In a regulatory announcement BP said it expects its future US after-tax earnings to be positively impacted by the recently-enacted changes to US corporate taxes, largely due to the reduction of the US federal corporate income tax rate from 35% to 21% (effective 1 January 2018).

The company noted: ‘The ultimate impact of the change in the US corporate income tax rate is subject to a number of complex provisions in the legislation which BP is reviewing.’

BP also points out that the lowering of the US corporate income tax rate to 21% requires revaluation of BP's US deferred tax assets and liabilities, and states: ‘The current estimated impact of this will be a one-off non-cash charge to the group income statement of around $1.5bn that will impact BP's fourth quarter 2017 results. Details of the final actual charge are expected to be disclosed in BP's fourth quarter 2017 results announcement, due on 6 February 2018.’

BP’s rival, Royal Dutch Shell, has also stated that it expects the potential economic impact of the recently enacted US tax reform legislation to be favourable to Shell and to its US operations, again primarily due to the future reduction in the US corporate income tax rate from 35% to 21%.

Shell says the changes – signed into law by President Trump just before Christmas and described as the most significant for a generation -- will impact the company’s fourth quarter 2017 results but the analysis of the actual impact is not yet complete.

In a statement, the company said: ‘However, on the basis of the third quarter 2017 financial statements, Shell would have incurred an estimated charge to earnings of $2bn to $2.5bn primarily driven by a re-measurement of its deferred tax position to reflect the lower corporate income tax rate. This charge represents a non-cash adjustment and will be reflected as an identified item.’

At the end of last year, shortly after the Tax Cuts and Jobs Act was enacted, Goldman Sachs indicated it expected the changes to result in a reduction of approximately $5bn in the firm’s earnings for the fourth quarter and year ending December 31, 2017.

Approximately two-thirds of this is due to the repatriation tax on deemed repatriated earnings of foreign subsidiaries, which Trump has hailed as a breakthrough in encouraging US multinationals to bring back revenues to the US. The remainder includes the effects of the implementation of the territorial tax system and the remeasurement of US deferred tax assets at lower enacted corporate tax rates.

Craig Hillier, EY international tax services leader in the UK, says the US tax reforms impact any UK company that has a footprint in the US, which will now need to assess how they will be affected.

‘They need to consider how their US affiliates will be taxed under the new legislation but also how it will change the taxation of cross-border flows between UK companies and their US affiliates.

‘UK companies with US operations that have high levels of intercompany debt and extensive inter-company charges may especially be impacted by the combination of interest expense restrictions and the new “base erosion” tax.

For example, UK PLCs charging their US groups for ordinary course of business royalties, UK headquarter costs/expenses or interest payments, may now be subject to the base erosion tax on those inter-company payments,’ Hillier said.

Beyond the tax issues, UK companies may need to adapt if their customers and suppliers shift certain operations to the US to take advantage of the lower tax rates, Hillier pointed out.

'Finally, the tax reforms may have significant repercussions for the financial statement, and reporting and disclosure obligations of UK companies. The lower tax rate could impact the value of balance sheet assets.

‘For example, tax losses or tax credits not used in prior years and carried forward on balance sheets had a value assuming a 35% tax rate – the value of these items reduces for financial reporting with a 21% rate. With the legislation passed before the end of 2017, this measurement and reporting will need to be considered in year-end or interim reporting,’ he said.

Report by Pat Sweet