US tax cut impact to Australia and ASX stocks

U.S. President Donald Trump, took control over his legislative achievement on his first year in power, by shaking up the tax system and slashing the 35 per cent of corporate tax to 21 per cent. The tax cuts is expected to generate more leverage for US companies to boost investment, attract foreign investors, increase wage growth and standard of living at the same time and slowly trying to repatriate back to the US, what Trump believed of at least $2.5 Trillion untaxed US earnings offshore.

So why should we still invest in Australia?

The massive US corporate tax cut sounds good, especially to the ears of wealthy individuals and big corporations. However, there is what they call the state tax, which is around 4 per cent on top of the 21 per cent company tax. So, that gives a real statutory rate to around 25 per cent compared to Australia’s 30 per cent. In addition, Australia’s unique system of dividend imputation favours local investors, by which, refund is given with their share of tax via what is known as the franking credits (are a type of dividend imputation and a way to reduce or eliminate the double taxation of dividends that occurs in many advanced economies).

Local investors and U.S. companies rejoiced and so as Australian companies operating in the United States.

BlueScope Steel Limited (ASX: BSL) released an announcement of increased earnings guidance for half year, ending 31 December 2017 as an update after the US tax reform. North Star Bluescope expects U.S. earnings to benefit through a lower federal tax rate, expecting a 7 per cent decrease in FY2018 and 11 per cent decrease thereafter. The tax cut benefit will be partially offset by toll charge on foreign earnings, which is not expected to be material. The announcement also helped BSL’s share price increased over 8 per cent during the day of US earnings announcement.

Ansell Limited (ASX: ANN) has an exposure of 40% revenues generated from the US. Ansell released an announcement regarding anticipated impact of US tax reform, which will increase profit after tax by FY2019 of around US$3-5 million p.a. primarily due lower direct tax expenses.

Aristocrat Leisure (ASX: ALL) with an exposure of two thirds of its revenue generated from the US, adding its recent acquisition with US based Social Gaming Company Big Fish last November 2017.

In addition to ASX stocks watchlist, with large potential impact from US tax cuts also includes

Stock Sector US Exposure
CSL Limited

(ASX: CSL)

Healthcare generates 40% of its revenue from the US
Cochlear Limited

(ASX: COH)

Healthcare generates 40% of its revenue from the US
BHP Billiton

(ASX: BHP)

Materials commodities are priced in USD (prices rise as USD depreciates)
Rio Tinto Limited

(ASX: RIO)

Materials commodities are priced in USD (prices rise as USD depreciates)
Computershare Limited

(ASX: CPU)

Information Technology 50% of its EBITDA is from the US
ResMed Inc.

(ASX: RMD)

Healthcare generates 55% of its revenue from the US

Why should I be worried?

For investors, the US corporate tax cut could mean a strong pull for American corporations to repatriate funds from China, where companies are taxed at a standard rate of 25 per cent. Analysts are looking closely to possible capital outflows from China and pressure to Renminbi as well as Australia and other economies.

In a world where investment flows are affected by changes in after-tax rates and passes through one another, the question lies, whether US corporate tax cuts will pressure the Australian government to reform its fiscal policy.

 

By Ivy Bacud

 

This content has been written and published by KOSEC – Kodari Securities.

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