We are all watching this earnings season hoping to see growth in revenue and profits that reinforce the economic recovery is truly taking hold.
Looking ahead, however, I’m hearing about another concern of businesses that could ultimately eat into profits—and this one has nothing to do with how well a business is operating.
It is the strong possibility that U.S. companies might have to pay additional taxes on international profits.
I recently participated in an off-the-record roundtable with a dozen or so CEOs and a member of the Obama Administration. The focus was economic policy in the U.S., and one of the most heated points of discussion was the possibility of taxes on overseas revenue.
As we have discussed at length in Investor Brief, the majority of real growth opportunities now lie outside the U.S., and multinational corporations are aggressively trying to tap into this growth in areas like Asia and Brazil where a sizable and growing middle class can afford to buy products made by U.S. companies. In many cases, multinational companies already derive more than 50% of their revenues from international economies.
Bob Doll told us in the new issue of Wall Street that he likes multinationals “to get exposure to the emerging markets, which are going to have faster growth.” One advantage for investors in multinational corporations is that they often have greater governance and transparency than a lot of the companies based in emerging markets.
That is why an additional tax on revenues brought in from outside the U.S. is a significant issue for both businesses and investors. The CEOs at this roundtable I participated in feel they would be taxed twice on global sales and profits because the numbers are already included in their overall corporate taxes.
Just as with you and me, any additional taxes we pay affect how much we have left, and that brings us back to where we started: earnings. If the recovery continues, investors will likely get back to more traditional ways of assessing companies, and earnings is obviously at the top of the list.
We’ll keep you up to date on the status of these proposed tax hikes and which companies they might hit the hardest.
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