US TAX REFORM

Trump’s tax gift to corporate Germany

BMW Chicago Trump tax reform
Odds are this German BMW was produced in the United States. Source: BMW

Overhauling the corporate tax code was always part of Donald Trump’s “America First” approach to American businesses – a means of leveling the playing field with foreign competition. Mr. Trump put it most plainly in an interview with Germany’s Bild newspaper before he took office last January, when he complained it was unfair to see Mercedes all over New York when so few Germans are buying Chevrolets.

And so there’s a certain irony to the fact that the tax reform bill, signed into law last week, has also given a gift to some of Germany’s larger companies, including its carmakers. The simple reason is that some of these companies already produce a large amount of their goods in the United States.

For German auto giants such as BMW and Daimler, which manufacture more vehicles in the United States than they export to the country, the lowering of the corporate tax rate from 35 to 21 percent stands to help them in the same way it helps American companies. Fresenius Medical Care, which produces its dialysis machines in the US, is also expecting the effects to be positive.

The carmakers are now forecasting additional benefits worth hundreds of millions of euros for the current business year, based on tax adjustments for their US subsidiaries. Daimler estimated that the changes would boost net income by €1.7 billion ($2.02 billion) in 2017, though tax expenses in other areas would limit the overall increase to only €1 billion. The company said those issues were not directly related to US tax reforms and that their impact could not yet be fully calculated. On February 1, Daimler plans to publish its annual results for 2017. It reported net profits of €8.8 billion last year.

BMW’s own preliminary estimates suggest that the carmaker could come away with between €950 million and €1.55 billion in additional profits. The company said it would have exact figures in its yearly report, which it plans to release on March 21. BMW first opened a plant in Spartanburg, South Carolina, more than a quarter-century ago. That plant is its largest, employing more than 9,000 people, with plans to add 1,000 more jobs.

Like Daimler, BMW acknowledged that the changes to US law, despite the tax cut, could also produce smaller negative effects in 2018, though such consequences could not be “quantified with sufficient certainty.” The carmaker posted about €6.9 billion in profits in 2016; this year, the total is expected to be well over €7 billion.

The new tax law isn’t good news for all German companies, particularly smaller businesses without major US manufacturing operations.

Some of the uncertainty might stem from what could still be on the horizon. In the same Bild interview where Mr. Trump complained about Mercedes’ dominance, he also threatened to impose a 35 percent tax on BMW vehicles built in Mexico and sold in the United States. The carmaker plans to have a plant in San Luis Potosi start building its BMW 3 Series beginning in 2019.

Whether anything happens on that front remains open. For now, the $1.5 trillion tax cut represents the most significant legislative victory for the US president and his Republican party since his inauguration nearly one year ago. The president has claimed that the middle class and jobs would also be “winners,” but he did not mention German business.

Despite that, some other German blue chips like Fresenius Medical Care, a German dialysis provider, stand to benefit to the tune of hundreds of millions of euros. Sales in the US, where FMC has taken over large companies such as Renal Care, account for a large share of its revenue. Mr. Trump’s tax reforms mean a one-time book gain of roughly €200 million, according to the company, which would also increase its net earnings.

FMC’s parent company Fresenius estimated that the cut to US corporate tax rates would lead to a €90 million book gain for the whole group. FMC, in which Fresenius holds a 31-percent stake, would contribute two-thirds of this amount, while its drug-making division Kabi would account for the additional €30 million. On February 27, Fresenius plans to report its 2017 results, as well as provide a forecast on the future recurring impact of US tax reforms.

The Trump administration’s new tax law isn’t good news for all German companies, however, particularly smaller businesses without major manufacturing operations in the United States.

Among those who will likely lose out is German printer maker Heidelberger Druck. Based on adjustments to its deferred taxes on US subsidiaries, the company is anticipating a one-off negative hit of roughly €25 million for the 2017/2018 fiscal year. Whereas it had previously predicted a moderate increase in its net earnings after taxes, Heidelberger Druck now expects a significantly lower total than the €36 million it reported last year. Its annual operating targets, adjusted for those effects, remain unchanged.

Despite this short-term pain, Heidelberger Druck predicted that Mr. Trump’s tax overhaul could spell other long-term benefits. As the uncertainty surrounding those reforms dies down, the company said it expects that US customers could increase their investment, and that ultimately the lower corporate tax rate would mean reduced tax liability in the US.

Other companies are being forced into more drastic steps to limit the negative effects of the new rules. German biotech company Qiagen said it is undertaking restructuring measures to ease the financial hit of as much as €120 million it expects in the fourth quarter of this year.

Unsurprisingly, the biggest beneficiaries of the tax overhaul are American companies, particularly banks and commercial airlines. According to the Financial Times, some US firms could see profits grow by as much as 30 percent. But that doesn’t take away from the fact that Mr. Trump is handing money back to foreign companies, too.

Ulf Sommer reports for Handelsblatt on companies and financial markets. Amanda Price adapted this story into English for Handelsblatt Global. To contact the author: sommer@handelsblatt.com.

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