Corporations may dodge billions in US taxes through new loophole

A loophole in the new US tax law could allow multinational corporations such as Apple to avoid paying billions of dollars in taxes on overseas profits. (Reuters)
Updated 12 January 2018
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Corporations may dodge billions in US taxes through new loophole

WASHINGTON: A loophole in the new US tax law could allow multinational corporations like Apple to avoid paying billions of dollars in taxes on profits stashed overseas, according to experts.
Stemming from a republican overhaul of international business taxes, the loophole involves the tax rates — 15.5 percent or 8 percent — that companies must pay on $2.6 trillion in profits they are holding abroad.
By manipulating their foreign cash positions, a determining factor under the new law, a US multinational could potentially save money by shifting profits to the lower rate from the higher one, according to Stephen Shay, a senior lecturer at Harvard Law School.
The savings could amount to more than $4 billion in Apple’s case alone, he said.
An Apple spokesman declined to speak on the record about Shay’s analysis. US treasury department and internal revenue service officials did not respond to Reuters’ queries seeking comment.
“This is clearly the result of rushed legislation,” said Shay, formerly a top treasury department tax official.
The sweeping Republican tax law was president Donald Trump’s first major legislative triumph since he took office almost a year ago. Rushed through congress, and approved over the unanimous opposition of Democrats, it took effect this month, delivering tax cuts and tax code changes that large, US-based multinationals had sought for years.
One of those changes was a one-time tax break on about $2.6 trillion in profits that multinationals have socked away overseas in recent years under a “deferral” rule that let companies hold profits offshore tax-free, as long as the money was not brought into the United States, or repatriated.
There is no such deferral under the new law and accumulated overseas profits will now be taxed at either 15.5 percent for cash holdings or at 8 percent for more illiquid investments.
Both rates are far below the 35 percent rate that would have been charged on repatriated foreign profits before the law was passed, and below a new 21 percent corporate income tax rate.
To knock their taxes even lower, experts said, multinationals could have leeway to shift foreign earnings into the 8 percent tax bracket and out of the 15.5 percent bracket.
“Even before the legislation was unveiled in November, multinationals were planning to convert cash to non-cash assets, although it wasn’t entirely clear what would constitute cash for this purpose,” said Reuven Avi-Yonah, a leading tax expert at the University of Michigan law school.
The loophole that makes the bracket-shifting possible involves a formula for calculating how much foreign earnings are subject to the higher tax rate. The benchmark is a company’s foreign cash position, calculated as the greater of either the average of the past two tax years, or the cash balance at the end of the last tax year begun before Jan. 1, 2018.
Companies would pay the 15.5 percent rate on sums up to the calculated foreign cash position. Anything over that would get the 8 percent rate.
Shay said some multinationals could reduce their cash positions, and the amount of money subject to the higher rate, through legitimate distributions including dividend payments.
He estimated Apple could have as much as $289 billion in foreign cash at the end of its current fiscal year on Sept. 30. Averaged across the last two tax years, the figure would be $234 billion.
To avoid paying 15.5 percent on the higher of those two figures, he said, Apple could distribute some of its cash through dividends or other means. Reducing its 2018 position by $55 billion to the lower, two-year average would save the company more than $4 billion in taxes, according to Shay.
The new law says transactions meant principally to reduce taxes due on foreign profits can be disregarded by US tax authorities. But tax experts said this anti-abuse measure does not apply automatically and that corporate tax lawyers could argue it does not apply to legitimate corporate actions.


Saudi stocks receive landmark emerging markets upgrade from MSCI

Updated 16 min 59 sec ago
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Saudi stocks receive landmark emerging markets upgrade from MSCI

  • Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months
  • MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds

LONDON: Saudi Arabian equites are poised to attract up to $40 billion worth of foreign inflows, following a landmark decision by index provider MSCI to include the Kingdom’s stocks in its widely tracked Emerging Markets index.

"MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro forma basis a weight of approximately 2.6% of the index with 32 securities, following a two-step inclusion process," the MSCI said in a statement late on Wednesday night Riyadh time.

“Saudi Arabia’s inclusion in MSCI’s EM Index is a milestone achievement and will likely bring with it significant levels of foreign investment,” Salah Shamma, head of investment for MENA at Franklin Templeton Emerging Markets Equity, told Arab News. 

“It is a recognition of the progress Saudi Arabia has made in implementing its ambitious capital markets transformation agenda. The halo effect of such a move will be felt across the stock exchanges of the entire Gulf Cooperation Council (GCC).”

Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months to bring local capital markets more in line with international norms, including lower restrictions on international investors, and the introduction of short-selling and T+2 settlement cycles.

Such reforms prompted index provider FTSE Russell to upgrade the Kingdom to emerging market status in March, opening the country’s stocks up to billions worth of passive and active inflows from foreign investors.

MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds. The inclusion of Saudi stocks in the index, alongside FTSE Russell’s upgrade, is forecast to attract as much as $45 billion of foreign inflows from passive and active investors, according to estimates from Egyptian investment bank EFG Hermes. 

The upgrade announcement was widely expected by the region’s investment community, following a similar emerging markets upgrade announcement by fellow index provider FTSE Russell in March. 

“MSCI index inclusion will be a historic milestone for the Saudi market as it will allow for sticky institutional money to make an entry in 2019 which will help deepen the market,” said John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh.