The US Senate pushed through a raft of changes to the corporate tax code last month, the most notable being the reduction of the corporate tax rate from 35% to 21%.
However, a series of exceptions and caveats makes the reforms more complex than they seem at first glance.
The possible benefits of the tax changes seem focused on the US government's goal to bring jobs back to the US. Although the reforms are forecast to cost the $1.3 trillion during the next decade, the hope is that economic growth will compensate for this.
Rama Variankaval, head of corporate finance advisory at JPMorgan, says these changes are the most important event to happen for corporates and capital markets in decades, but that everyone will view them differently.
“Broadly it is good, but every circumstance is different," he says. "For largely domestic companies it is good, as they will have the tax cut. But for US companies with large offshore businesses not paying significant US taxes today, it is obviously less good.”
The new rules are likely to see treasurers making some notable changes to how their cash management operations are run. Beyond the headline tax cut, there are a number of reforms that will impact cash management strategy.
Variankaval says: “Every corporate will have a specific response to the reforms depending on the structure of the company. The expectation of their shareholders, creditors and rating agencies will create different constraints.
"For some it will give them the option to invest, return to shareholders or to deleverage balance sheet.”
One senior US banker told Euromoney the reforms will see the US move towards a global tax system, as under the previous tax code corporates were taxed on offshore funds being brought onshore at the 35% rate and was often a big disincentive to repatriate funds.
Now they face a one-off rate of 15.5% for cash and 8% for less liquid assets. While still facing charges, this is a substantial reduction on the current rate.
The banker says that treasurers might use this to overhaul operations, adding: “It will provide the impetus to do a deep dive on cash management arrangements. How much cash can actually be repatriated and how much is trapped?
"Although there is nothing to fundamentally change pooling structures and cross-border sweeping, it presents the opportunity for reassessment.”
Mark Smith, global head liquidity management services at Citi, says the bank’s clients might use it to concentrate pooling structures.
“In the short term, I would anticipate many US companies will review their international liquidity investments and, depending on needs, look to repatriate the excess liquidity pools," he says.
“In the longer run, a more fundamental structural change could take place around global treasury liquidity structures, working capital and funding strategies, and potentially clients overall trading models particularly as the full impact of the interest deductions is evaluated.”
As well as rethinking where cash is held, for some companies it will bring about reviews on their plans for international expansion or mergers, particularly if it was to reduce their tax bill.
Says JPMorgan's Variankaval: “It will make the US more competitive against foreign companies. It is possible the trend for US companies looking to move overseas will end.”
However, corporates who decide to keep their cash offshore will not be heavily penalised for doing so.
Variankaval says: “The changes create a lot more freedom for the treasurer about where cash sits. It will be more fungible globally and simplifies the cash strategy.”
The US banker echoes this, explaining that clients have already been asking about how much they should repatriate, but have been told they do not need to do anything unless it is in their benefit.
He does note there are circumstances when repatriation could be advantageous, saying: “We may suggest the repatriation of cash in negative currencies, such as the euro which is charged at 40 basis points. There are also benefits to be derived from reducing volatile FX exposure through repatriation.”
Another development is the ability to write off capital investment immediately, rather than over a period of time. Previously, for example, the construction of a $100 million factory could be offset over a decade at $10 million a year, while it can now be written off in one year.
The US banker notes this will reduce the corporate tax bill, but to make it work companies will need to have the cash available to make the investment.
“Taking out loans to benefit from a tax break does not make sense,” he says.
However, with the ability to repatriate cash with the reduced tax bill, this might look like an attractive way to use the funds.
Variankaval says this is likely to play out over several years, adding: “We will have a transition period when treasurers will work on the business case for moving the cash back onshore and how to use it.”
There are still features of the reforms that need to be clarified before treasurers make their final decisions on restructuring.
Variankaval says: “There are aspects that need to be cleared up. There are lots of provisions in the international tax code and it is not completely clear how transfer pricing will be impacted.”
Although the exact details of the new rules were not finalized until December, there has been plenty of time for the institutions involved to prepare. Indeed, tax reforms were proposed under the Obama administration.
Variankaval says: “The market has been focused on the arrival of these changes for the past year. It is up to the industry as a whole, with help from banks, tax advisers and accountants, to restructure financial policies and make the most of the opportunities open to them.”
And with this in mind, despite the intention of the reforms, the US banker says the complexity of the tax code will mean there are ambiguities that will be exploited. The Trump administration’s goal of bringing funds onshore and increasing investments might not reach the desired levels.
The banker says: “The tax code has been developed in layers on top of each other over the years rather than wiping the slate clean each time, making it hugely complex. There are already loopholes emerging and the largest corporates will have an army of tax experts and lawyers looking into how to use the changes to their advantage.”