Large multinationals in the technology and healthcare sectors are most exposedNew market research from Fitch Ratings considers if this could influence management decisions related to legal structures and capital investments.
Fitch Ratings-Chicago-11 May 2021: A higher marginal tax rate is not a key credit risk for US non-financial corporations, especially if taxes do not materially affect actual cash flows, says Fitch Ratings. The prospect of higher tax rates under President Joseph Biden as the administration seeks to offset ambitious spending plans with new corporate tax revenues could influence management decisions related to legal structures and capital investments. However, business confidence, monetary policy and investment options are more likely to drive capital deployment and credit risk profiles than marginal tax rates.
Moreover, the significant build-up of cash to bolster liquidity during the pandemic and improving business prospects as the economy recovers and infection rates decline could be used to offset any cash flow implications from higher corporate income taxes. This would support capital allocation decisions over the near term.
Quantifying The Effects Is Difficult
Quantifying the potential effects of higher marginal tax rates on cash flows and capital allocation is difficult. Tax provisions based on marginal tax rates do not necessarily equate to tax liability or cash taxes paid, as tax expense can be deferred, while tax credits, deductions and other provisions can help offset any increase in minimum tax rates.
The cash flow effects of higher corporate income tax rates are not expected to be symmetrical with the Tax Cuts and Jobs Act (TCJA) of 2017. TCJA provided a cash flow benefit to most US companies but did not result in any rating upgrades, due in large part to an increase in shareholder-friendly activity rather than debt reduction.
Large companies and US multinationals, particularly in technology and pharmaceuticals, receiving a significant portion of income from overseas are most exposed to President Biden’s Made In America Tax Plan (MIATP). In addition to raising the marginal corporate tax rate to 28% from 21%, MIATP seeks to establish a minimum 15% tax rate on book income for large companies and to strengthen the global minimum tax.
Changes in tax laws resulting in increased cash taxes in the middle of the coronavirus pandemic and at the onset of rising interest rates could also be an added burden for issuers operating in sectors hit hard by the pandemic. However, there is no guarantee MIATP will become legislation, given bipartisan agreement seems unlikely and passage of a bill via reconciliation is limited to up to three in a given year.