US tax and the global ITC industry – digging and filling holes

In December the US made multiple changes to its tax laws as part of President Trump’s nationalistic campaign to improve investment and employment entitled the ‘Tax Cuts and Jobs Act’. Most important for the global IT and communications market is the change in corporation tax; not only in its reduction from 35% to 21%, but also in its status from a global to territorial system; meaning that multinational companies will no longer have to pay extra for their international profits. This has already led to the repatriation of international profit pools typically held in off-shore banks. My Figure shows the total net profit and profitability (net profit/revenues) of all the 180 ITC suppliers currently in the the ITCandor market model. It demonstrates a 3-4 year cycle of profit taking with peaks in 2007, 2010, 2014 and 2017-8. It means that there is currently more at stake than in the shallow years. This paper looks at the implications of this change on the global and regional markets I track.

IBM and Intel are among the few vendors who have reported their financial results for calendar Q4 2017; both have reported net losses for the quarter due to one time transition tax charges ($5.5b and $5.4b respectively) for repatriating previously untaxed foreign profits, suggesting funds of $36b and $35b respectively, based on the assumption that the payments represent 15.5% of the totals.

I’m very interested in what Apple will report next week. The Paradise Papers revealed the existence of its $252b fund of accumulated foreign profits in Jersey. It moved the money to 2 subsidiaries there when the Irish government, under pressure from the EU, stopped companies incorporated there from being considered as stateless for tax purposes. An article published by the BBC suggests that since taking advantage of Jersey’s 0% corporation tax, Apple has sold intellectual property owned by one of its Jersey subsidiaries back to an Irish one, creating a huge tax write-off in the process. This makes it unlikely, but still possible, for it to report a $20b one-time transition tax charge next week.

US changes to corporation US tax will have a positive effect on the country’s GDP and employment levels over the next few years according to its government. It may also effect other areas of the global market by:

  • Reducing the size and importance of off-shore funds, since US suppliers will no longer need to collect their international profits there as opposed to declaring them at home;
  • Reducing corporation tax levels in other countries and economic regions as they attempt to create a level playing field for their indigenous suppliers;
  • Reducing investments in international factories, offices and data centers by US companies and staff by US companies, who will find it easier than before to locate them in the US.

I believe the new nationalism being pursued by citizens of the US, UK and Catalonia are in part an attempt to redefine their countries in the wake of globalisation. Paradoxically the tax changes in the US are likely to increase the global importance of US vendors. I believe the EU should respond by actively supporting its indigenous ITC vendors before it has none left and China by strengthening its non-US international business. I’ll be able to report more when all of the publicly quoted US vendors have reported their profits of course.

In 1920 the economist Maynard Keynes wrote that we ‘should pay people to dig holes in the ground and then fill them up’. In 2018 we’re learning that it’s not much use if the country that does the digging is different from the one that does the filling!


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