Considering the impact of the tax cuts and jobs act on valuations

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On 20 December 2017, the House and the Senate passed the tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the Act) and it was signed into law by the President on 22 December 2017. The sweeping modifications to the Internal Revenue Code include a much lower corporate tax rate, changes to credits and deductions for both businesses and individuals, and a move to a territorial system for corporations that have overseas earnings. The significant overhaul will have immediate and long-term implications on valuations of businesses, equity, and related assets and liabilities, as entities continue to assess the impact on corporate strategy, acquisitions, and financial and tax reporting.

We expect it will take buyers time to fully assess the impact of the Act. Investors appear to view the changes positively, and major stock exchanges have reached record high valuations in part due to the anticipated tax changes. Nevertheless, some market participants have taken a wait-and-see approach and have not incorporated the expected tax changes explicitly into their deal models. The longer-term impact on individual companies will likely take time to assess given the complexity of the Act, likelihood of future changes to the Act and potential adjustment to operating models implemented by management teams in response to the Act.

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