Asset managers in the United States will benefit from the new U.S. tax law which will increase demand for investment products from individuals and institutions, while materially cutting the effective tax rate for the sector, Moody’s Investors Service says in a new report.
“High net worth individuals are more likely to invest than consume their tax savings and will take advantage of the doubling of estate tax-related exemptions, while investors in high-tax states will look to tax advantaged strategies to offset the new limits to deducting state and local taxes,” the report says. “As well, corporate treasury departments are likely to reinvest cash coming in from overseas.”
As well, the adoption of a 21% corporate tax rate “will provide significant tax savings to U.S. asset managers”, the report says. Asset managers have historically been taxed at 30% or more.
The median cash savings for the asset managers Moody’s rates will be about US$50 million, based on just the cut in rates, the report says. “Higher rated firms such as BlackRock and Franklin Templeton Investments, are likely to experience the greatest annual cash savings of approximately $400 million and $270 million, respectively,” Moody’s says in a news release.
“The new tax provisions are largely positive for asset managers,” says Rokhaya Cisse, an analyst at Moody’s, in a statement. “From the decrease in the corporate tax rate to the adoption of a territorial system, the main beneficial provisions of the new tax law seem to offset the more negative provisions such as the limits on the deductibility of interest expense, executive compensation and fringe benefits.”
“The new tax law enhances the financial flexibility of most asset managers,” Cisse says. “Whether these savings will ultimately go towards funding acquisitions, debt pay downs, dividends and/or share repurchases is unclear.”