US: ‘Repatriation tax’ another dollar supporting factor - MUFG

Derek Halpenny, European Head of GMR at MUFG, lists down the potential impact on the dollar from one of Donald Trump’s tax reforms – his plan to change the tax rate on foreign earnings in order to bring funds back to the US.

Key Quotes

“Firstly, this tax, as laid out by Trump, is not going to be time-constrained like the Homeland Investment Act of 2005 was under President Bush (just one year). Back then a one-year 5% effective tax rate was offered that a Congressional report suggested prompted over USD 300bn of repatriation flows, mostly in the calendar year of 2005. Trump’s plan will be open-ended and hence the flow impact could be considerably less.”

“Secondly, the proposed 10% tax (versus the domestic rate currently at 35% but under Trump’s plans is to be cut to 15%) could cover all foreign earnings or earnings made covering a certain period with the tax owed paid over a certain period as well. So again the flow impact while positive is unclear.”

“There is however a much larger sum held abroad today than in 2005. One consequences of the HIA back then was that it created an expectation of another similar policy being implemented. Estimates put the total abroad now at around USD 2.5trn. Even if a large portion is held in dollars, the non-dollar switch could still act as a positive for the dollar although we wouldn’t describe it as game-changer or as influential as in 2005 when the dollar advanced notably, in part on HIA flows but also reflecting Fed tightening in that year as well.”