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Tax reform: 'Lingering uncertainty' keeps media CEOs cautious

President Donald Trump is turning his attention toward tax reform, an issue that stands to have a major impact on companies in the media sector. Prior to the election, Trump pledged to cut the corporate tax rate to 15%, down from the current statutory rate of 35%. An alternative proposal put forward by House Republican leadership called for a 20% corporate tax rate. Several of the largest players in the media space including Walt Disney Co., Liberty Media Corp. and Nielsen Holdings — will pay 2016 effective tax rates close to or above the current 35% statutory rate, making tax reform an important and appealing prospect.

Many media executives, who have complained of being burdened by effective tax rates at or near 35%, are eager for tax reform to free up capital and alleviate the need for tax-saving financial acrobatics.

Liberty Media President and CEO Greg Maffei, for instance, recently told investors that the chatter around lowering the corporate tax rate "does change our perspective or make us think" about how the company might structure deals going forward.

Liberty Media, led by company Chairman John Malone, has cultivated a reputation for engineering complex and tax-efficient transactions, using spinoffs, tracking stocks and Reverse Morris Trusts. This makes tax reform an area of particular importance for Liberty Media.

Similarly, Six Flags Entertainment Corp. had until recently been weighing whether to convert to a real estate investment trust, or REIT, which is a corporation that qualifies for special treatment for U.S. federal income tax purposes because, among other things, it derives most of its income from real estate-based sources. On March 30, though, Six Flags said it would not pursue a REIT structure, saying it would not be in the best interests of its shareholders.

Six Flags executives had hinted in February that the potential for tax reform could sway their decision on whether to move forward on the complicated and time-consuming conversion.

But while the decision from Six Flags seems to indicate a degree of bullishness about tax reform, Liberty Media's Maffei said it will likely be some time before any changes to the tax code are signed into law.

"I'm not as certain as I was that tax reform is going to come in in the near term," he said in March, pointing to the border adjustment tax proposal in the "A Better Way" blueprint backed by House Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Rep. Kevin Brady, R-Texas. The border tax would be applied to goods manufactured overseas and would aim to limit American imports while encouraging American exports.

Opponents of the border tax warn that it could distort supply and demand, ultimately raising prices for U.S. consumers. Additionally, it may violate a World Trade Organization "national treatment" clause that prohibits favoring domestically produced goods over imports.

"I think the border adjustment tax looks like it has got a lot of hair on it," Maffei said, adding that he also believes there will be a "big fight" over whether any tax cuts need to be balanced with new revenue.

U.S. Treasury Secretary Steven Mnuchin has said he would like to see a deal with congressional Republicans on tax policy before the August recess, but Maffei said that deadline seemed overly ambitious.

Liberty Media reported an effective tax rate for 2016 of 34.9%, very close to the federal statutory rate of 35%.

Companies report their effective tax rate as a calculated figure that includes federal, state, local and foreign taxes. In some cases, it can be higher than the 35% federal statutory rate, as state taxes typically add a few percentage points, while lower foreign tax rates can drive the overall figure down.

Looking at the 15 largest U.S.-based publicly traded media companies, as ranked by market cap, six of them — Walt Disney, Omnicom Group Inc., Liberty Media, Nielsen, Scripps Networks Interactive Inc. and Liberty Interactive Corp. — reported a 2016 effective tax rate above 30%.

Meanwhile, a number of other major names in the media space — including Time Warner Inc., 21st Century Fox Inc., CBS Corp. and Viacom Inc. — were able to get their effective tax rates below 30%, largely due to earnings from non-U.S. entities and from beneficial tax rulings from the Internal Revenue Service regarding the accounting for film and television cost amortization.

Of the 15 companies considered, Lamar Advertising Co. had the lowest effective tax rate at 4.3%, largely due to its status as a REIT.

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