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Deutsche Bank Estimates Impact Of US Tax Reforms

by Ulrika Lomas,, Brussels

08 January 2018

Deutsche Bank has become the latest major international banking institution to announce a significant reduction in 2017 profits due to the tax reform legislation signed by United States President Donald Trump last month.

On January 5, Deutsche Bank announced that as a result of the recent enactment of the US Tax Cuts and Jobs Act (TCJA), it expects 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 has arisen due to a revaluation of its US deferred tax assets (DTAs) which reflects the reduced 21 percent US federal corporate tax rate, which took effect on January 1, 2018.

Deutsche Bank expects to record "a small full-year after-tax loss" as a result of the revaluation of its US DTAs.

However, the bank predicts that the reduction in the US corporate tax rate from 35 percent to 21 percent will decrease the bank's overall tax rate to the lower end of the previously forecast 30–35 percent range.

The bank also revealed that its analysis of the Base Erosion and Anti-Abuse Tax (BEAT) provisions of the TCJA is ongoing. However, it said 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. 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 added 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."

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 USD5bn lower.

Goldman Sachs said 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.

The remainder includes the effects of the implementation of the territorial tax system and the remeasurement of US deferred tax assets at lower enacted corporate tax rates, the bank said.

TAGS: tax | interest | banking | corporation tax | legislation | tax rates | United States | tax reform | Other | Tax

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