By Nina Trentmann
Foreign companies are calculating whether the cost increases
they will bear under the new U.S. tax law will outweigh the
benefits of a lower corporate rate.
New measures, such as taxing large companies on payments made to
international affiliates under the Base Erosion and Anti-Abuse Tax
-- or BEAT -- are raising alarm among international companies
operating in the U.S. Meanwhile, tighter rules on the deductibility
of interest and one-time charges linked to a reduction in the value
of deferred tax assets are also sparking concern.
Foreign companies worry these moves will put them at a
competitive disadvantage.
Still, a centerpiece provision of the new tax law ushers in a
steep reduction in the U.S. corporate tax rate to 21% from 35%,
which makes doing business in the U.S. more attractive, executives
say.
Finance chief Patrick Jany is still tallying the potential bump
in tax costs for Swiss chemicals maker Clariant International Ltd.,
he said.
Companies like Clariant, that generate more than $500 million
annual revenue in the U.S. now could face new taxes on payments
they send to international affiliates under the BEAT tax.
Royalties, interest and compensation to foreign units for the
use of intellectual property rights and services could now be taxed
in the U.S. if those payments make up a big enough part of the
company's U.S. tax deductions. Previously, companies could deduct
these payments from their U.S. tax bill.
"This will add millions to our U.S. tax bill," said Mr. Jany
said, adding that the company will also write down its deferred tax
assets by more than 10 million Swiss francs ($10.4 million).
The BEAT provision has some foreign companies fuming. The U.S.
is "obviously pursuing protectionist policies" with the tax plan,
spokesman for German auto parts maker Continental AG said in an
email. These policies, including BEAT, hinder international
competition, he said.
Other foreign companies, including Chinese computer maker Lenovo
Group Ltd. and Daimler AG say they are carefully considering their
options.
"There are both sticks and carrots in the tax bill, some of
which could result in higher tax charges for U.S. subsidiaries of
international companies," said Manal Corwin, national leader of the
international tax practice at KPMG LLP (U.S.).
CFOs are also busy assessing potential one-time charges incurred
by their U.S. subsidiaries. Many of these stem from deferred
tax-assets that are worth less because of the drop in the corporate
tax rate at which these deductions will now be recognized.
Lenovo, the Chinese maker of laptops and smartphones, forecasts
a $400 million non-cash charge due to re-measuring the company's
deferred tax assets. While the company continues to assess the
impact of the new law, Lenovo believes the lower tax rate will have
a positive long-term impact on the earnings of its U.S.
operations.
"It's a very extensive and detailed bill that is still very new
so at the moment the teams are working through it to understand the
opportunities [and] changes it presents," a spokeswoman said in an
email.
Foreign companies must also measure the impact of new rules that
put a cap on the deductibility of interest. This measure will raise
costs for U.S. units of foreign companies that borrowed heavily and
deducted the interest payments from their U.S. tax bill at the old
35% tax rate, said Stef van Weeghel, global tax policy leader at
PricewaterhouseCoopers LLP.
The new law also increases the risk that U.S. investors will
divest from -- and ultimately avoid owning -- minority stakes in
certain foreign controlled corporations, said KPMG's Ms. Corwin.
Earnings from some of these structured investments could now fall
subject to U.S. taxes, she said.
But other companies predict a positive one-off impact from the
new tax rules. German automaker Daimler will record a boost of
EUR1.7 billion ($2.1 billion) for 2017 thanks to a reduction of its
net tax liabilities.
Executives at foreign firms welcomed the reduction in the U.S.
corporate tax rate, despite these challenges.
"Any tax cut is good for business" said Jane Jie Sun, CEO of
Ctrip.com International Ltd., a Shanghai-based travel firm listed
on the Nasdaq.
The lower corporate tax rate also offers operational
flexibility, said Kaarina Muurinen, CFO of Vaisala Oyi. The Finnish
industrial instruments maker could source more of its components in
the U.S. rather than import them from home now that the U.S.
corporate tax rate, at 21%, is closer to Finland's rate of 20%, she
said.
"Before, the difference in tax rates was so big," that sourcing
components from the U.S. was "unfavorable" in comparison to
importing them from Finland, Ms. Muurinen said.
Similarly, Clariant expects to broadly benefit from the drop in
the corporate tax rate despite the introduction of BEAT and other
charges. The company is keen to expand its U.S. footprint,
potentially through bolt-on-acquisitions in areas such as oil
services.
"The U.S. is becoming more competitive in comparison to other
markets," Clariant's Mr. Jany said.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
January 21, 2018 05:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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