U.S. Tax Reform to Cost BP $859 Million in Lowered Calculation

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By Ben Stupples

BP Plc has said the immediate cost of U.S. tax reform on it will be $859 million, about $640 million less than prior estimates, in a sign businesses continue to calculate the impact of the new law.

Europe’s third-largest oil company Feb. 6 issued its full-year results, revising an estimated $1.5 billion charge in a Jan. 2 statement on U.S. tax code changes.

The 2017 U.S. tax act ( Pub. L. No. 115-97) is forcing multinational businesses to reassess their balance sheets after it lowered the U.S. corporate tax rate to 21 percent from 35 percent. In the short term, companies can either benefit or suffer from a change in the value of their carried-forward U.S. taxes. All businesses will eventually benefit, though, from the lower headline corporate tax rate.

BP’s disclosure of its 2017 results makes it the first company listed on the U.K.’s benchmark FTSE 100 stock index to issue a reassessed figure on the impact of U.S. reform on its deferred taxes.

A spokeswoman for London-based BP told Bloomberg Tax in a Feb. 6 email that the company had “refined” the short-term impact of the U.S. tax reform on its balance sheet after “further assessment.”

Mixed Bag

Like BP, rival businesses Royal Dutch Shell Plc issued an early warning on the initial cost of U.S. tax reform. In a Dec. 27 statement, Europe’s largest oil company said the new code may cost it as much as $2.5 billion. Barclays Plc similarly said on the same day it faces a charge of around $1 billion pounds ($1.4 billion).

Since then, though, several FTSE 100 business have said that U.S. reform will give them a short-term boost. Most recently, energy network-manager National Grid said Feb. 2 it will have a one-off tax credit of $2 billion from the law. Anglo-Dutch consumer-product giant Unilever N.V. said Feb. 1 in its full-year results that it would have a benefit of 578 million euros ($712.4 million).

The fluctuation in fortune for the U.K.’s largest multinationals is due to whether they have carried-forward tax liabilities or carried-forward tax assets in the U.S. Any reduction in the U.S. corporate tax rate will lower the value of companies’ deferred tax liabilities and thus boost their balance sheet.

Malcolm Joy, a London-based international tax partner at the global accounting firm BDO UK, told Bloomberg Tax Feb. 1 he expected U.K. companies with U.S. subsidiaries to have deferred tax liabilities more often than deferred tax assets.

“For accounting purposes, you tend to recognize deferred tax liabilities as soon as you know of them, while with assets you don’t usually recognize them until they’ve definitely come in,” Joy said. “Companies with deferred tax assets will be hit in the short term by the lower corporation tax rate, but they will certainly benefit from it over the long-term.”

U.S. Key Market

The U.S. is a key market for BP, accounting for 35.6 percent of its total revenue in 2016.

In a Feb. 6 call with analysts following BP’s latest results, Chief Executive Officer Bob Dudley said that the lower corporation tax rates will see the business increase its activity in the country.

The lower headline rate in the U.S. “is, of course, of enormous to value business in many ways,” Dudley said. “It’s important for us. There’s no doubt we’ll increase investments.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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