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How Will Tax Reform Benefit HP?

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Tax reforms announced recently

Congress recently passed the US Tax Cuts and Job Act, which reduced corporate tax to 21% from 35%. The US government has also imposed a one-time repatriation tax of 15.5% on cash held in overseas markets and an 8% tax on non-cash assets. HP (HPQ) has supported this tax reform and expects it to stimulate the US economy and make domestic firms more competitive.

HP has estimated tax reforms will improve net earnings, strengthen the firm’s balance sheet, and improve shareholder returns. Further, the reforms might create capacity for HP to invest in its business as well as improve employee value. HP aims to use a portion of the annual tax savings to provide non-executive employees with an increase in their annual variable performance bonus.

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Impact of tax reforms

HP recorded a non-cash tax-related accounting gain of $1.1 billion in its GAAP (generally accepted accounting) results. This gain includes the expected repatriation transition tax charge as well as other accounting benefits. Under the new tax law, US-based firms will pay a repatriation transition tax on offshore earnings that have not been repatriated to the US.

HP has booked a gross repatriation charge of $3.2 billion in fiscal 1Q18 that will be paid over an eight-year schedule. HP expects the actual cash payments to be lower, as the firm will reduce the overall liability by over 50%. According to HP CFO, Cathie Lesjak, “We have also recorded a net $4.3 billion accounting benefit in the quarter, which more than offsets the gross repatriation tax. This provisional adjustment is a result of reversing previously accrued upon earnings from foreign subsidiaries, which are netted against revaluing our deferred tax assets and liabilities at a lower 21% U.S. tax rate.”

HP’s non-GAAP tax rate in fiscal 1Q18 was 15% compared to the earlier estimated figure between 21% and 22%, which positively impacted non-GAAP EPS by $0.04 in 1Q18.

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