USD: Little reaction yet from the G7 tax deal
FX markets start what looks to be a busy week in contained fashion. Thursday looks to be the busiest day of the week with the release of US CPI for May and also an important ECB meeting. Before Thursday, the market may mull over the G7 agreement this weekend on a global minimum tax rate and jurisdictional tax changes. Recall the momentum behind this agreement has largely come from Europe levying digital services taxes on US big tech in a bid to tax a fair share of their revenues. A change in the US Administration and a welcome return to multilateralism has allowed this deal to be done.
What will the deal mean for FX markets? We’ve started to think about this over recent weeks and our early thoughts rest on two (opposing factors) that stem from the two pillars of the agreement. The first pillar of the agreement looks at taxing large multinationals more in the location of where they earn their revenues (i.e. to fight against the transfer pricing of profits to low-tax jurisdictions). The second pillar looks at introducing a minimum 15% global corporate tax rate. By the way, this deal needs to be approved by the G20 in July, the OECD in October and then passed into local regulation, which could take years.
The implications of the first pillar could look slightly dollar negative. US big tech are going to have to pay a larger share of their taxes where they earn their revenues – especially in Europe which has been the source of the digital services tax. Of course, those taxes should be paid in local currencies. The OECD estimates this pillar could bring in an extra $12bn per annum for governments. Though for FX markets the implications could be a little larger since it would be an issue of also switching jurisdictions where taxes are paid.
The OECD estimate that the implications for government revenues are larger from the second pillar – the global minimum tax rate of 15%. Our thoughts here are that the removal tax havens could have implications for the hundreds of billions of dollars of cash parked overseas by US multi-nationals – reducing the incentives to keep cash overseas and perhaps prompting the kind of capital repatriation seen during the Homeland Investment Act in 2005 or more recently under Trump’s tax plans. This repatriation of capital would be dollar positive.
Needless to say this is a complex topic and could take years to be implemented. Clearly more work is to be done here.
Back to today, Asian equities are a little mixed after some softer Chinese trade data (chip shortages seem clearly at play here). And the PBOC fixed the CNY a little weaker, suggesting commodity and EM FX may not enjoy the tailwind of recent CNY appreciation. DXY to trade well inside Friday’s 90.00-90.60 range.