MNCs may take a hit from trio of taxes in House Bill

US multinationals including Apple and General Electric are suddenly looking at as many as three new taxes — estimated to raise $454.1 billion over a decade — under the House tax bill released Thursday.

For some, their tax rates may wind up higher than they are now, experts say.

First, companies would no longer be able to escape US taxes on what a Goldman Sachs research note estimated to be $3.1 trillion in earnings that they have stockpiled offshore for years. Those earnings would be taxed at rates as high as 12 per cent and would generate an estimated $223 billion. Firms would have eight years to pay.

The largest stockpiles belong to Apple at $252.3 billion, followed by Microsoft, Cisco Systems, Alphabet, Oracle and Johnson & Johnson, according to data compiled by Bloomberg.

“We’ve always been a very strong advocate for comprehensive corporate tax reform,” Apple Chief Financial Officer Luca Maestri said in a telephone interview. “We will need to see what legislation is enacted.”

The 12 per cent rate is a break — the current tax rate for corporations is 35 per cent — but it’s still on the “borderline of being business unfriendly,” said Steven Englander, head of research and strategy at Rafiki Capital Management. President Donald Trump had proposed a top rate of 10 per cent on stockpiled offshore earnings. House Speaker Paul Ryan pitched 8.75 per cent.

“It’s not a game changer, but the changing tone is a disappointment,” Englander said. “It’s gone from the way forward for the tax system to a piggy bank to pay for the tax cuts.”

Two other new taxes may be more controversial. One would apply to royalty payments or other payments for “costs of goods sold” that a US company makes to its related foreign subsidiaries or parents. Interest payments wouldn’t be included. Another would hit US companies that receive “high returns” from foreign subsidiaries. Combined, they’d raise an estimated $231 billion over 10 years, according to Congress’s Joint Committee on Taxation.

Under those new taxes, some high-margin businesses “will have a higher tax rate,” said Manal Corwin, the national leader of the international tax practice at KPMG.

“It’s going to be hard for people to absorb” due to the vagueness of the tax, said Corwin, a former top tax official in the US Treasury Department.

Both levies appear aimed at preventing US companies from shifting their earnings to offshore units to avoid higher US taxes. While the bill that House Republicans unveiled Wednesday would cut the US corporate tax rate to 20 per cent, there are lower rates elsewhere in the world. Ireland’s corporate tax rate, for example, is 12.5 per cent. So the new taxes are designed to shore up the domestic US tax base.

Unlike most developed countries, the US applies its corporate tax rate to companies’ global earnings, but it allows them to defer paying taxes on foreign earnings until they bring those earnings home. Before releasing the bill, GOP leaders had talked of moving the US from that global system to a “territorial” approach that would focus on domestic earnings.