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Tax Reform Costs Reach Beyond U.S. Companies

Posted on January 4, 2018 by AMANDA ATHANASIOU

British petroleum giant BP PLC has joined the ranks of multinational companies that are estimating multibillion-dollar hits to their financial statements as a result of U.S. tax reform.

While the company expects the new 21 percent corporate income tax rate, effective January 1, to favorably affect its future U.S. after-tax earnings, the reduction in the rate from 35 percent is also expected to result in a one-time charge to its income statement of approximately $1.5 billion.

The hit stems from a reevaluation of the company’s U.S. deferred tax assets and liabilities under the new rate — an exercise that has led several multinationals to announce similar charges to their financial statements recently. The noncash charge to BP’s income statement would affect the company’s fourth-quarter 2017 results, according to a January 2 press release.

In the first nine months of fiscal 2017, BP had $64,582,000 in U.S. sales and other operating revenues, compared with $125,335,000 non-U.S., according to its most recent quarterly report. During an October 31 third-quarter earnings call, the company said it expected its effective tax rate for 2017 to be over 40 percent.

The company said it’s still reviewing complex provisions in the new U.S. legislation and expects to have more details about the actual charge to its income statement when it announces its fourth-quarter results February 6.

The news follows similar announcements by U.S. companies that are attributing multibillion-dollar charges to a fall in value of deferred tax assets, many of which built up as a result of the global financial crisis. Of a $20 billion hit to the profits of Citigroup Inc., announced before the final version of legislation was passed, $16 billion to $17 billion was attributed by the company to its calculation of deferred tax assets using a 35 percent rate. Citigroup had the largest deferred tax asset balance of any public company at the end of 2016, according to MarketWatch.

Capital One, JP Morgan Chase & Co., and Canadian pharmaceutical company Valeant have also made announcements about the costs of the tax reform, including not only the new corporate rate’s effect on deferred tax asset calculations, but also the transition taxes associated with a deemed repatriation of accumulated foreign earnings, which can be paid over eight years. The final version of the tax reform bill, known informally as the Tax Cuts and Jobs Act (P.L. 115-97), set the toll charge at 8 percent on illiquid assets and 15.5 percent on liquid assets for post-1986 earnings and profits.

MarketWatch recently analyzed 15 companies with the largest deferred tax asset balances and estimated that after Citigroup, General Motors, American International Group, Bank of America, and Federal Home Loan Banks would take the largest profit hits as a result of a reduction in the corporate rate to 21 percent. Those companies are followed, in order, by Ford Motor Company, Lockheed Martin, IBM, and Morgan Stanley. Citigroup, IBM, and JP Morgan Chase & Co. have also been identified as among the Fortune 500 companies with the largest stockpiles of offshore earnings.