US: Little impact for the USD from profits repatriation - ANZ
With all of the houses in Washington aligned in the pursuit of tax reform, a ‘repatriation tax holiday’ is looking increasingly likely and the Trump administration is proposing a one-off tax of 10% on untaxed foreign profits but analysts at ANZ think that any such decision will have only a marginally positive effect on the USD.
Key Quotes
“According to the Congress’s Joint Committee on Taxation, offshore earnings of USD2.5trn could be repatriated to the US. However, this number probably exaggerates the actual flow, given that it is unlikely that the full amount will be repatriated.”
“To estimate how much could be repatriated, we looked at what happened when the US introduced the Homeland Investment Act, 2004 (HIA) and temporarily allowed companies to bring back foreign profits at a 5.25% tax rate. According to the IRS, US corporations repatriated around USD362bn over the following year.”
“Foreign earnings retained abroad are now almost double those of in 2005. So, assuming firms make the same decisions they did in 20051, simple extrapolation suggests that we could expect ~USD700bn in flows. However, this simple arithmetic is unlikely to be accurate.”
“While there is no certain way to get an accurate reading on what the currency breakdown of these earnings is, a good portion of these foreign profits are probably already in US dollars. A 2011 report from the Congressional Research Service said that 46% of the overseas earnings were in US dollar assets around the time of the HIA. That number is likely to be much bigger now, as suggested with some consistency by company reports from the S&P 500, with about 80% of foreign profits likely to be denominated in USD.”
“This suggests that the equivalent of around USD140bn is likely to be converted into USD, with most of the repatriation being Eurodollar transfers into domestic dollar accounts.”
“While this could have some effect on the supply/demand of the USD, we think it will amplify rather than drive the impact. If history is any guide, the effects of corporate repatriation on the USD are often dwarfed by evolving monetary policies.”
“In the year following the implementation of the HIA, the DXY strengthened by around 13% (~8% on a trade-weighted basis). That said, over that period, the Fed almost doubled its benchmark interest rate (to 4.25% at the end of 2005 from 2.25% a year earlier) and the DXY-weighted 2-year spread widened by roughly 100bps. This contributed in pushing our fair-value model around 10% higher, thus explaining most of the move in the DXY.”
“Finally, profit repatriation may boost the USD via second order effects, if the funds are deployed in capital spending and job creation, thus boosting growth and expectations around the Fed’s tightening path. The HIA experience, however, shows thatin 2005, firms used those profits mostly for share buybacks, with little effect on employment and investment spending. A government study shows that as much as 91 cents for each dollar repatriated went to share repurchases, even though Congress had prohibited that at the time.”
“Further, though these actions were good for corporate performance, there is also little evidence that the tax holiday resulted in a strong portfolio flow into the US.”
“On net, we think that while a tax repatriation holiday will add to more positive sentiment surrounding the USD, in isolation it will be unable to be a sole driver of the USD. Indeed, a strong fiscal impulse elsewhere, able to push the Fed into a more aggressive stance on monetary policy, would be a better candidate for how US tax policy can drive a stronger USD.”