Republican lawmakers in the U.S. congress have passed legislation which would significantly overhaul the U.S. tax code this year.
While the final details are still being worked out in conference committee, there are five key aspects of the bill which are likely to become law—and two overriding conclusions.
- Orthopedic suppliers will be more profitable in 2018 and 2019 because their tax rates will drop from 35% to 20%. Big change.
- Companies that have global operations will have new incentives to bring overseas cash, intellectual property and manufacturing back to the U.S. Another big change.
What does it all mean for orthopedic physicians, hospitals, sales reps and investors?
Here are 5 takeaways that explain it all.
1. Supplier Profit Margins Will Increase
The corporate tax rates will drop from 35% to 20%. While most orthopedic companies have an effective tax rate of less than 35%, this drop will still lower the amount of taxes being paid by U.S.-based orthopedic suppliers. We’re confident that the ultimate rate will fall to 20% because both House and Senate bills propose that. The main difference is when that rate takes effect. Senate is 2019. House is 2018. One potential compromise is to lower the rate to 22% in 2018, then 20% in 2019. However it’s worked out in conference, the bottom line is that taxes are dropping for orthopedic suppliers.
Who will likely be the biggest winners? Easy. The companies who pay the most taxes—like JNJ, Medtronic, Stryker, Zimmer Biomet, Integra LifeSciences, Globus Medical, NuVasive, Conmed and Orthofix.
2. Overseas Cash, Intellectual Property and Manufacturing May Come Back
This tax reform bill is also an expression of an “America First” approach and has built in several financial incentives to bring overseas cash, intellectual property (IP) and manufacturing back to the U.S. The Senate bill proposes to drop the tax on repatriating overseas cash from 35% to 14.5% and to also drop the tax on non-cash overseas assets to 7.5%. The House bill has slightly different tax rates (14% and 7%), but the direction is the same. Also, both bills give the companies have eight years to pay the tax.
One company for whom this could be a big deal is Medtronic—which holds most of its cash and short-term investments outside the U.S.
But, the real question is whether this could have any practical impact on corporate orthopedic R&D spending or product pricing decisions. So far, it’s hard to see a connection.
One area that may have a small practical affect is overseas intellectual property. The Senate’s tax bill allows companies to bring IP into the U.S. at the cost basis at the time of acquisition, not today’s market value.
That could bring some IP into the U.S.
