Goldman warns of $5-billion earnings hit from U.S. tax law

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange
FILE PHOTO: A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013. REUTERS/Brendan McDermid

December 29, 2017

By Aparajita Saxena

(Reuters) – Goldman Sachs Group Inc <GS.N> said on Friday it would take a $5 billion earnings hit in the fourth quarter for the new U.S. tax law, becoming the first major U.S. bank to detail the law’s one-time impact on corporate profits held overseas.

Set to take effect on Monday, the sweeping tax code changes enacted a week ago by President Donald Trump were expected to mean short-term pain, but long-term gain for U.S.-based corporations, like Goldman, that do business worldwide.

Like many such companies, Goldman has stored away billions of dollars in profits abroad. It did so under a law that lets multinationals avoid the present 35-percent, U.S. corporate tax rate as long as those profits did not enter the United States.

The new law encourages companies to repatriate those earnings and slaps a mandatory tax on them of 15.5 percent on cash and liquid assets, or 8 percent on illiquid assets, regardless of whether the earnings come home or not.

Scores of large companies, including other big banks such as Citigroup <C.N> and JPMorgan Chase & Co <JPM.N>, have socked away an estimated $2.8 trillion overseas in recent years. The one-time tax on those earnings is expected to raise $339 billion in federal revenues over the coming decade, according to the Joint Committee on Taxation (JCT), a nonpartisan research arm of the U.S. Congress.

That will hurt multinationals for a while, but they will have eight years to pay the taxes due. Some other tax breaks for banks will be eliminated or narrowed, under the new law, ranging from limits on deducting interest to curbs on deducting premiums paid to the Federal Deposit Insurance Corp.

Some U.S. financial companies have disclosed hits related to deferred tax assets from losses they suffered during the 2007-2009 financial crisis.

Citigroup has said it expects as much as a $20 billion charge to earnings for this, while Bank of America <BAC.N> has detailed a $3 billion charge to fourth-quarter profit.

But these negatives should be more than offset in the long run by other changes under the law, analysts said.

Foremost among these profit-enhancing changes will be a deep cut in the overall U.S. corporate income tax rate to 21 percent from 35 percent. That will cut U.S. corporations’ federal tax bills by more than $1.3 trillion over the next decade, based on JCT research.

WORLDWIDE TO TERRITORIAL

The new law will also shift U.S. corporate taxation to a “territorial” system. Under the present, “worldwide” system, Washington taxes active foreign profits, if they are repatriated, at the same rate as domestic profits.

Under the new territorial system, domestic profits will still be taxed, but profits earned abroad by U.S.-based multinationals, within some limits, will no longer be taxed.

This was expected to reduce federal tax revenues by $224 billion over a decade, the JCT estimates. A collection of new minimum and anti-base erosion taxes will offset those losses, but for the most part, the territorial system represents a major win for corporate lobbyists who have been pursuing such a change for decades.

The new law, passed by Republicans in the U.S. Congress over the united opposition of Democrats, marked Trump’s first significant legislative victory since taking office in January.

Multinationals had pushed for many years for a discounted rate on tax-deferred foreign profits. Under the Republican bill, they finally got it. Analysts expect repatriated earnings to go mostly to stock buybacks and shareholder dividends.

JPMorgan, Wells Fargo <WFC.N> and Morgan Stanley <MS.N> did not immediately respond to requests for comments.

(Reporting By Aparajita Saxena in Bengaluru; Writing by Lauren Tara LaCapra and Kevin Drawbaugh; Editing by Shounak Dasgupta and Andrew Hay)

  • Roscoe

    If businesses have more money they do more R&D and expand and create more jobs. The more people that have jobs the more state and federal taxes are collected. To a person who had no job or an Obozo created burger flipping job they can now maybe make more money. The people who invest in the companies make more money. My IRA has made over 30K since Trump was sworn in. I don’t begrudge anyone who has made more but if you have an IRA you SHOULD have made money. If I had twice as much in my IRA then I would have made twice as much. The more you put at risk in investments then the more you make. If you are safely holding bank CD’s then you make almost nothing. I am in a Vanguard fund that makes about 8% but all of my money is at risk but I only pay .5% as a yearly service fee. If you make 10% in a managed account but pay for trades and have a 2% annual service fee you probably make no more then I do. There is money for everyone in this new tax law. Take your new found money and put it in your 401K IF it is managed by another company like Vanguard, Fidelity, or T. Rowe Price and the fund makes money. If you invest new money, pay raises and tax breaks or an inheritance for instance, into more stuff and time payments when you are at retirement age you will be another loser at the end of your life. If you invest it wisely in diversified funds managed by honest managers and companies retirement can be a very nice thing. Don’t mumble or grumble what someone else makes. Take action now and save and manage your money wisely.

  • Informed

    The new tax law is not hurting these companies. It is helping them move their money back to the US for investing here. They are choosing pay these taxes. The new 21% rate should stop US multi-national companies from being forced to headquarter in other countries to survive against global competition. I would think politicians would rather have 21% of something than 35% of nothing. It will also help US only companies to compete with foreign competitors selling here too.

    I am not aware of a steep tax cut for wealthy taxpayers? Can you provide an example of a wealthy taxpayer that is due a windfall tax reduction?

    • HarryObrian

      If you take the time to find the critique and examples of the new tax cuts from Marketwatch you’ll see that the ‘rich’ get the lion’s share, percentage wise, of the rate cut. The rich average 4.5% deduction in taxes while the middle class maxs out at 1.5%. This tax cut basically pays back the rich for supporting President Trump and averages to about $1000 per week for someone making a mill a year and about $30 a week for someone making $100k a year.
      Those are real numbers but it will be a wait and see as far as your assumption about what companies will do when they allegedly bring their money back in-country. You see, in theory, that money was always available to those companies and they could have spent it in the US no matter where it was being hoarded.
      I’m a old conservative and regardless of the all the fake news I’ve never seen trickle down economics work, except for the rich.

      • WhatReallySure

        I think you are already seeing “trickle down” economics work. Businesses are giving bonuses, hiring, expanding in US. That is a direct benefit. I think the numbers cited are flawed. People making less than 24k will not pay a dime. I am saving about 3k a year on a 73k salary with three kids–from owing about 2500 in taxes to getting back 400 (net – without paying a dollar in). That is about a 125% reduction and gives me about 200 or more a month back. My guess is that people with an axe to grind include the masses that don’t even pay taxes to fudge the average since they do not get a deduction, technically, since they pay nothing.

        In a global economy we have to think globally with respect to corporate rates. All the companies bringing back money is a direct benefit that would not have been realized otherwise. Like the initial post said, 21 percent (or even 15 or 9 percent) of a lot is much better than 35 percent of a little. Just because the money is available for spending has no bearing, at all, on the benefit of being able to tax that repatriated money. They still have that option, but now they already paid into the coffer. And don’t forget about corporate double taxation scheme, which effectively jumps the actual rate paid.

        And of course the rich are going to get a higher proportion of the savings. They have way more money they work with and get taxed on, so the figure is misleading, at best, for those that can’t think it through. They pay a much higher proportionate share of taxes as it is so the benefit will also benefit them disproportionately. Nothing nefarious about it.

        • HarryObrian

          Well I hope your kids are less than 7 years out from graduating college because your tax cut expires in 7 years (now tell me about your faith they will extend it, if you vote for them). Not to mention your rich counterpart who makes 10 times what you do who doesn’t really care about taxes nor college costs yet he’s getting the lion’s share of the tax cut.
          There is no reason for these scales of tax cuts, no reason for someone making 100k to get 1.5% and someone making a mill getting 4.5%. A simple across the board 2 or 3% cut for all would have done it but that would not keep the ridiculous tax system alive as it would have tended towards a fixed rate tax. You’re being duped as usual.

          • WhatReallySure

            Arguing a policy is not good because it may end is not a very compelling argument, just so you know.
            You don’t understand a global economy. Keep higher taxes on corporate rate and then we have no money to tax… Ever notice how everything you buy is NOT made in America? That is because it is cheaper to run a business everywhere else… And the tax break will be extended because we will see the success of a lower corporate rate and people will not want to see their paychecks dwindle away to pay for those that don’t want to work. The paycheck boost will sway the needed voters to secure a GOP stronghold.
            Either way, I went to undergrad and got two degrees – one in applied math, the other in philosophy – and then graduated top of my class in law school, so I built my foundation on a rock and will support my family regardless of the tax structure. Those that don’t make a great deal of money have only themselves to blame; they should stop crying about how the government is now taking less from the rich.
            It’s a fact the rich are responsible for the economy. Others just work the jobs provided by the rich. Tax cuts for them means more jobs and more production in the USA — there is your reason, among others. Are you forgetting that those making under 24 k now pay nothing and those around that will pay next to nothing? The poor pay nothing, the rich pay a great deal… A 4.5 reduction over a smaller reduction for lower wage earners makes sense when you look at how much (proportionately) the wealthy are supposed to pay. You know tax rates get higher the more you make? This allows a greater reduction for the higher incomes while retaining a higher effective tax rate overall. Not to mention the rich take advantage of deductions that are no longer available, which will offset the numbers even more. I think you are also forgetting the fact the rich can simply hide their money and avoid being taxed at all, so a lower rate will only disincentive such moves. Just look at the huge corporations repatriating money back into the US.
            So who is being duped into thinking they should give the government more money? You liberals think you are smarter than Trump… You are all wrong. We’ve seen a stronger economy than we have in decades within the first year. You don’t agree with Trump because you don’t have the facts.

          • HarryObrian

            “We’ve seen a stronger economy than we have in decades within the first year.”
            No you haven’t, you’ve been told you have by the people you want to listen to and believe. Your self-appreciation is getting in the way of reality, just ask your daddy.

          • WhatReallySure

            The bar was easy for me–studied half the time of others and got a 230 on the MBE and finished the multiple choice in half the time allowed (the highest state requirement is 185). Licensed in two states and now work for the federal judiciary deciding cases. Graduated third in my class while providing for a family. Call yourself what you want, but baseless attempts to attack a person because of their position while failing to actually address the points raised is a liberal move. Fail # 1.

            Your argument ignores reality. There is a clear boost in the economy and manufacturing jobs. Nearly everyone that has a job and a brain knows it. GDP is up. Stocks are up. Spending is up. Consumer confidence is up. House sales are up. Unemployment is low. Minimum wage is up. Companies are opening plants in USA. China is now offering tax incentives to stop companies from moving back to USA. The market for legal jobs alone shows the dramatic difference. Eight years ago lawyers were lucky to get a job. Now, there are good jobs everywhere. Fail # 2.

    • All American

      America First🇺🇸MAGA MASA MAAA🇺🇸

    • All American

      America First🇺🇸MAGA MASA MAAA🇺🇸