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US proposed tax cuts in its impacts on Corporate profits

The US president has just announced its eagerly awaited tax reform. Since American stocks have become very expensive, it is important to question anything that may impact the earnings of listed companies. Given the importance of Wall Street for the other market places,this is more than just an US issue. At first glance, lowering corporate taxes from 35% to 20% should boost profits. Yet with the effective tax rate for listed companies so far from the theoretical rate, the reality is not nearly so black and white. Plus, we are seeing major disparities, according to business sector, the share of international sales or the size of the companies. Against this backdrop, a global view can be misleading. Ultimately, according to our calculations and estimates, only four sectors out of ten should really benefit from the decline in the tax rate: Telecom, Health Care, Consumer Discretionary and Consumer Staples. Three other sectors, Industrials, Energy and Materials, are also expected to benefit, but to a lesser extent. Finally, three sectors - Utilities, IT and Financials - are in a specific situation which means that they will not really benefit from the tax cut. There is clearly a strong relationship between the percentage of sales in the United States and the rate of taxation: the more a sector is international and the lower its tax burden is. This is particularly the case for the IT sector. As for the Utilities, this sector is very domestic (95%) but little taxed: in return for their regulated income, their possibility of deduction was hitherto very broad. Lastly, with regard to the Financials, if their average tax rate over the period 2007-2016 was close to zero (6%), this reflects the deterioration in their profitability at the beginning of the Great Financial Crisis (2008-2009) and the generation of significant deferred tax credits since then. Note that domestic stocks and small- and mid-caps should benefit from the tax cut.         

Only time will tell whether the announced tax return will make it through Congress. If the key points of the plan are upheld, the impact on listed company earnings would be more limited than it appears, given the massive gap between the theoretical corporate tax rate - 40% including local taxes - and the effective rate - 25% on average from 2007 to 2016 -  (see graph). As mentioned above, pay attention to the specificities of the sectors though.

 

2017.10.20-Fiscalité par secteur

For further details, please refer to the next monthly cross asset (November 2017), to be published next week

WANE Ibra , Strategy and Economic Research at Amundi
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US proposed tax cuts in its impacts on Corporate profits
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