation, acknowledged the repatriation numbers seem lower than predicted. But he said the news isn’t all bad.

Although Congress was probably hoping for a substantial one-time revenue collection, the fact that it may be a one-time hit to expectations and not a sustained revenue loss over time helps, he said.

Lower repatriation tax revenue also shouldn’t mean much for the overall health of the U.S. economy, he said. “The case for having repatriated cash having a positive effect on the U.S. economy is pretty weak. The economy is closer to recovery than it was five years ago. Repatriation is less economically consequential than it would have been,” he told Bloomberg Tax.

Inflated Figures?

The numbers companies are disclosing now may also be inflated, further increasing the odds that repatriation tax revenues could fall short of original estimates.

In their financial reports, many of the companies said the amounts they were reporting were “provisional” and subject to change based on guidance issued by the Treasury Department and Internal Revenue Service. The IRS has released three notices and a set of FAQs to help taxpayers determine their repatriation tax amounts.

“As a whole, I would say we have the majority of the guidance we’re going to get, and I think that most taxpayers should be able to accurately determine what their 965 liability is based on” that guidance, said Cory Perry, international tax senior manager in the Washington National Tax Office at Grant Thornton LLP. The figures companies reported early on, however, are likely inflated because many taxpayers were making conservative estimates to “be on the safe side,” he told Bloomberg Tax.

This is especially true for the first installment paid to the IRS by companies choosing to spread the tax burden over several years. The new law allows U.S. multinationals to pay what they owe over eight years—8 percent of the total in each of the first five years starting in 2018, followed by 15 percent in 2023, 20 percent in 2024, and 25 percent in 2025. Several companies, including Pfizer and Apple, plan to take advantage of this option.

“There was a significant risk if they underpaid the first installment, but limited risk if they overpaid it,” Perry said.

Tech Leads the Pack

Based on the Bloomberg Tax analysis, the technology industry is the sector most impacted by deemed repatriation.

Just three companies in that industry—Apple, Alphabet, and Microsoft—accounted for about 50 percent of the $131 billion total, disclosing a combined repatriation tax expense of $66 billion.

Intellectual property—an intangible asset primarily encompassing copyrights, patents, and trademarks—is one of the main reasons technology companies are facing some of the highest repatriation tax bills, Perry said. IP made it “that much easier to defer” U.S. income taxes “because they could move income around by moving intangible assets around,” he said.

Large banks, including JPMorgan Chase & Co. and Citigroup Inc., are also seeing tax hits in the billions as a result of deemed repatriation. Perry said the banking industry is similar to the technology sector in that banks generate most of their earnings through intangible assets. “A lot of their income is not generated from boots on the ground, or manufacturing, or hard assets,” he said. “It’s generated from cash, and intangibles, and other things of that nature.”

Bank of America Corp. disclosed a net tax charge of $2.9 billion related to the new tax law, but that amount wasn’t included in the repatriation total calculated by Bloomberg Tax because a company spokesperson declined to say how much of the charge stemmed from deemed repatriation.

Pfizer, which has one of the largest overseas stockpiles, is another company facing a substantial tax charge. The pharmaceutical giant disclosed that its tax liability from deemed repatriation is $15.2 billion—on par with the amounts owed by the tech companies. Even so, the company reported a net benefit in 2017 as a result of the new law, primarily stemming from lower tax rates and the remeasurement of U.S. deferred tax liabilities.

‘All Over the Map’

Of the top 55 Fortune 500 companies, those within the same sector seemed to be affected similarly, with the exception of retail, Perry said. That industry was “all over the map—ranging from no deemed tax to over $10 billion,” he said.

The Bloomberg Tax analysis shows that Johnson & Johnson, for example, expects to owe $10.3 billion in repatriation taxes, while Amazon.com Inc.—to the surprise of some interviewed—said “the amount of this one-time tax is not material.”

“The variability of the data might have something to do with the ebbs and flows over the years in various retail sectors,” Perry said.

Unlike the other companies in Fortune’s Top 55, American International Group Inc. (AIG) reported an estimated $38 million “tax benefit” from the one-time deemed repatriation tax. The company said in its most recent annual and quarterly earnings reports that it calculated that amount by netting the one-time transition tax against tax credits related to applicable foreign taxes paid.

Twelve companies either said the repatriation tax was immaterial or had no impact. The amount of repatriation tax owed by two companies—Kroger Co. and Anthem Inc.—was unclear based on their financial disclosures. The companies didn’t return requests for comment.

Reinvestment Plans

While deemed repatriation can mean a high upfront tax for some companies, it’s a long-term benefit to most of them, Perry said. It allows the companies to access cash they’ve been stockpiling offshore for years at a tax rate much lower than the 35 percent they would have paid under the old regime, and they can reinvest it in ways that will help them expand their domestic operations—buying back stock or funneling the money into new U.S. plants, he said.

The new lower corporate tax rate, 21 percent, can also help offset the one-time tax expense.

It’s too early to tell how most companies will reinvest the profits they bring back, especially since some of them “haven’t even brought back the physical cash yet,” Perry said. “They’ve been subject to deemed repatriation, but there are other things they have to consider like withholding taxes and how they’re going to get the cash out of the foreign entities.”

Joe Calianno, a tax partner with BDO USA LLP, said it’s possible some corporate taxpayers will decide to keep their cash—and their business—overseas.

“I think it varies as to whether companies will actually be remitting cash,” he said. “If they’re using it for foreign operations, they may not want to bring it back. Others may want to bring the cash back to expand in the U.S. I think it really depends on their overall business plan. They could say, ‘I need that cash offshore to build a factory in Country X.’”

In the big picture, Greenberg said, companies may have significant amounts of their earnings invested in less-liquid assets overseas, such as plants and equipment, that are “not necessarily something they would repatriate.”

With assistance from Laura Davison, Lydia O'Neal, and Sony Kassam in Washington.

To contact the reporters on this story: Allyson Versprille in Washington at aversprille@bloombergtax.com; Alison Bennett in Washington at abennett@bloombergtax.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bloombergtax.com

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