Goldman to take $5 billion earnings hit from U.S. tax law

By Aparajita Saxena

(Reuters) – Goldman Sachs Group Inc will take a $5 billion earnings hit in the fourth quarter due to a new U.S. tax law, the Wall Street bank said in a regulatory filing on Friday.

The cost relates to profit Goldman stored abroad to avoid a 35 percent corporate tax rate in the United States. The law, signed by President Donald Trump last week, encourages companies to repatriate earnings by imposing a 15.5 percent rate, which they face regardless of whether they bring the money home or not.

Banks are expected to be net winners under the Republican tax bill that will take effect on Monday, analysts said.

Numerous tax breaks for banks will be eliminated or narrowed, ranging from new restrictions on the deductibility of interest to smaller items like curbing deductions for premiums paid to the Federal Deposit Insurance Corp. However, a deep cut in the corporate income tax rate banks face – to 21 percent from 35 percent – will more than offset those hits and likely lift long-term profitability, analysts said.

Overall, multinational businesses are expected to see profits hurt by $2.8 trillion over the next few years due to one-time taxes on overseas profits. These earnings have piled up because, under existing law, U.S.-based corporations do not have to pay the corporate income tax on foreign profits that are not brought into the United States. As a result, multinationals have been storing profits overseas for many years on a tax-deferred basis.

Goldman Sachs ranks among the 50 U.S. multinationals with the most profits held abroad, according to Audit Analytics, a corporate research firm. Other banks on the firm’s top 50 list are Citigroup Inc , JPMorgan Chase & Co and Bank of America Corp .

The Republican law marked Trump’s first significant legislative victory since taking office in January. It slaps offshore holdings with a one-time tax of 8 percent on illiquid assets and 15.5 percent on cash and cash equivalents.

Analysts and investors expect repatriated earnings to be dedicated to stock buybacks and shareholder dividends. Balances due to the U.S. Treasury under the one-time tax can be paid off over eight years.

Goldman is the first major U.S. bank to detail the impact of repatriation charges. Other financial companies have disclosed hits as a result of deferred tax assets related to losses they suffered during the 2007-2009 financial crisis.

Citgroup has said it expects as much as a $20 billion charge to earnings, while Bank of America detailed a $3 billion charge to fourth-quarter profit. Big European banks including Barclays , UBS Group and Credit Suisse Group have also detailed costs from $1.3 billion to $3 billion related to U.S. tax rules.

JPMorgan Chase & Co , Wells Fargo and Morgan Stanley did not immediately respond to requests for comments.

Outside the finance sector, Apple Inc is likely to be a big beneficiary of the tax overhaul since it allows the iPhone-maker to bring back its $252.3 billion foreign cash pile at a much lower cost.

Drugmaker Amgen Inc last week said it expected to incur tax expenses of $6 billion to $6.5 billion over time as it repatriates cash.

Several other companies have also warned of a one-time loss due to the tax overhaul. For instance, Delta Airlines said it may take a hit of around $200 million to tax expense.

Goldman also said it would expedite stock grants awarded in prior years to several executives to save on tax costs. The grants are not related to 2017 compensation but were scheduled to be delivered in January.

(Reporting By Aparajita Saxena in Bengaluru; Writing by Lauren Tara LaCapra and Kevin Drawbaugh; Editing by Shounak Dasgupta and Andrew Hay)