Goldman to take $5bn hit from new tax regime, but gain ultimately

Goldman Sachs will take a $5-billion hit to its profits for the fourth quarter from the new tax law signed by President Trump last week.

As a result of the changes, the New York bank expects to report a loss for the last quarter of 2017, even though ultimately Goldman and other banks will be among the largest beneficiaries of the new tax code.

The American investment bank is the latest to warn about the short-term pain caused by the tax change, which is intended to be a stimulus to America's economy but will initially create a bill for many companies.

Trump delivered on a package of promises he had made on the campaign trail to slash tax rates with the Tax Cuts and Jobs Act that he signed into law on 22 December. From next week, the headline US corporate tax will drop from 35 per cent to 21 per cent.

Goldman on Friday became one of the first companies to release details on how changes in the tax code will affect how money parked overseas is handled. The bank said two-thirds of the $5 billion is related to changes in repatriation taxes, when funds are returned from overseas.

The effect of the tax changes on Goldman Sachs was revealed in a filing with the US Securities and Exchange Commission early on Friday.

The new tax overhaul imposes a discounted one-time levy on overseas money returned to the US - 15.5 per cent for earnings held in cash or other liquid assets and 8 per cent for earnings held in harder-to-sell assets. Previously, companies had to pay a 35-per cent corporate tax when they returned that money, so they left it parked overseas.

It is expected that changes in the law would prompt many companies to return money to the US, potentially $2.5 trillion or more. Keefe Bruyette & Woods analyst Brian Kleinhanzl estimated that the repatriation part of Goldman's charge equates to an 11 per cent tax rate, based on the $32.6 billion in undistributed foreign earnings Goldman had at the end of 2016.

Goldman had been expected to post fourth-quarter net income of $2.07 billion, according to banking analysts polled by FactSet. The bank reports earnings in mid-January.

After taking a hit on repatriated earnings, Goldman, and other banks, will operate in a much more favourable tax environment. The tax measure signed into law by President Donald Trump this month spreads benefits across a wide array of American industry, including banks.

Finance and insurance companies would have paid an effective corporate tax rate of 26.1 per cent next year. Now, it will be 14.3 per cent. Analysts at Goldman Sachs have estimated that the tax law will boost big-bank earnings per share by 13 per cent next year. The top beneficiary will be Wells Fargo, which has been dogged by scandals over cheating customers. It will enjoy an 18 per cent earnings surge in 2018, Goldman estimates.

Goldman also said part of the reduction to fourth-quarter earnings comes from recalculating the value of it deferred tax assets. Those are past losses that companies can use to lower future tax bills. Goldman and other banks suffered huge losses during the financial crisis. Those assets will now have less value because of the lower corporate tax rate.

The company did not say how changes in the tax law would affect its decisions on investments going forward.