Companies warn of hits from tax cuts, but big profits ahead

Over the next few weeks, some of the world’s biggest companies, household names including Microsoft, Google and Johnson & Johnson, are likely to warn that their financial results will be severely dented, if not altogether wiped out, by huge tax bills that they have to pay to the Internal Revenue Service. Don’t be fooled. The big one-time losses are a prelude to even bigger profits — a paradox caused by the tax cuts that recently zoomed through Congress and that largely benefit corporations.

A couple of provisions in the tax package are prompting many companies — those based in the United States as well as some foreign corporations with big American presences — to pay the taxman while anticipating huge savings for decades to come.

The biggest factor, by far, is the requirement that American companies bring back money that they claimed to have earned via overseas subsidiaries, most of them in tax havens such as Luxembourg, Grand Cayman and Bermuda.

Until now, companies generally didn’t have to pay federal income taxes on such earnings, at least not immediately, as long as those profits stayed overseas. But if the companies brought the money back to the U.S., they would face a 35 percent tax rate (minus whatever they had already paid in other countries).

American companies currently attribute about $2.8 trillion to their overseas units. The new law requires them to bring the money back to the U.S., but at reduced tax rates as low as 8 percent.

In the short term, that may appear painful. Companies collectively will have to pony up $235 billion in taxes, said David Zion, a tax accounting analyst. He estimates that five companies, Apple, Microsoft, Pfizer, Cisco and Oracle, account for one-third of that.

Goldman Sachs Group said last week that it expected to suffer a $5 billion charge in the fourth quarter, mostly because of the forced repatriation of earnings. That threatened to obliterate the Wall Street bank’s normally robust quarterly profits. But investors shrugged.

“Although hundreds of companies are going to report unfavorable charges, ultimately the legislation should be a big win for them,” said J. Richard Harvey, a Villanova University law professor and former IRS official.