Multinationals are in line for a windfall from President Donald Trump’s call to cut the tax rate on U.S. companies’ stockpiled overseas earnings, but a select few would do better than others.
Apple Inc. and Pfizer Inc. may enjoy an extra earnings bump because of their previous accounting maneuvers, while companies including Microsoft Corp., Merck & Co. Inc. and Exxon Mobil Corp. might have to log a one-time earnings hit, data recorded in their public filings suggest.
The difference, which could mean a bookkeeping boost of as much as $7.9 billion for Apple and $5.3 billion for Pfizer, can be found on both companies’ balance sheets. Both have created multibillion-dollar “deferred tax liabilities” to reflect the U.S. taxes they expect to owe on their accumulated offshore income.
Those liabilities are based on the current U.S. corporate income tax rate of 35 percent -- but Trump and congressional Republicans have proposed slashing the rate on accumulated foreign earnings to just 10 percent or lower. If they succeed, Apple and Pfizer would be able to pay their lower-than-anticipated tax bills and then adjust their balance sheets, with one-time additions to their earnings worth billions, tax experts say.
“These companies will be happy campers,” said Bret Oliver, a tax partner at PricewaterhouseCoopers.
The bookkeeping adjustments wouldn’t be tied to actual business growth, so from an investor’s point of view, they’d drive a “lower quality” rise in earnings per share, said Ronald Graziano, a director and global accounting strategist at Credit Suisse Group AG. Still, companies that have created large tax liabilities for their offshore earnings “wouldn’t have to come up with cash” for their tax bills because they’ve already accrued for it, he said. “It’s a massive benefit.”
It’s impossible to discern the precise effect on companies -- they generally disclose only portions of their tax planning to shareholders every year. Also, it’s unclear how extensively companies could lower their U.S. repatriation taxes further by claiming credits for foreign taxes they’ve already paid on overseas income -- the congressional plan and Trump’s plan have been silent on that question.
“If the goal is to raise revenue, we would assume that they will limit the use of foreign tax credits,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center and a former Treasury tax-policy economist.
To arrive at its estimates, Bloomberg used public disclosures from a number of companies that report large offshore earnings, along with calculations endorsed by three tax and accounting specialists.
Microsoft created a relatively small deferred tax liability for its offshore income, so it may have to take a one-time earnings hit of as much as $11.7 billion for its repatriation tax bill. For Merck, the tab could be as much as $5.1 billion, and Exxon’s could be as much as $5.4 billion. A spokesman for Microsoft declined to comment, while a spokeswoman for Merck didn’t respond to emailed requests and calls for comment.