U.S. Tax Reform Offsets Cost of OECD Project to Curb Avoidance

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By Ben Stupples

U.S. tax reform is counteracting the higher costs that multinational companies are facing from the OECD’s project to quash tax avoidance, according to an analysis of corporate filings by Bloomberg Tax.

Compass Group Plc, the world’s largest catering company, and U.S. medical device maker ResMed Inc. have cited higher corporate tax rates in earnings calls with analysts due to the Organization for Economic Cooperation and Development’s 15-action project to stop abusive tax planning.

In a Jan. 22 statement, though, Compass Group said that the new U.S. tax code will cut its effective tax rate by 2.5 percent. ResMed Chief Financial Officer Brett Sandercock, meanwhile, said in a Jan. 21 earnings call the new U.S. tax code will lower the company’s effective tax rate largely due to how it will have “far more flexibility to repatriate cash back to the U.S. at little or no tax cost.”

The 2017 U.S. tax act ( Pub. L. No. 115-97) is forcing businesses to reassess their finances after it cut the U.S. corporate tax rate to 21 percent from 35 percent. In addition, businesses can bring cash piles they have built up overseas back to the U.S. if they pay a one-time 15.5 percent levy.

San Diego, Calif.-based ResMed, a member of the Standard & Poor’s 500 stock index, “will be able to more effectively utilize our strong global cash flows to invest in growth opportunities and undertake capital management activities” due to the new U.S. laws, Sandercock said Jan. 21.

$240 Billion

The tax changes in the U.S. come as countries across the globe introduce new laws that stem from the OECD’s Base Erosion and Profit Shifting, or BEPS, project.

As part of the BEPS project, which began in 2013, the OECD has estimated that multinationals avoid as much as $240 billion a year in tax. The United Nations said this month, meanwhile, that U.S. tax reform may lead to local multinationals bringing back $2 trillion of their overseas funds.

One BEPS measure cuts the interest businesses can offset against their tax bills to 30 percent of earnings before interest, taxes, depreciation and amortization. Debt interest is a tax-deductible expense.

In a Nov. 21 earnings call, Compass Group’s Finance Director Johnny Thompson said that BEPS-related laws had pushed up the Chertsey, England-based company’s 2017 tax rate by 1 percent.

Compass Group’s 2017 annual report, published Dec. 18, then says that the U.K. introducing limits to inter-company financing structures last year could raise its tax rate up by an extra 1 percent in 2018.

“They’re really trying to manage their tax rate here,” Heather Self, a tax partner at global accounting firm Blick Rothenberg, told Bloomberg Tax by telephone Feb. 5. “It’s going to take a while to see the full effect of BEPS, but U.S. tax reform will accelerate some of the effects immensely.”

Cross-Border Abuse

Similar to the fixed ratio for interest deductions, another BEPS measure aims to stop companies avoiding tax by exploiting mismatches in international laws through their cross-border structures.

Australia’s Treasury department sought input over its implementation of this measure to stop the abuse of these corporate structures, known as hybrids, between November and December 2017.

In last month’s earnings call, ResMed’s Sandercock said he expected the Australian government to enact the legislation in 2018 in a move that would push the company’s effective tax rate next year.

“This will impact the taxation of our transactions between Australia and the rest of our global businesses, and likely result in additional fiscal income attributable to the Australian tax jurisdiction,” he said.

Any multinational with a hybrid, which are often part of inter-group financing structures, will have to assess their cross-border tax planning due to BEPS-related legislation, Self told Bloomberg Tax.

“I think it’s really interesting that we’re starting to see comments” on the effect of BEPS, she said. “Some businesses will gradually comply, while others will hang on to their existing structures for as long as they can, and some will reassess their planning and realize they don’t have to do anything.”

Spokespeople for ResMed and Compass Group declined to comment.

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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