Taxman & Another Reason For USD Shine - Credit Agricole

The inversions law announced this week aims to prevent US companies from relocating abroad to lower their tax liabilities (the US for instance has the highest corporate tax rate in the developed world at 35%, even though after deductions and other loopholes net tax payments are much lower). The decision was a surprise to markets after Treasury Secretary Lew recently suggested that tax reform would require “legislative activity,” which means at the time he felt Treasury Japan: Inflation rate further went down in August A number of factors continue to push EUR yields/rates down across the curve We think BTPs are already good value in RV, ahead of Monday’s supply 26 September 2014 3What matters today (Asia edition) did not have the authority to address the “inversion rule” itself.

The announcement this week reflects a departure from that thinking but more important it also has forex market implications. The introduction of the law drove in part some of the recent USD strength, especially against European currencies.

Above all, the law going forward should reduce M&A outflow from the US, which should marginally add to the USD’s medium-term outlook. Indeed, about 45 companies have reincorporated in low-tax countries since 1982 – 14 since 2012. Ireland, the UK, Switzerland and Sweden have been the biggest recipients of the surge in M&A flow. Drug and Tech companies reaped the largest benefits from tax inversion. This year, US firms announced over USD200bln in M&A deal volume – 70% of which is cash-financed deals (cash deals are important for forex activity since its impacts the supply and demand for currency; equity funded deal have zero forex impact).

The law does not impact “completed” deals but it will impact the possible outflow from “pending” deals, which are close to USD150bln. While some firms will complete the deal given the costs to cancel, we think the law will lead to less cross-border M&A outflows over time. The result is higher net FDI flows and a more supportive USD backdrop, especially against GBP, SEK and CHF.

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