The new tax law, passed by Congress and signed by President Trump before the end of last year, has set off a bonanza in investments, acquisitions and operations extensions for companies as we go further into the new year. The slashing of the corporate tax rate from 35 percent to 21 percent, in other words a 14 percent cut, will be enormously beneficial for U.S. business over the long run. As has been well publicized, Apple has decided to bring $252 billion of its assets held overseas back to the United States, while companies like Verizon, more quietly, are planning to use the new law to pay down their debts, donate to charity and give stock to employees.
There will be new, unforeseen levels of profits and opportunities to make them. The Wall Street Journal noted that companies in the S&P 500 stand to see profits rise by 7–8 percent as a result of the law. At the same time, its long-term impact on investment and the economy generally remains unclear. And any new tax law, even a massive tax cut, will send business scrambling. Amendments to statements in light of new tax policy must be made within the first quarter of the year that it becomes law. Essentially, businesses now have less than two months to catch up. For those businesses, like Apple, that want to repatriate their cash, this means having to go through 30 years of statements (since the last major tax law) to provide investors with a number for their savings in the next earnings report.
The policy will affect entities of all sizes. Many businesses are considering how to restructure so they can make the most of the potential advantages the law now allows them. This post is to highlight the most significant of these advantages — for entities of any size.
Repatriation of AssetsWith the new law, companies in any industry from software to pharmaceuticals are looking at how they can benefit by re-investing their assets in the United States. The tax bill allows business a single opportunity to repatriate assets at a significantly lower rate than previously available. Companies repatriating their assets will pay a one-time 15.5 percent tax on cash holdings and an 8 percent tax on illiquid holdings — much lower even than the new rate for assets that were already in the United States.
For a massive company like Apple, this means a one-off $38 billion tax on the assets it’s repatriating. But that cost for Apple and others will be more than offset by the ability they have for the first time to access this cash within the United States.
Discount on Acquisitions
Another provision of the law allows companies to deduct the cost of buying some assets immediately, instead of over several years, as required by previous policy. One prominent entity to take immediate advantage of this was the catering and uniform juggernaut Aramark, which between Trump’s signature on the bill and the end of January acquired both the hotel supply firm Avendra and the linen supplier AmeriPride Services, Inc. These deals together were made for $2.35 billion, of which Aramark will now save over $490 million due to the new tax law.
New Opportunities to Invest
In keeping with President Trump’s talk on the campaign trail in 2016, the new tax law features substantial incentives for companies to reinvest assets — especially those that can create jobs — in the United States. Apple, for instance, aims to build a new campus that will generate 20,000 new jobs. While the amount of cash from the portion they repatriated that will be put toward this investment is unclear, Apple has been proactive and gotten in the good books of the Trump Administration this way.
Amicus Therapeutics, a pharmaceutical manufacturer of treatments for rare diseases, has announced that it will drop $200 million on a new production facility in the U.S., instead of in Europe, as they had been planning before the new law. Kimberly-Clark Corp., the manufacturer of Kleenex, will also spend hundreds of millions of dollars to upgrade machinery in one of its U.S. plants.
The new tax law presents tremendous new opportunities for any firm located in the United States. However, these opportunities are limited, and even ephemeral. It allows huge savings to be applied to the bottom line or to new investments. But this is a one-time gain. The new tax rate becomes the new normal, with further growth not tied to the federal government’s largesse.
It is essential in the next few months that all firms assess the ways in which they can benefit from the new tax policy and begin to restructure their operations and assets accordingly.
This doesn’t require you to reinvent the wheel. Diligent’s entity management software, part of our Governance Cloud, offers a number of elegant, effective and affordable solutions to assist with the restructuring process for firms of any size. We’re ready to help you through this transition period in any way we can. Please call or email us to discuss our solutions.
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Board directors are obligated to perform a host of varied duties and responsibilities. Diligent developed a suite of governance tools to help them fulfill their responsibilities accurately and efficiently. The Governance Cloud ecosystem of products includes:
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