Profit Shifting Rules Hiking Tax Burden: Credit Suisse

Switzerland's second-biggest bank Credit Suisse has stated that it fears a higher tax burden for 2018 than it had forecast earlier. This follows changes in the U.S. tax provisions aimed at preventing companies from shifting their profits abroad.

The Zurich-based bank is expected to report full-year results on Feb. 14.

Accordingly, the Swiss bank said its effective tax rate would become 40 percent on 2018 results, up from the 36.8 percent rate covering the first nine months and higher than the previous guidance it issued at 37 percent.

It said the bank also incorporated an “adverse impact” in the estimates by 2 percent, anticipating the new U.S. regulations.

The new rule intended to stop profit shifting

The new tax is intended to prevent big U.S. companies and non-U.S. corporations from shifting profits abroad.

But BEAT rules can make banks vulnerable to higher tax as they face a bigger rate than other multinationals. The provision came up during the tax overhaul under President Donald Trump. HSBC Holdings, Mizuho Financial Group, and Deutsche Bank also said they would be affected by the new taxation.

The Internal Revenue Service (IRS) has promised some leeway for foreign-based banks with U.S. operations when calculating it.

What is BEAT and how it impacts companies?

The U.S. Treasury Department in December 2018 introduced Base Erosion Anti-Abuse Tax (BEAT) in a bid to prevent companies from downsizing their earnings from U.S. operations by padding up costs and deductions, to transport profit to lower-tax destinations via intercompany transfers.

The BEAT mandates corporate taxpayers with gross receipts of more than $500 million to make deductible payments to foreign entities.

Since BEAT rules are yet to have final clarification, Credit Suisse believes that the group will be subject to this tax for 2018.

On December 13, 2018, the Internal Revenue Service (IRS) and the Treasury Department issued regulations on BEAT. The requests for hearings on the regulations have to be made within two months of issuance of the notification.

BEAT will apply to U.S. taxpayers if they meet two requirements. First, there must be a three-year average of gross receipts exceeding $500 million dollars.

Secondly, the deductions for intercompany payments by the U.S. taxpayer for services, interest, property, assets, and royalties have to be higher than three percent of total deductions permitted.

However, alternative thresholds are allowed for banks and special entities. Many of the BEAT provisions are not applicable to regulated investment companies and REITs.