News Archive

U.S. tax code may allow dramatic retaliation in EU Apple case

WASHINGTON U.S. tax law gives the Obama administration power to double tax rates for European companies should it choose to dramatically escalate a dispute with the European Union over Apple’s tax bill.

Experts said the administration was unlikely to take such a drastic measure, and even if it did, courts might strike down that action because of treaties.

Section 891 of the U.S. tax code, passed in 1934 but never used, allows the president to double tax rates for citizens and corporations of any country the administration considered was discriminating against U.S. companies.

The U.S. Treasury on Wednesday declined to comment on whether Washington was considering such drastic measures, which Democratic and Republican lawmakers have proposed putting on the table due to what they see as overreach by the European Commission in a tax grab targeting American companies.

The European Commission on Monday ordered the U.S. technology giant to pay up to $14.5 billion in back taxes to Ireland.

“This is an option that is viable only in the minds of a handful of analysts who seem willing to put the entire global trade order at risk,” said Edward Kleinbard, a professor at the University of Southern California in Los Angeles.

Treasury Secretary Jack Lew has said the European Commission action appeared highly focused on U.S. companies but did not mention measures the United States might take. A Treasury spokesperson on Tuesday said the department would work with the EU to prevent erosion of tax bases.

Legal scholars considered it highly unlikely Washington would take drastic measures against one of the country’s closest allies and biggest trading partners.

“This is crazy talk,” said Daniel Shaviro, professor of tax law at New York University.

Lawmakers including Republican Senator Orrin Hatch and Democratic Senator Ron Wyden have pressed the administration to consider implementing Section 891 over the European Commission moves to scrutinize how U.S. companies minimize their tax bills in Europe.

Georgetown University law professor Itai Grinberg drew attention to the obscure tax code provision in January on the website The next month Grinberg appeared before a House of Representatives committee laying out the case for invoking Section 891.

The Treasury’s Assistant Secretary for Legislative Affairs, Anne Wall, told lawmakers in a letter in March the department was reviewing the provision.

It was unclear whether treaties with European countries since 1934 would supersede the provision if it were challenged in court.

(Reporting by Jason Lange; Editing by David Gregorio)

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U.S. private payrolls rise solidly; pending home sales jump

WASHINGTON U.S. private employers maintained a steady pace of hiring in August and contracts to buy previously owned homes surged in July, suggesting the economy was regaining sufficient momentum for the Federal Reserve to raise interest rates this year.

Other data on Wednesday showed a sharp moderation in factory activity in the Midwest this month amid shrinking order books, indicating the manufacturing sector continued to be hobbled by the residual effects of a strong dollar and oil price slump.

“This should give the Fed confidence that the economy is strong enough to generate new employment and importantly, that the economy has enough forward momentum to withstand an interest rate hike,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The ADP National Employment Report showed private payrolls increased 177,000 jobs this month after rising 194,000 in July. August’s gain was in line with economists’ expectations.

The services sector accounted for all the increase, with construction shedding another 2,000 jobs on top of the 5,000 positions lost in July. Manufacturing payrolls were flat after rising by 5,000 jobs in July.

The ADP report, which is jointly developed with Moody’s Analytics, was published ahead of the government’s more comprehensive employment report for August due on Friday.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 180,000 jobs in August after rising 255,000 in July. August’s anticipated step-down in job gains follows two straight months of payroll increases above 250,000.

Economists say with the labor market near full employment and the economy’s recovery from the 2007-09 recession showing signs of aging, a moderation in job growth is normal.

The dollar rose to a three-week high against a basket of currencies, while prices for U.S. government debt fell marginally. U.S. stocks were trading lower as the stronger dollar weighed on oil prices and materials companies.


The U.S. central bank hiked interest rates at the end of last year for the first time in nearly a decade, but has held them steady since amid concerns over persistently low inflation.

But with data ranging from consumer spending to housing and industrial production suggesting the economy has regained speed after sputtering in the first half of the year, most economists expect another rate hike in December.

The Atlanta Fed is currently forecasting third-quarter gross domestic product rising at a 3.5 percent annual rate.

That upbeat assessment of the economy was further bolstered by a second report on Wednesday showing that contracts to buy previously owned homes surged in July after two straight months of declines as demand rose almost across the board.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed last month, increased 1.3 percent to its second highest reading in over a decade.

Pending home contracts become sales after a month or two, and last month’s data implied a pickup in home resales after they declined 3.2 percent in July. Economists had forecast pending home sales rising only 0.6 percent last month.

“The latest rise suggests some improvement in existing home sales,” said Kevin Cummins, senior economist at RBS in Stamford Connecticut. “However, we may not see all of the latest reported increase filter through as quickly as it usually does since there appears to be some delays in the pipeline.”

Demand for housing is being driven by the labor market, which is steadily generating increases in wages as it nears full employment. Sales, however, are being constrained by tight inventories and high prices, which are causing appraisal complications, delaying the closing of contracts.

Data on house prices, residential construction, new home sales and home builders’ confidence have been upbeat in recent months. Pending home sales rose 1.4 percent from a year ago. Contracts increased 0.8 percent in the Northeast and jumped 7.3 percent in the West. They gained 0.8 percent in the South, but fell 2.9 percent in the Midwest.

But the manufacturing sector is lagging gains in the economy as factories continue to process the lingering effects of the dollar’s past rally and oil price collapse. In addition, the sector which accounts for about 12 percent of the economy, has been hamstrung by weak global demand and an inventory correction in the United States.

In a third report, the Institute for Supply Management-Chicago said its business barometer fell 4.3 points to 51.5 in August. A reading above 50 indicates expansion in factory activity in the automotive-heavy region.

Order backlogs tumbled 14.5 points, falling back into

contraction territory. New orders and production also weighed on the index, although both remained in expansion.

Supplier deliveries were little changed and factory employment rose to its highest level since April 2015.

“U.S. manufacturing has struggled to gain traction following the appreciation of the dollar in 2014 and 2015 and the collapse of drilling and mining activity in the U.S.,” said Rob Martin, an economist at Barclays in New York. “We expect manufacturing activity to improve just a touch over the rest of this year.”

(Reporting by Lucia Mutikani; Additional reporting by Chuck Mikolajczak in New York; Editing by Andrea Ricci)

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U.S. to urge G20 to boost economies, heed citizen anger

WASHINGTON U.S. President Barack Obama will urge leaders of the world’s major economies to use fiscal policy and other tools to boost growth while paying more attention to angry citizens who feel left behind, Treasury Secretary Jack Lew said on Wednesday.

The United States will also call for the Group of 20 leading economies to keep their steel industries from getting so big that factories are underused, Lew said in a preview of the U.S. message to the Sept. 4-5 G20 summit in Hangzhou, China.

Lew’s comments suggest Washington could press Beijing at the summit on excess capacity in China’s giant state-backed steel industry. The remarks also point to the rising awareness among leaders of advanced economies that support for global trade and financial integration cannot be taken as a given.

“There are very real concerns about globalization and technology, but the answer cannot be to close ourselves off,” Lew said in prepared remarks at the Brookings Institution.

In the campaign ahead of the U.S. presidential election in November, both major candidates have expressed skepticism over free trade pacts both new and old. Britain voted in June to leave the European Union, another sign of discontent with globalization.

The G20 needs to find ways to boost the living standards of poor and middle-class families, Lew said, saying Obama will press G20 leaders to make banking services universally available.

America has been pressing other G20 governments to spend more when possible to boost the global economy, which has cooled as weaker growth in China reduced demand for commodities like copper and iron. Europe and Japan have also been growing at lackluster rates.

Obama will also urge more countries to launch reviews of fuel subsidy programs, part of a commitment at the G20 to phase out inefficient programs supporting fuel purchases, Lew said.

(Reporting by Jason Lange; Editing by Chizu Nomiyama and W Simon)

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Apple tax receipts could help cut Ireland’s debt pile

LONDON The European Commission’s ruling that Apple should pay 13 billion euros of back-dated taxes could help Ireland reduce its debt significantly but may undermine the Irish government in the process, Standard Poor’s told Reuters on Thursday.

“There are many uncertainties ahead but if we assume that the money will definitely come through, the sum of 13 billion euros is not insignificant for an economy the size of Ireland,” said Moritz Kraemer, the ratings agency’s chief European sovereign rating officer.

The sum of 13 billion euros constitutes more than 5 percent of Ireland’s gross domestic product, and would allow the country to bring its debt down to around mid 80 percent of gross domestic product if the government uses it for that purpose alone, he said.

However, Kraemer warned that the ruling might destabilizes the current government and its ability to formulate and implement policy — an important rating factor that Standard Poor’s looks at.

“If the government chooses not to accept the 13 billion euros at a time when they have stated the money is not there for other spending needs, it could undermine them in the eyes of the public and weaken their position,” he said.

Kraemer added that it may be that the Irish business model is being put to the legal test.

(Reporting by Abhinav Ramnarayan; editing by Dhara Ranasinghe)

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Faced with crunch, Tesla plans to raise additional cash this year

Facing a severe cash crunch, Tesla Motors Inc plans to raise additional money this year to help fund development and production of its new Model 3 sedan and build out a giant battery factory, the company said on Wednesday.

The electric carmaker plans to raise money through either an equity or debt offering, it said in a registration statement filed with the U.S. Securities and Exchange Commission.

Tesla Chief Executive Officer Elon Musk had warned the company might need “a small equity capital raise” in 2017.

Earlier this month, Tesla said it closed the second quarter with nearly $3.25 billion in cash, but in July it repaid $678 million on a revolving credit line and planned to redeem $422 million in convertible notes.

That would leave the company with $2.15 billion in cash. But it also told analysts earlier this year it planned to spend $1.75 billion in the second half on plants and equipment, primarily to get the $35,000 Model 3 ready for production next year and finish construction at the Reno “gigafactory.”

As a result, Tesla would be left with around $400 million in cash at a time when the company has been burning through cash and is in the process of acquiring and absorbing its money-losing sister company, SolarCity Corp.

“Tesla will need many, not-so-small capital infusions to stay on its development plan and more as it takes over Solar City, a virtual sinkhole for capital,” said Erik Gordon, a business professor at the University of Michigan.

Tesla has posted operating losses in 14 straight quarters and negative cash flow since early 2014.

The company said its main source of revenue is the sale of vehicles, but deliveries fell below projections in the first half, to 29,222.

Tesla shares dipped 0.4 percent to $210.35 on Wednesday.

(Reporting by Paul Lienert in Detroit; Editing by Jeffrey Benkoe)

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Wall St falls as lower oil prices weigh on energy stocks

Wall Street was slightly lower on Wednesday, the last trading day of August, as a stronger dollar weighed on oil prices and materials companies.

Oil prices dropped about 1 percent as the dollar traded at three-week highs. Exxon fell 0.6 percent and was the top drag on the SP. [O/R]

The 0.74 percent drop in the SP 500 energy index weighed on the benchmark.

Materials, which includes companies with large overseas operations, was off 0.62 percent.

Investors, however, are focused on the upcoming U.S. nonfarm payrolls data on Friday which could provide clues on the timing of the next interest rate hike.

The markets have been playing a guessing game on when the Federal Reserve would be able to raise rates after top Fed officials, including Chair Janet Yellen, turned hawkish on the back of slow but steady economic growth.

Boston Fed president and voting member Eric Rosengren, in a panel discussion in China on Wednesday, said the Fed was nearing its employment and inflation rate goals, adding that rate hikes could shield the economy.

A smaller-than-expected drop in private payrolls numbers boosted investors optimism about Friday’s jobs report which includes both private and public sector employment.

The U.S. private sector added 177,000 jobs in August, compared with expectations of 175,000.

At 9:41 a.m. ET, the Dow Jones industrial average was down 34.18 points, or 0.19 percent, at 18,420.12.

The SP 500 was down 4.18 points, or 0.19 percent, at 2,171.94.

The Nasdaq Composite was down 10.12 points, or 0.19 percent, at 5,212.87.

“I think today will be very quiet. It’s all about Friday morning, it’s late August and most risk managers aren’t going to allow traders to comes in with large positions,” said John Brady, senior vice president at R.J. O’Brien Associates in Chicago.

The markets are still skeptical of the Fed raising rates in September, given the U.S. presidential elections in November and inflation rate that rides below the Fed’s 2 percent target.

Traders have priced in a 27 percent chance of a rate increase in September and a 54.4 percent chance in December, according to CME Group’s FedWatch tool.

Financials, which gain the most in a higher rate environment, was the only sector that was trading higher.

Palo Alto dropped 7.5 percent to $132.87 after the cyber security firm forecast current-quarter profit and revenue below analysts’ estimates.

Juno Therapeutics fell 6.5 percent to $29.65 after BTIG initiated coverage with a “sell” rating.

Declining issues outnumbered advancing ones on the NYSE by 1,670 to 951. On the Nasdaq, 1,385 issues fell and 858 advanced.

The SP 500 index showed 10 new 52-week highs and one new low, while the Nasdaq recorded 48 new highs and six new lows.

(Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Don Sebastian)

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U.S. pending home sales jump in July

WASHINGTON Contracts to buy previously owned U.S. homes surged in July after two straight months of declines as demand rose almost across the board, suggesting the housing market remains on solid ground despite last month’s drop in home resales.

The National Association of Realtors said on Wednesday its Pending Home Sales Index, based on contracts signed last month, increased 1.3 percent to 111.3, the second highest reading in over a decade.

Pending home contracts become sales after a month or two, and last month’s implied a pickup in home resales after they declined 3.2 percent in July. Economists had forecast pending home sales rising 0.6 percent last month.

Demand for housing is being driven by the labor market, which is steadily generating steady increases in wages as it nears full employment. Data on house prices, residential construction, new home sales and home builders’ confidence have been upbeat in recent months.

Pending home sales rose 1.4 percent from a year ago. Contracts increased 0.8 percent in the Northeast and jumped 7.3 percent in the West. They gained 0.8 percent in the South, but fell 2.9 percent in the Midwest.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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Dubliners divided over Apple windfall dilemma

DUBLIN Faced with a $14.5 billion windfall after an EU ruling on Apple’s (AAPL.O) tax affairs, carer Louise O’Reilly knew exactly what the Irish government should do with the money: spend it on pensioners who are struggling to get by.

In fact the penalty, which the EU Commission on Tuesday ordered Apple to pay as back taxes to Ireland, would cover the country’s entire annual health service bill or six percent of its national debt.

But Dublin is to fight the ruling, fearful it might jeopardize its ability to attract multinational companies, many of whom come to Ireland for its low rates of corporation tax, although a victory in court would mean the government forgoing Apple’s money.

“They are doing the wrong thing. They don’t care about the normal people,” said O’Reilly, 57, a full-time carer for her diabetic and partially blind mother.

“The money should be spent on the old-age pensioners who worked all their lives and are struggling to survive.”

O’Reilly’s mother pays 10 euros tax on a monthly pension of 1,050 euros ($1,170), a higher rate than the EU said Apple’s main Irish unit paid on its profits in 2014.

Gerard Augusta, a 56-year-old security guard from Dublin, said the government should take Apple’s money and put it into housing and hospitals.

“I think the unions and the workers should be out marching about it, to be honest with you. Apple is paying just 50 euros on every million euros that they earn,” he said.

Natalie Byrne, 36, a cleaner, also thought the government should not appeal against the EU ruling.

“I understand about the jobs part. We don’t want to see any more jobs go. But we have to live by the rules.”

Others worried about how the ruling would affect a country where one worker in ten is employed by a multinational corporation.

“The big thing is to make sure the big corporations keep coming to Ireland,” said Conor Moran, 30, a software developer.

“As mad as it sounds turning down that kind of money … I think in the long term it might be more beneficial to cosy up to these guys,” he said, referring to the multinationals.

Brid O’Carolan, a 70-year-old pensioner, said Ireland should defend its low-tax climate.

“I think we have to do whatever we can to get jobs here,” he said. “We need to fight our own corner.”

($1 = 0.8989 euros)

(Additional reporting by Sarah Young; Writing by Giles Elgood; editing by Anna Willard)

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U.S. housing market turnover to improve over coming year: Reuters poll

Turnover in the U.S. residential property market is set to rise over the coming year, according to a strong majority of analysts polled by Reuters who also forecast the pace of house price gains to remain relatively steady this year and next.

The results, from a poll taken Aug. 15 to 30, are based on optimism about a continued strong job market and spell good news for the U.S. economy given all of the industries tied to housing, from construction to furniture sales.

House prices are forecast to rise at more than double the rate of inflation this year, by 5.2 percent, followed by 4.6 percent next year, according to the poll, roughly similar to findings from a Reuters survey three months ago.

The data coincide with increased optimism from Federal Reserve officials that the case for another interest rate rise is getting stronger, a view that could be bolstered by expected strong August hiring data due later this week.

“The tighter U.S. labor market will lead to stronger wage income growth over the coming year. Combined with still-low mortgage rates, income growth will lead to stronger purchase demand,” said Andres Carbacho-Burgos, analyst at Moody’s Analytics in West Chester, Pa.

With the Fed likely to raise rates only gradually, 30-year mortgage rates are not expected to rise much either, according to the poll. Currently at 3.67 percent, they are expected to climb to 4.08 percent next year and 4.60 percent in 2018.

The recovery from the housing market collapse that began nearly a decade ago, knocking prices down by 40 percent in some areas and triggering a global financial crisis, has been relatively swift in recent years. It has been driven in part by institutional investors as well as existing owners.

That has left the housing market overall, which still varies greatly across the country, rated a median of 6 on an affordablity scale ranging from 1 as cheap and 10 as most expensive, according to the poll.

Many young aspiring first-time buyers, who are frequently burdened by exceptionally high piles of student debt, remain priced out of the market, left behind by existing home owners and speculators.

But many said that with the job market improving and pay for younger people eventually rising, it is only a matter of time before the young begin supporting the market again and bring home ownership up from multi-generational lows.

“More millennials will become first-time buyers,” wrote BMO Capital Markets senior economist Sal Guatieri in Toronto. “Twenty-five-year-olds are the single largest population group, and they will be of prime home buying age early next decade.”

But no analyst polled expected a surge in U.S. home prices like those in Canada, which did not have a major market correction and where prices are forecast in a similar poll to rise an average 10 percent this year. [CA/HOMES]

Still, more than two-thirds of economists who answered an extra question thought housing turnover would rise in the coming year, with only a handful saying it would fall.

In the meantime, existing home sales are forecast to run at a 5.55 million annualized unit rate over the coming several quarters, slightly higher than the 5.39 million unit rate reported for July.

“Continued equity build-up will allow some homeowners who have been waiting to sell to list their homes. Additionally, growth in the new home market will free up resale inventory,” wrote Matthew Gardner, economist at Windermere Real Estate Company in Seattle. “That said, I do not expect to see any tangible expansion of inventory until we get into 2017.”

(Poll data: POLL67)

( other Reuters poll stories on housing markets)

(Writing by Ross Finley; Polling by Kailash Bathija and Vartika Sahu; Graphic by Shrutee Sarkar; Editing by Meredith Mazzilli)

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