US tax reform: winners and losers in the infra world

US investors need to consider how tax reforms being proposed in Congress will affect current and future infrastructure deals, according to two lawyers at Debevoise & Plimpton.

While Congressional leaders have provided little detail about what a tax reform package would look like, two of the most cited proposals include a reduction in corporate income taxes from 35 percent to 20 percent and changes to interest tax deductibility provisions to allow repatriation of overseas money.

According to Peter Furci, co-chair of Debevoise’s global tax practice, revamping the latter would allow US multinational corporations to bring overseas cash back to their homeland for a one-time tax charged at a reduced rate.

Furci told Infrastructure Investor this could create “net winners” and “net losers” from US tax reform. He described a situation where a US company that suddenly has access to a large amount of cash as a result of repatriation could spend money more freely compared with investors raising money from institutional investors on a per-deal basis.

“A taxpayer who is less leveraged, has income from other sources and has access to offshore cash is likely to be advantaged from an acquisition point of view,” Furci said. “Any financial buyer who is heavily dependent on debt financing is likely to be disadvantaged by a system where even with lower tax rates you lose interest deductibility.”

Douglas Buchanan, co-head of Debevoise’s global infrastructure and project finance group, said another scenario to consider is the effect tax reforms can have on P3 deals already under contract.

“This risk of future tax change is one of the risks that investors own and the procuring authorities don’t own, as a general rule,” Buchanan said. “Are investors going to get the deal they bargained for under the law that was in effect at the time that they closed their deal, or is the reform going to apply across the board and everybody who is already in deals going to have to restructure and deal with it?”

Furci argued investors should be factoring in potential tax reform changes into their financial models to gauge what their returns will look like if legislation is passed.

“You should be going into transactions with your eyes open on what the potential return differential could look like with some of these levers pulled,” he said.