The Deutsche Bank has announced a significant reduction in 2017 profits due to the potential impact of the recently enacted U.S tax reform legislation on its earnings.
Last Friday, the bank announced that as a result of the recent enactment of the US Tax Cuts and Jobs Act (TCJA), it expected to recognize a non-cash tax charge of approximately EUR1.5bn (USD1.8bn) in the group’s consolidated financial results for the fourth quarter 2017.
The bank explained that the loss was due to a revaluation of its US deferred tax assets (DTAs) which reflect the reduced 21 percent US federal corporate tax rate, which took effect on January 1, 2018.
While expecting to record “a small full-year after-tax loss” as a result of the revaluation of its US DTAs, the bank, however, predicted that the reduction in the US corporate tax rate from 35 percent to 21 percent would decrease the bank’s overall tax rate to the lower end of the previously forecast 30–35 percent range.
A news report by Tax-News.com indicated that the bank also revealed that its analysis of the Base Erosion and Anti-Abuse Tax (BEAT) provisions of the TCJA is ongoing, adding that it does not expect “any significant long-term impact” on the company’s tax rate as a consequence of these measures.
The BEAT is intended to penalize those companies that engage in “earnings stripping” – borrowing excessively from a foreign company or affiliate to increase their interest payments and thereby reduce their US taxable income by using the interest expense deduction.
Other banks have warned that the BEAT provisions could have a major impact on their US operations.
It would be recalled that last month, Barclays, which is also reviewing these anti-avoidance measures, suggested that they could “significantly reduce the benefit of the reduction in the statutory US federal rate.”
However, the bank stated that “due to the uncertain practical and technical application of many of these provisions, it is currently not possible to reliably estimate whether BEAT will apply and if so, how it would impact Barclays.”
Similarly, Goldman Sachs also expects to see a substantial reduction in profits as a result of the TCJA, disclosing in a recent regulatory filing with the US Securities and Exchange Commission that its fourth quarter earnings will be approximately USD 5bn lower.
Goldman Sachs stated that roughly two-thirds of this reduction is due to the TCJA’s deemed repatriation tax, under which foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and earnings held in illiquid assets are taxed at an eight percent rate.
In addition, the bank disclosed that the remainder includes the effects of the implementation of the territorial tax system and the re-measurement of US deferred tax assets at lower enacted corporate tax rates.
