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U.S. Tax Reform: Why Lower Corporate Tax Rates Might Not Lower Some Companies' Tax Burden

One of the most important provisions in the proposed overhaul of the U.S. tax code now before Congress is the reduction in the statutory corporate tax rate. The effective date of that rate cut hasn't been finalized, although the Trump Administration, the House, and Senate would like to see this rate at 20% of profits, instead of the current 35%. Yet how much a corporation actually incurs as tax expense--its effective tax rate rather than the statutory one--is often less than 35%, thanks to a variety of corporate tax deductions and deferrals. S&P Global Ratings' analysis indicates that many companies in certain sectors would have very little impact on effective tax rates from the lower statutory tax rates primarily due to the offset of deductions they get today.

We find that at many companies with strong domestic earnings the effective tax rate would ultimately fall under the impact of a lower statutory rate. However, when we look at potentially lower statutory rates in conjunction with critical proposed changes in how the U.S. government taxes foreign earnings, we find that companies with significant offshore earnings--notably those in the technology and healthcare industries--are likely to see little change in their effective tax rates from lower corporate tax rates alone.

Overview

  • The effective corporate tax rate, or what companies actually incur as tax expense, is more illustrative of a company's U.S. tax liabilities than the statutory rate.
  • Under a bill now before Congress, the government would generally tax U.S. companies only on their domestic profits, and the statutory rate would fall to 20% from 35%.
  • We believe that the effect would be a lower effective tax rate for companies with primarily domestic earnings.
  • Companies with large overseas earnings, however, are unlikely to see big changes in their effective tax rates.

The Proposed Tax Deal

While changes to the statutory corporate tax rate and the rules regarding taxation of foreign earnings, including repatriation of overseas earnings, are the items grabbing attention, there are other important proposals on the table that could affect how corporations do business and manage their finances, both domestically and abroad. These include changes in how corporations and which ones can take deductions for business interest and capital expenses, the tax treatment of operating losses, and when certain changes in the tax code would become effective.

We have compared the tax provisions under current law with those in the Tax Cuts and Jobs Act, the House Committee on Ways and Means' bill published Nov. 2, 2017, as passed on Nov. 16, 2017 (House Tax Bill) and the Senate's Conceptual Bill Language (see table 1) to determine the impact these different proposals would have on the effective tax rates of U.S. corporations. We must also keep in mind that while the House Tax Bill was passed on Nov. 16, 2017, the Senate is still amending its own tax plan, with some important differences between the two. Ultimately, both the Senate and House plans must be reconciled into one bill and passed by both houses before President Trump can sign it into law.