By Vicki Schmelzer

NEW YORK (MNI) – The U.S. dollar is doing just fine on its own
these days, given the widespread risk aversion in the market, but the
greenback may get an added lift if there is true corporate tax reform,
as now seems increasingly likely, analysts said.

As evidence, they pointed to a Wall Street Journal report over the
weekend that the Treasury Department “is considering a proposal to
eliminate some but not all taxes on the overseas profits of U.S.
multinational companies, a central element of the administration’s
broader plans to overhaul the corporate tax code.”

Currently, the United States operates on a “world wide tax system,”
which means that a U.S. corporation pays taxes on income earned within
U.S. borders as well as income earned abroad.

A U.S. corporate making money here, without any loopholes or tax
credits, would pay a 35% tax rate.

If the firm also earned income abroad in Country A, which has, for
example, a 15% tax rate, the firm would pay 15% tax to Country A, and
then would pay the U.S. the remaining 20% in the event profits were
brought back home.

If the U.S. corporate does not repatriate its profits, it gets a
tax credit for the taxes already paid abroad under the current system,
which can be used to reduce its overall tax rate.

Instead of a “world wide tax system,” U.S. corporate CEOs have
begun to argue instead for a “territorial tax system,” where firms would
pay taxes based on where the income is earned.

The downside is that corporates might be more inclined to set up
shop abroad where labor is cheaper and the tax burden is lighter.

The upside would be that there would no longer be tax credits to
offset taxes owed, which could increase the amount of U.S. corporate
taxes that are ultimately collected.

Of the WSJ report, “they are talking about shifting the U.S.
international tax system to a territorial tax system, ” explained Daniel
Clifton, head of policy research at Strategas Research Partners.

“Under a pure territorial system, there would be no need for a HIA
(Homeland Investment Act of 2004), since money can come back and forth
tax free,” he said.

The Obama Administration has concerns about the territorial system,
both from a job creation standpoint (jobs created overseas instead of
domestically), as well as from a tax perspective.

“Hence, the plan they are developing would limit what type of money
would qualify for territorial status and are seeking to remove tax
credits that businesses are holding since technically they won’t need
those credits — that is why the provision should raise tax revenue,”
Clifton said.

Also, U.S. corporates will be reluctant to give up their accrued
credits, he said, reminding that corporations “fought Clinton when he
proposed something similar in the early 90s.”

A move to a limited territorial system or any other tweaking of
corporate taxes would need to be “part of comprehensive tax reform,”
Clifton stressed.

As other possibilities to raise revenues, currency analysts do not
completely rule out a second Homeland Investment Act tax repatriation
holiday.

As a reminder, the Homeland Investment Act of 2004, part of the
American Jobs Creation Act, was a 12-month window where U.S. corporates
could repatriate overseas earnings at a 5.25% tax rate instead of the
normal 35% tax rate.

HIA was designed to raise revenues as well as to stimulate the U.S.
economy.

An oft-quoted 2009 National Bureau for Economic Research working
paper on HIA stated that while $300 billion in eligible revenues (IRS
puts eligible revenues at $312 billion) was returned to the U.S. in
2005-2006, 92% of the funds were returned to shareholders, in the form
of dividends, buybacks, etc.

“Repatriations did not increase domestic investment, employment or
R&D — even for the firms that lobbied for the tax holiday stating these
intentions and for firms that appeared to be financially constrained,”
NBER said.

Naysayers argue that the original HIA repatriation did not produce
the desired result, and have grave doubts that a tax holiday would
produce better results now.

The White House and Treasury have stressed that repatriation would
only be considered in the context of a wholesale rewrite of corporate
tax laws, not passed as a separate measure.

The greenback would benefit from any type of larger corporate tax
reform, analysts said.

“A new version of the Home Investment Act would have a considerable
positive impact on the dollar,” said Sebastian Galy, senior currency
strategist at Societe Generale.

Until now, a second tax holiday had been pushed “by corporates and
Republicans, rather than Democrats,” he noted.

In 2005, HIA repatriation served to underpin the dollar at various
points over the course of the year.

A second HIA or HIA2 could be similarly dollar supportive, analysts
said.

In addition, much-needed corporate tax reform in general could also
have a positive effect on the dollar.

“Any shifting of the tax code that reduced production abroad, that
should be a dollar positive,” said Greg Anderson, senior currency
strategist at CitiFX.

Tax reform to “level the playing field” could act to reduce the
U.S.’s external imbalance and hence also be deemed as positive for the
dollar, he said.

As for the prospects of a HIA2, Anderson also noted that the Obama
administration has consistently opposed a repatriation holiday unless it
is part of broader tax reform.

Nevertheless, there was still scope for negotiation regarding HIA2.
If larger tax reform was at stake, the Administration might “negotiate
back and embed HIA if Republicans insisted,” he said.

The market will watch closely to see what proposals are ultimately
put forward.

The Obama Administration is preparing its own corporate tax reform
package as part of a proposal to be submitted next week to the Senate
Finance Committee.

See MNI mainwire story at 2:40 p.m. EDT for additional details on
corporate tax reform prospects.

** Market News International New York Newsroom:212-669-6430 **

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