Tax-cut law’s planned rule helps foreign-owned banks

WASHINGTON — President Donald Trump’s tax cuts have been very good to big banks. For foreignowned banks, they could get even better.

The cuts allowed America’s largest banks to save an estimated $16 billion collectively in taxes last year, a windfall that helped those firms reward shareholders through stock buybacks and dividend payments.

The savings flowed largely from changes to the corporate tax rate, which fell to 21% from 35% under the new law. For years, domestic banks’ effective tax rates had been higher than those of many other companies’, so when the tax rate was cut, those institutions enjoyed outsize benefits.

Foreign-owned banks reaped benefits as well, although the structure and reporting of their global financial operations make them more difficult to quantify. Late last year, they won a potentially lucrative victory in a proposed Treasury Department regulation that puts into effect a part of the 2017 tax law that established a global minimum tax on multinational corporations. Analysts say the proposed regulation, which companies must apply even though it has not been made final, could allow foreign banks to largely avoid the minimum tax.

The regulation effectively provided a carve-out that would allow foreign banks to reduce or avoid a new tax, known as the base erosion and anti-abuse tax, or the BEAT. Treasury’s rule would allow foreign banks to minimize their tax liability by sending large payments back to their headquarters in the form of interest payments, which would not be counted toward the minimum tax.

Many foreign banks, and an industry lobbying group, welcomed the proposal — and quickly pushed Treasury to expand it by exempting more transactions between banks and their overseas affiliates from the tax. The final regulations will be decided this summer.

“There’s a lot of uncertainty” about the anti-abuse tax, said Andrew Silverman, a tax analyst at Bloomberg Intelligence. “But a lot of companies are taking comfort from the fact there are a lot of big exceptions to it.”

Financial filings, transcripts of corporate-earnings calls and industry and company letters to Treasury officials underscore the degree to which the tax cuts have helped banks financially. Some of the ways appear to go against the intention of the Republicans in Congress who drafted and approved the law in a two-month flurry at the end of 2017.

The favorable treatment for banks is contributing to a steep decline in corporate tax revenue, which has helped sharply increase the federal budget deficit. Corporate receipts were down more than 25%, or nearly $60 billion, in the 2019 fiscal year through June from the 2017 fiscal year, before the tax cuts took effect. The budget deficit is on track to top $1 trillion in 2019, a 28% increase from 2018.

The 10 largest U.S. banks — a group that includes Jpmorgan Chase, Wells Fargo and Goldman Sachs — had a combined income tax expense of $35 billion last year, equivalent to 20% of their pretax earnings. Their average effective rate in the five years through 2016 was 29%. If last year’s pretax income had been taxed at that rate instead of the post-tax-cuts rate, the banks’ income tax expense would have been $51 billion, or $16 billion more.

Money saved from having a lower tax rate helped pay for a surge in stock buybacks and dividend payments to shareholders. Last year, the 10 largest U.S. banks distributed over $104 billion to their shareholders in these two ways, an increase of 25% from nearly $84 billion in 2017.

Some banks are reporting tax rates well below the 21% statutory rate. Wells Fargo said this week that its effective tax rate — the rate reported on financial statements — was just over 17% in the second quarter. Jpmorgan’s rate for the period was just shy of 15%, in part because the bank enjoyed a tax benefit after tax audits were resolved.

Those savings continued to pad bank profits in the second quarter, according to financial filings released this week, and helped to offset weakness in trading revenue. Citigroup’s larger-thanexpected earnings per share, for example, were almost entirely the result of the corporate rate cut and its stock repurchases.