Gauging the Impact of the Tax Bill on Semiconductor Customers like AT&T
Impact of tax bill on semiconductor companies’ customer industries
The Senate’s version of the tax bill brings five major amendments that would impact the technology (QQQ) sector. These include a 20% maximum corporate tax rate (effective 2019), treating capital expenditures as an expense for five years, increasing the one-time repatriation tax rate, the retention of the alternative minimum tax, and the interest deduction to 30% of taxable income.
Each of the above amendments would likely benefit some industries that semiconductor companies serve.
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Technology companies would likely benefit the most from the lower one-time repatriation tax rate of 14.5% on cash assets as most tech companies have stacked their cash overseas. According to Goldman Sachs, US-based companies have $3.1 trillion cash overseas, with Apple (AAPL) having the largest cash stockpile of $252.3 billion.
Semiconductor companies like Intel (INTC) and Qualcomm (QCOM) have also stacked large piles of cash overseas in order to avoid the maximum 35% tax. Now, they wouldn’t likely have to pay a 14.5% tax, regardless of whether or not they bring the cash back to the US. This will likely encourage some companies to bring their cash reserves back to the home country and spend it on future growth opportunities in the US, and this logic could hold true for the industrial segment as well.
However, critics have pointed out that history shows that when companies were allowed to repatriate overseas cash at lower rates, they have spent most of this cash on shareholder returns instead of capital spending.
Telecommunications companies would likely benefit from the provision of expensing their capital spending as they spend huge capital on regular network upgrades. These companies are now heading toward 5G deployment, which is more capital-intensive than 4G.
The capital-expensing provision would likely encourage telecom operators to invest in network upgrades. AT&T (T) CEO (chief executive officer) Randall Stephenson stated that the company would invest an additional $1 billion in US infrastructure in 2018 if the tax bill is passed. Large investments by telecom companies would thus likely lead to increased revenues for communications semiconductor companies like Qualcomm and Broadcom (AVGO).
The provision of limiting the interest deduction to 30% of EBIT (earnings before interest and taxes) would also likely work well for startups and other companies that are funded by private equity investors. Right now, private equity firms squeeze out returns by charging high interest on taxable income. The above provision would limit the amount of interest private equity investors can charge, as a higher interest would fall under the new tax bracket.