The U.S. Congress passed the Tax Cuts and Jobs Act in mid-December, 2017. As people try to figure out what this means, William Blair believes the overall impact will be positive. The reduction in corporate tax and a lower tax rate for repatriated foreign income are two exciting aspects of the tax reform that will impact dealmaking.
The corporate tax rate has been reduced from 35% to 21% and the corporate alternative minimum, that ensures corporations pay at least some tax on their income, was eliminated. With lower rates, companies are expected to have higher cash flows and higher equity valuations. This means we can expect to see more companies will have capital to use through acquisitions.
Also, the United States is moving to a territorial system and implementing a reduced tax on repatriated income. This means only income earned domestically is subject to U.S. taxes along with a reduced, one-time tax rate on foreign profits that companies have already accumulated overseas. U.S. companies will no longer have incentive to keep profits overseas and it is expected to have a meaningful positive impact on M&A activity. An example of this is in January of 2018, Apple announced that it will pay a one time tax of $38 billion on repatriated income (a return of $250 billion in capital to the U.S.) and it will also be making domestic investments in new offices and advanced manufacturing in the U.S.