GE is a rare loser from US tax reform
While many US companies are working out how to spend the windfalls they expect from the tax reform passed at the end of last year, General Electric is facing the opposite prospect: it is expecting a rising tax rate over the next few years.
Reporting earnings for the fourth quarter of 2017 last week, GE forecast its percentage tax rate to be in the mid to high teens this year and next, and in the low to mid-20s in the long term. That compares with a tax rate of 14 per cent in 2015 and 9 per cent in 2016 for the industrial operations that are the continuing core of the company now it has shed most of its financial services businesses.
GE’s tax department, employing hundreds of accountants and lawyers, has long been acknowledged as one of the most effective in US business, for years keeping the group’s tax charges well below the main corporate rate of 35 per cent. Other companies have sought to emulate its success.
But the Tax Cuts and Jobs Act, signed into law by President Donald Trump on December 22, is expected to wipe out much of the advantage that GE has enjoyed.
The rising tax rate represents another headwind for John Flannery, the new chief executive who took over last August, as he attempts to turn round the troubled industrial group.
Businesses are still working through the full implications of the tax changes, but it already seems likely that GE will be worse off. That outlook contrasts with the position for other US manufacturers such as Honeywell, which on Friday revised up its projected earnings for 2018 because it expected a lower tax rate.
The reform package cut the main rate of US corporate tax to 21 per cent, but also put limits on international companies’ ability to make use of credits and losses. A new minimum tax on “global intangible low-taxed income”, levied on the earnings of the foreign subsidiaries of US groups, will make it harder to reduce charges by shifting profits to lower-tax jurisdictions. Another new measure, the “base erosion anti-abuse tax”, limits companies’ ability to take advantage of tax credits.
Jamie Miller, GE’s chief financial officer, told analysts on a call last week that the company’s effective tax rate was expected to rise because it would be less able to use credits and losses to cut its payments.
The company took a charge of $3.5bn for the fourth quarter as a result of the US tax overhaul, including $2.2bn for the reduced value of credits and losses, and $1.2bn for a new tax charged on past foreign earnings.
GE conducted a radical shake-up of its tax planning unit, sometimes referred to as “the Harvard of tax departments”, just last year. In April, 600 of the group’s tax professionals moved to PwC, the accountancy and consulting group, where they will continue to work for GE, but also for other companies.
Mike Gosk, GE’s senior tax counsel, said at the time that other clients of PwC would have the opportunity to “tap into the world’s best tax team”.
GE’s group tax rate has been low thanks in part to accumulated losses in GE Capital, the financial services division, following the crisis of 2007-09, but it was paying less than the 35 per cent headline rate for years before then.
Jeff Immelt, the previous chief executive, acknowledged in 2016 after Mr Trump was elected that tax reform could have adverse consequences for GE, but said he saw opportunities in the proposals put forward by Kevin Brady, the Republican chairman of the ways and means committee in the House of Representatives. Mr Brady’s plan would have helped companies such as GE that export from the US, but it was abandoned by Republicans last summer after opposition from retailers.
Ms Miller said last week that in spite of the adverse direct impact of the tax overhaul on GE, the group still saw it overall as “a real positive for US companies”.
She added that she did not expect GE to be repatriating a large amount of cash to the US as a result of the tax reform, because the group’s foreign earnings were mostly reinvested into its businesses overseas.
GE is not the only US company that expects to pay a higher tax rate under the new system. IBM reported a 12 per cent tax rate for last year, excluding one-off items, and said it expected to pay 14-18 per cent on the same basis this year.
Eaton, the electrical products manufacturing group that relocated its headquarters to Ireland after buying Cooper Industries in an “inversion” deal in 2012, has also said it expects to face a higher tax rate.