So wait: somehow due to whatever accounting wizardry IBM was using previously to calculate their numbers, with the new corporate tax law, they are saying they took a $1.9B hit to profits? I'm not a tax accountant nor a tax attorney, but seems to me IBM was likely doing some serious numbers magic and now with the new tax laws they are disallowed from performing the shady calculations.
https://www.wsj.com/articles/for-some-companies-tax-cut-gains-are-smaller-than-they-once-appeared-11549195201
With earnings season in full swing, investors are starting to learn which companies were overly optimistic about their tax cuts.
C-sino chain Las Vegas Sands Corp. has already taken a $727 million hit to its fourth-quarter profit, after a corporate tax regulation proposed in November made the 2017 tax overhaul less favorable than the company expected. International Business Machines Corp. said the same provision reduced its profit by $1.9 billion in the fourth quarter.
As more companies report year-end results in coming weeks, investors can expect more dents in more bottom lines—plus, presumably, at least a few pleasant surprises.
“There’s so many provisions still left to be decided, determined, defined that can swing numbers pretty significantly,” said Barbara Young, a Marriott International Inc. tax executive speaking on behalf of the Tax Executives Institute, an association of corporate tax directors.
The tax charges come as large publicly traded companies are reporting fourth-quarter profit and revenue growth that trails recent quarters but remains robust overall. Per-share earnings at S&P 500 companies are expected to rise 14.9% over the previous year, with revenues rising 5.9%, according to Refinitiv data that combines actual results for nearly half the index with analyst estimates for companies that haven’t reported yet. Profit growth is widely expected to slow substantially in 2019.
Investors often look past one-off charges, including adjustments companies make as they adapt to the new tax law. Still, some reflect real-world consequences of the legislation, such as losing the benefit of tax credits that could have had financial value.
At work in the latest quarter’s tax charges are accounting rules that ask companies to outpace the new law. Generally accepted accounting principles in the U.S. require companies to book the costs and benefits of new legislation immediately. But rule writers at the U.S. Treasury and Internal Revenue Service typically take months, and sometimes years, to draft and finalize regulations. The details in those rules can make a big difference in a company’s analysis of the law.
“As guidance comes out, they need to go back and look at what they originally estimated and determine whether or not it’s accurate,” said Jeffrey LeSage, Americas vice chairman of tax at KPMG LLP.
The Securities and Exchange Commission gave publicly traded companies a year from the legislation’s passage to finalize their calculations of its impact. That deadline passed Dec. 22, meaning most companies will include their final estimates with fourth-quarter results. Meantime, tax officials have at least proposed many of the regulations required by the new law, giving companies much of the insight needed to refine their original estimates of its impact.
The impact of the law’s sweeping new international-tax provisions, in particular, can vary widely depending on a company’s structure and operations.
When Las Vegas Sands reported its tax charge last week, it said most of the charge reflected the reversal of a $670 million benefit that the company claimed in early 2018. The company had booked that benefit believing the new law would let it use accumulated foreign tax credits that it previously declared unusable.
But the company, run by major Republican donor Sheldon Adelson, had booked that initial benefit based on a “technical tax interpretation,” it said in its recent earnings announcement. The company reversed that conclusion after the November regulations limited its ability to use those historical foreign tax credits, it said.
The rules essentially stop companies from using foreign tax credits generated under the old law to reduce a new minimum tax on international income that was created under the new legislation, said Steve Rosenthal, a senior fellow at the Tax Policy Center in Washington, which is run by a former Obama administration official. Mr. Rosenthal said the Treasury sensibly followed the law, but noted that Sands or other companies could still take contrary positions on tax returns and litigate the dispute.
The $1.9 billion in charges IBM took were also related to an international provision of the tax law, called
GILTI, or Global Intangible Low-Taxed Income. It imposes a minimum tax on U.S. companies’ foreign
profit. GILTI is complicated, and companies have been struggling to understand how it works and how it
interacts with pre-existing U.S. tax law.
FedEx Corp. reported a 2-cent-a-share expense in the quarter ended Nov. 30. The carrier said it reported the expense after it recalculated its deferred tax liabilities, a measure of taxes the company expects to have to pay in the future. A FedEx spokesman declined to elaborate on company disclosures.
In December, Hewlett Packard Enterprise Co. said it had incurred a $1.3 billion expense in the quarter ended Oct. 31 related to wrapping up much of its tax-overhaul calculation. That included increasing the estimate of a tax owed on past foreign profit and determining how many of its foreign tax credits it would be able to use before they expire.
The expense was one of a series of items recorded by HPE over the course of the year as it came to terms with the law’s impact. It recorded a $3.6 billion benefit early on, from reversing tax accruals the company took under previous rules governing foreign profit intended for eventual use in the U.S. It also recorded about $1 billion in expenses around the same time for the new law’s lower “transition” tax on its accumulated foreign profit. And during the course of the year, it shrank the size of future tax benefits and obligations carried on its books. All told, in the fiscal year ended Oct. 31, HPE reported a net $422 million expense for the tax law, the company’s securities filings show.
HPE has said it would complete its tax calculations in its fiscal first quarter, ending in January. “Due to the complexity involved in applying the provisions of the Tax Act, the Company has not completed the accounting,” the company wrote in its Dec. 12 annual report.
Going forward, companies can continue to adjust the tax law’s impact on their financial statements as necessary—as long as they made a solid effort to get the number right in 2018, said Janet Pegg, an accounting analyst at Zion Research Group.
“There could still be a few tweaks in the future as regulations are issued or finalized,” Ms. Pegg said. “If they used their best efforts to figure this thing out and record it on a timely basis, I don’t think the SEC would fault anybody on it.”