Accenture CFO: U.S. Tax Reform Bill Will Likely Result In Modest Increase To Our Effective Tax Rate

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Accenture CFO David Rowland said his company will likely end up with a slightly higher effective tax rate as a result of the tax reform legislation passed by Congress.

"Over time, on an ongoing basis, the legislation could modestly impact our ongoing effective tax rate by imposing taxes on our intercompany transactions and limiting our ability to deduct certain expenses," Rowland told Wall Street analyst Thursday morning.

A signature component of the U.S. Tax Cuts and Jobs Act, which passed Congress Wednesday and awaits President Donald Trump's signature, is a reduction in the corporate tax rate from 35 percent to 21 percent.

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But Accenture's effective tax rate in its most recent fiscal year was just 21.3 percent due primarily to its non-U.S. operations being taxed at a lower rate, according to a filing with the U.S. Securities and Exchange Commission (SEC). The United States accounted for 45 percent of Accenture's $34.85 billion of annual revenue in fiscal 2017, while no other country comprised 10 percent or more of sales.

Accenture has been incorporated in Ireland since May 2009, which has a tax treaty with the United States and a corporate tax rate of just 12.5 percent, which is one of the lowest in all of Europe. Unlike its peers incorporated in the United States, Accenture doesn't have to pay the American government tax on income earned abroad when returning cash to its corporate parent.

An intercompany transaction is an internal transaction between two related entities that file a consolidated tax return or financial statement.

The Tax Cuts and Jobs Act imposes a 20 percent excise tax on all payment from a U.S. parent company or subsidiary to a related foreign corporation if the payment includes items like intermediate goods or depreciable capital assets that can be deducted for tax purposes, according to the Tax Foundation, an independent tax policy research organization.

This excise tax can only be avoided if the American entity includes a portion of the foreign company's income in its U.S. taxable base, the Tax Foundation said.   

The GOP tax bill also limits net operating loss deductions to 80 percent of taxable income, limits net income deductions to 30 percent of EBITDA until 2021, and limits or eliminates the domestic production activities deduction and the deduction for entertainment expenses. All told, these moves are expected to generate $1 trillion in revenue for Uncle Sam over a decade.

"The lower [tax] rate is closely offset by the loss of certain deductions and the tax imposed on intercompany transactions," Rowland said. "We see a modest impact over time."

Accenture additionally expects to record a non-cash expense of up to $500 million in its current fiscal year to reflect the impact of lower tax rates on its U.S. deferred tax assets, Rowland said. But he doesn't expect the Tax Cuts and Jobs Act to impact Accenture's tax cash payments in the current fiscal year, which ends Aug. 31.     

A deferred tax asset occurs when a business has overpaid taxes or paid taxes in advance, meaning these taxes are eventually returned to the business in the form of tax relief. But the value of a deferred tax asset is a function of the tax rate, meaning that a cut in the statutory tax rate would require companies with deferred tax assets to take an immediate charge to earnings, according to The New York Times.

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