US tax cuts reveal the huge off-shore funds held by ITC vendors

Beyond the headline social implications The Tax Cuts and Jobs Act enacted by the US government in December will have a major effect on the national balance of global IT players in the world market. Following my initial analysis, I’ve been investigating each supplier in turn as it publishes its financial results for Q4 2017. While there are still a few major vendors yet to report (HPE and Dell for instance), there’s already enough information to guess at the size of the off-shore funds being repatriated from the one-off payments the suppliers have made in Q4.

My Figure shows the changes in corporation tax made in December.

My table shows the size of the one-off payments (*or the total of those set to be paid in installments by Apple) made by the largest ITC vendors in December to the American government.

Table – repatriation payments and inferred off-shore funds – selected IT vendors

Source: ITCandor, 2018

Whether or not my calculations in calculating the inferred funds are right (I’ve made the assumption that each vendor ‘s one-off payment was 15.5% of the total), there’s been a lot at stake. This change will have a disruptive effect on the balance of global business in our market. In particular:

• For major US-centric telecoms vendors such as AT&T, Verizon and Sprint corporation tax reduction from 35% to 21% is boosting their net income.
• For global IT players (Apple, IBM, Intel, etc.) the reduction from 35% to 0% on profits made overseas allows them to repatriate profit pools typically held in off-shore tax-havens at a one-time cost of 8%, or 15.5% for cash; most by taking a financial hit in fourth quarter they will enjoy substantially higher profits in future as a result.
• Although designed to stimulate inward investment in the USA, these funds can be used for any purpose of course; I expect to see even more M&A activity of ITC players around the world as a result.
• The change will have a severely detrimental effect on off-shore funds and the countries (often very small) that allow them. It will be bad news for those countries that planned future economic growth from these funds.
• I expect to see a reaction from other governments around the world in an attempt to stem the flow of money out of their countries and regions as a result of the change in the US; 21% seems like a reasonable rate for all.
• Nevertheless US publicly listed global ITC suppliers who have succeeded in negotiating very low rates internationally will do everything they can to hold on to this advantage, not least because constitutionally their prime objective is to ‘maximize shareholder value’.

If the change reduces the overall tax paid in the US it will have a negative effect on social spending and accelerate the shift in wealth to the highest earners. It comes at a very bad time as automation begins to create massive redundancies in blue- and white-collar workforces worldwide.

US suppliers will dominate the ITC market even more than they do today as a result. I expect it will slow down the growth of Chinese suppliers and push the governments of Japan, the EU, UK to support their own global vendors in new ways. I’ll have another look at this issue once all of the US publicly listed companies among the 180 vendors I track each quarter have reported their results.