Tax Bill’s Impact to Vary Greatly Among Sectors : Heavy Manufacturing and Real Estate Seen Hard Hit; Technology, Retailing Win

The sweeping tax bill approved by congressional negotiators over the weekend is expected to have a dramatic impact on American industry. Heavy manufacturing and many real estate developers have railed against the loss of cherished tax incentives. But retailers and technology firms, which have long felt overtaxed, generally have cheered the move to lower overall corporate tax rates. While the enthusiasm of some early corporate tax-reform advocates has waned, some opponents have found the process less painful than anticipated.

With approval of a final bill by Congressional negotiators--and expected approval next month by the full House and Senate--American business is now bracing for this massive overhaul of the nation’s tax system. Here is a look at how various industries will be affected:

Multinationals

The flexibility that U.S.-based multinational corporations now have when reporting income and tax deductions from several countries will be limited under the final tax bill.

Currently, multinationals can reduce their U.S. tax payments by the amount of taxes that they pay overseas. Because U.S. tax rates are higher than they are in many countries, some multinationals attempt to pay as much tax overseas as possible. They do this by reporting as much income overseas as they can--including not only normal company operations but also “passive income” such as interest, dividends and royalties as well.

Tax reform would force multinationals to distinguish between operating income and passive income, allowing them only to take a credit for taxes paid on the former.

By closing this loophole, international tax specialists say, lawmakers have effectively reduced the attraction of many foreign countries as a tax haven for capital investments. That should make the United States much more attractive for future investments. However, the attraction could be offset by elimination of the investment tax credit and other factors.

“The foreign provisions of the bill are a negative overall” for multinationals, observed John J. Coneys Jr., international tax partner at Price Waterhouse. “Especially, any company with losses in the United States but making money outside the United States would be hurt” by the foreign tax sections of the bill.

Like all U.S. businesses, U.S.-based multinationals will be aided by the reduction of the top business tax rate to 34% from 46%. But even that will cause tax headaches for many because they will have a difficult time fully utilizing their foreign tax credits.

Major oil companies, for example, typically have large capital investments overseas and so have large foreign tax bills. But currently they can deduct the full amount, through foreign tax credits, from their U.S. taxes.

With a sharply lower U.S. tax rate, however, many will accumulate larger foreign tax credits than their entire U.S. tax bill. The extra credit, if unused for five years, will simply be lost.

Thus, U.S.-based multinationals will focus on ways to pay less foreign tax, which could mean sharp curtailment of operations in high-tax countries and a return of some operations to the United States.

The 34% top tax rate also should make corporations “much more willing to repatriate their (overseas) capital here in the way of dividends,” Coneys said.

Likewise, multinationals based in Japan, Korea and other foreign countries already have expressed interest in exporting more goods to the United States because tax rates on U.S. income would be lower.