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This article was first published in the October 2018 UK edition of Accounting and Business magazine.

There are always winners and losers when tax systems are reformed, and inevitably these are now beginning to emerge as we approach the first anniversary of the 2017 Tax Cuts and Jobs Act in the US. One of US President Donald Trump’s flagship policies, it is one of the few he has been able to implement successfully.

Signed into law in December 2017, the act marks one of the most radical shake-ups of the US tax system in a generation. It makes significant amendments to the Internal Revenue Code of 1986 – the domestic element of federal statutory tax law. As well as cutting tax rates for individuals, the act took an axe to the corporate tax rate, chopping it from 35%, one of the highest rates among the G20 countries, to a far more palatable (for large corporations) 21%.

The new US corporation tax regime it ushered in also operates on a territorial basis, while a one-off 15.5% rate served as an incentive for US groups to repatriate cash held overseas.

Senior corporate executives appear bullish about the ultimate impact the tax reforms will have and are beginning to indicate how they will redeploy the cash they expect to save through investments in a number of different areas of their businesses. The headline figure from a recent study by PwC reveals that nearly eight out of 10 executives reckon the tax reform savings will give them the chance to make strategic investments that would not have been possible under the previous regime. And nine out of 10 say their company has experienced savings as a result of tax reform.

Deniz Caglar, cost transformation principal at consultancy PwC Strategy&, says: ‘Executives across companies have taken stock of the implications of the tax reform for their companies and are now looking to invest in a range of areas.’

The most popular area for investment appears to be the workforce, through job creation, wage rises and higher pension contributions. The executives also say they are focusing on strategy, digital capabilities, research and development, mergers and acquisitions and product development.

Stateside attractions

But the most telling result may be that an overwhelming majority believe the tax cuts package has made the US more attractive for their company’s business, with one-third saying they are likely to make geographic changes as a direct result. According to BDO, organisations can expect to feel the impact of tax reform differently according to the industry they are in, their legal structure, capital structure, geography, business objectives and other details.

The firm says that businesses will need to look carefully at the tax code to decide where wins, losses and opportunities may lie, and model how the ‘butterfly effect’ of change may affect their company.

Matthew Becker, managing partner of BDO’s US national tax office, says: ‘Given the complexities of domestic and global tax regimes, seemingly small changes in business approach can have wide-reaching consequences for the various tax liabilities of a business. Examining a company’s total tax liability by considering all its various tax dynamics is now a necessity for businesses looking to survive and thrive during this time of intense change.’

The results of the corporate tax cuts are now beginning to emerge as US companies report the impact the tax will have in their financial filings. The results may raise a few eyebrows – this is where the effects of the tax reforms are creating winners and losers.

Net loss

According to the Financial Times, 61 of the top 100 quoted companies in the US have reported an initial net income expense, adding up to US$168bn. The other 39 corporates have reported one-off net tax benefits totalling US$150bn. As the FT points out, this means that the biggest overhaul of the US tax code in 30 years has ended up cutting US$18bn from the current book value of its leading companies.

How is this so, and does it matter in the long run? The reason why so many companies are now declaring a tax hit is that the Tax Cuts and Jobs Act didn’t just cut the headline rate of corporate tax, it also upped the rate paid by companies with high foreign earnings in low-tax jurisdictions through a tax on global intangible low-tax income.

There was also a one-off levy on past profits held offshore. Microsoft, having generated foreign earnings of US$128bn from years of offshore activity, took a US$13.8bn hit, while Citigroup reported a US$22bn net expense – not that this will worry the financial giant, as it anticipates its effective tax rate falling from 31% to 24%, with a sharp increase in earnings in the future as a result.

On the other hand, Warren Buffett’s company Berkshire Hathaway reported it has already benefited by US$29bn. As the Sage of Omaha put it: ‘A large proportion of our [US$65.3bn] gain did not come from anything we accomplished at Berkshire. Only US$36bn came from Berkshire’s operations. The remaining US$29bn was delivered to us in December when Congress rewrote the US tax code.’ Buffett stressed that the gain ‘is nonetheless real, rest assured of that’.

It remains to be seen how real the estimated net tax reduction of US$1.45 trillion over 10 years will be. US companies, though, will be expected to use the windfall wisely. As PwC’s value chain transformation leader John Ranke says: ‘The Tax Cuts and Jobs Act demanded executives’ immediate attention. That attention must now be placed on how the investment of those savings provides a long-term competitive advantage. The future of their business may depend on it.’

Philip Smith, journalist