Goldman Sachs expects $5 billion hit from tax overhaul in 4Q

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange. (Reuters)
Updated 29 December 2017
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Goldman Sachs expects $5 billion hit from tax overhaul in 4Q

NEW YORK: Goldman Sachs expects to take a $5 billion hit to profits for the fourth quarter and year because of the tax overhaul signed into law last week.
As a result, the New York bank will likely report a loss for the last quarter of 2017. But Goldman and other banks will be among the largest beneficiaries of the new tax code.
Goldman on Friday became one of the first companies to release details on how changes in the tax code will affect how money parked overseas is handled. The bank said two-thirds of the $5 billion is related to changes in repatriation taxes, when funds are returned from overseas.
The new tax overhaul imposes a discounted one-time levy on overseas money returned to the US — 15.5 percent for earnings held in cash or other liquid assets and 8 percent for earnings held in harder-to-sell assets. Previously, companies had to pay a 35 percent corporate tax when they returned that money, so they left it parked overseas.
It has been expected that changes in the law would prompt many companies to return money to the US, potentially $2.5 trillion or more. Keefe Bruyette & Woods analyst Brian Kleinhanzl estimated that the repatriation part of Goldman’s charge equates to an 11 percent tax rate, based on the $32.6 billion in undistributed foreign earnings Goldman had at the end of 2016.
Goldman had been expected to post fourth-quarter net income of $2.07 billion, according to banking analysts polled by FactSet. The bank reports earnings in mid-January.
After taking a hit on repatriated earns, Goldman, and other banks, will operate in a much more favorable tax environment.
The tax measure signed into law by President Donald Trump this month spreads benefits across a wide array of American industry, including banks.
Finance and insurance companies would have paid an effective corporate tax rate of 26.1 percent next year. Now, it will be 14.3 percent. Analysts at Goldman Sachs have estimated that the tax law will boost big-bank earnings per share by 13 percent next year. The top beneficiary will be Wells Fargo, which has been dogged by scandals over cheating customers. It will enjoy an 18 percent earnings surge in 2018, Goldman estimates.
Economists believe the overall effect on the economy will be muted, however, because of those cuts to the US corporate tax rate.
Historically, repatriated profits have not had a broad effect on the US economy anyway.
A 2004 law temporarily cut taxes on repatriated profits to 5.25 percent, from 35 percent. That led 843 companies to bring back $312 billion. But those companies tended to use the money to buy back shares of their own stock, not to hire or expand operations.
Goldman also said part of the reduction to fourth-quarter earnings comes from recalculating the value of it deferred tax assets. Those are past losses that companies can use to lower future tax bills. Goldman and other banks suffered huge losses during the financial crisis. Those assets will now have less value because of the lower corporate tax rate.
The effect of the tax changes on Goldman Sachs was revealed in a filing with the US Securities and Exchange Commission early on Friday.
The company did not say how changes in the tax law would affect its decisions on investments going forward, and did not immediately return messages left early Friday.
Shares of Goldman Sachs Group Inc. fell 1 percent to $254 in early trading.


INTERVIEW: MENA partner at EY Matthew Branson lays out economic benefits of UAE’s ‘Expo effect’

Updated 21 April 2019
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INTERVIEW: MENA partner at EY Matthew Branson lays out economic benefits of UAE’s ‘Expo effect’

  • A total investment of 40.1 billion dirhams will create more than 900,000 “job years” at Dubai Expo 2020
  • In 18 months’ time the doors will open on the event

DUBAI: "I’m having a fairly busy life at the moment," said Matthew Benson, a partner covering the Middle East and North Africa at auditing and consulting firm EY.
He had just presented the findings of a two-year-long study into one of the most high-profile events in the near half-century history of the UAE — the looming Expo 2020 trade fair that the country, and Dubai in particular, expects will be an economic and developmental game-changer.
“I think it’s going to be an amazing event,” Benson said, a couple of days after he had unveiled his report and had had time to assess reactions to the heavily researched work.
The headline findings were eye-catching, confirming that the UAE would get huge economic benefit from the event. Dubai won the right to stage the show back in 2013, to much fanfare, and the clock has been counting down ever since.
In 18 months’ time the doors will open on the event, which has been called the biggest gathering in the history of the Arab people. Some 25 million visits are expected to be made to the site in south Dubai, putting the UAE even more firmly on the map as a global destination.
The report by EY — formerly known as Ernst & Young — was commissioned by the organizers of the show to analyze the financial and economic benefits of the event, and confidently concluded that the Expo would indeed be a step-change in the country’s history.
In the 17-year period since the event was won up until 2031 — a decade after it closes its doors — EY found that some 122.6 billion dirhams ($33.4 billion) of gross value will be added to the UAE economy. At its peak, the Expo’s contribution will be equivalent to 1.5 percent of the UAE’s annual GDP.
A total investment of 40.1 billion dirhams will create more than 900,000 “job years” — nearly 50,000 new jobs per year — and leave the permanent legacy of a brand new mini-city between Dubai and the capital Abu Dhabi. The city, dubbed “District 2020,” will be a mixed-use conurbation with offices, residential, exhibition space and leisure facilities.
“It’ll be a new city south of Dubai, and the economic benefit will go on long beyond that time frame (2031) as well … You might get more economic benefit but that has not been included in this model,” said Benson.

What the UAE has done is they had a vision and knew that (they) had to do something bold. 

Matthew Benson

However, some skeptics have argued that those benefits are not guaranteed. They point to the ambitious figure for visits — 25 million in a six-month period, with the Dubai government forecasting 20 million tourists per annum by 2020.
A viable “legacy” — a challenge faced by other Expos and big events such as the Olympics and FIFA World Cup — is not assured, the critics argue.
In addition, they point to EY’s reliance on official statistics to reach its conclusions, rather than building in other data and scenarios.
Benson, who has been working for the firm since 2013 as head of “transactional diligence” for the MENA region — rebutted those criticisms in detail.
“(The report) focuses on the impact of Expo 2020 and not on the development of the wider economy. So it’s maybe a fine distinction, but it’s based on a set of assumptions around Expo and how that would impact the economy.
“This is a forward-looking study. Really we focused on Expo and where that fits in the wider economy. It’s a macroeconomic model focusing on the incremental effects only, so it’s about what Expo has brought to the economy. It doesn’t focus on other investments that are happening. If Expo didn’t happen, this economic impact wouldn’t happen either,” he explained.
He clarified that the study — based on data from the Expo organizers and several other Dubai government departments like the transport and tourism authorities and official statistics department — is not a cost-benefit analysis of the event, weighing financial gains and returns.
“There are certain other questions that (the report) does not answer and which are not part of the aim of the study. he said.
In the early phase of the Expo project — which is currently nearing completion — the EY team expects a big boost to the UAE’s construction industry, the so-called “Expo effect,” in the UAE’s otherwise sluggish economy. “There are people working on the construction site and the Expo is happening. The impact is there. There are multiple effects going on, maybe counterbalancing the effect or maybe increasing it. Economies go through cycles over time as well,” Benson said.
When the event is up and running, the benefit will come from the spending by visitors at the site as well as in the wider Dubai economy, and also through the multiplier effect of employees specially engaged for the event.
When the curtain falls in April 2021, the Expo site will transform into District 2020, with its own internal economy. Two multinationals — German engineering giant Siemens and consultancy Accenture — have already said they will set up there, and Benson expects others to follow. The Dubai Exhibition Center will give the emirate even more capacity for the big forums and conferences, in which it is already a regional market leader.

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BIO

BORN

•Chichester, Sussex, UK, 1973

EDUCATION

•University of Bristol, mathematics

•Duke’s Fuqua School of Business, North Carolina, US

•Goethe Business School, Frankfurt, Germany

CAREER

•With EY since graduation, working in UK, Germany and Dubai

•Currently partner and transactional diligence leaderfor MENA

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The site will be “repurposed” — made ready for its long-term role — but that will not involve knocking down or removing many of the extravagant pavilions and facilities currently in place or under construction. The “construction” element of the final phase is relatively small, at 1.2 billion dirhams out of a total economic impact of 62 billion dirhams, Benson said.
In the detailed technical report which accompanied the study, EY set out the assumptions on which its findings are based. Some look optimistic, others not.
For example, a projected figure of 1.5 million local and 1.1 million international visitors for the new exhibition center, and that 55 percent of the center’s total available area will be used, look like conservative calculations in the legacy phase.
On the other hand, an 85 percent occupancy for offices, retail and food and beverage developments, in a city already bulging with such facilities, looks ambitious, as does a projected 80 percent occupancy for hotels in an already hospitality-rich environment.
And who can say with any certainty that local visitors — who make up the bulk of the total projected visitor numbers — will really stay an average of 2.4 days at the Expo, or that international visitors will visit for five days?
Similarly, the EY report says with certainty that “all Expo 2020 assets are assumed to be sold off” by the end of the event, but that forecast is surely subject to market vagaries.
Are the findings of the EY report too optimistic? “I don’t really have a view on whether they’re optimistic or not. I’d rather say they’re based on a set of assumptions as presented, and they have been modeled through,” said Benson.
Did the EY team look at the track record of previous Expos? “We haven’t focused on comparing this directly with those, on the basis that this is the first in this part of the world. Previous ones were in more mature parts of the world. For example Shanghai in 2010 was a much bigger economy,” Benson explained.
The report was also criticized for being based only on “best case scenario” figures prepared by the government, with no alternative factors — such as geopolitical or economic volatility — modeled through.
“It’s difficult to say what’s ‘best case’ and what’s not. This is all forward-looking and there’s no real range on outcomes. This is in the middle of what you’d expect to happen — it could be higher than this, it could be lower than this. The assumptions are set out as best we can. We have not assumed any real variation in the economic outlook. We haven’t taken a view on the UAE economy or the global economy. It’s based on today,” Benson said.
He did allow, however, that economic fluctuations might affect the outcome, although EY economists did not model these factors in preparing the report.
Benson, who spends a lot of time in Saudi Arabia as part of the EY team advising on various aspects of policymaking, believes that the Kingdom can learn and benefit from the Expo experience as it gets on with its own program of big events and projects.
“I think there’s a lot that Saudi Arabia is doing really well, but one can always learn. Saudi Arabia is already doing big projects and events. NEOM is one, but there are others like Formula E, the recent golf event and others. They’re much shorter than a six-month event like Expo. But they’re already doing quite a lot,” he said.
Benson expects the Expo will permanently change the way the world looks at the Middle East.
“What the UAE has done is they had a vision and knew that (they) had to do something bold,” he said. “It’s not just organic, it’s a big splash, a big push. It’s consistent with their vision to do something profound for Dubai.”