T30 Bets Yes on Repatriation

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T30 Bets Yes on Repatriation

The Treasurers’ Group of Thirty (T30) anxiously awaits tax reform and other potential economic boosters.  
 
Here is a summary of key takeaways from the group’s recent meeting at Nasdaq:
 
Will tax reform ever arrive? Some kind of tax legislation is likely to become law this year. However, it probably won’t be the radical reform favored by House Speaker Paul Ryan and many Republicans in Congress. That is unless a bill is introduced by the start of August, given procedural hurdles and other challenges, including the 2018 budget and raising the debt ceiling. The radical tax reform would up end the current corporate and individual tax systems, eliminating the corporate income tax completely and instituting a consumption-like border adjustment tax (BAT). Lesser reform could lower the corporate rate, require repatriation of corporates’ trapped cash and introduce a territorial tax system, according to KPMG’s Kathleen Dale, principal, international tax accounting. The tax legislation must be revenue neutral to skirt an almost certain Democratic filibuster and avoid expiring in 10 years, and to do so, BAT will be necessary to generate tax revenue, although it faces stiff opposition from US importers.  Another controversial component of the “House Blueprint” is the elimination of interest expense, given the impact it would have on corporate funding sources. 
 
Repatriation: Bet on it. Companies are chomping at the bit to repatriate stranded cash, Ms. Dale said, and moving to a territorial system to tax overseas earnings is a necessity or companies will continue to hold cash overseas. The Republicans need some sort of tax win, should more radical reform prove elusive, and a territorial tax system fits at least part of the bill. “I think it’s very likely we’ll get mandatory repatriation before the 2018 midterm elections,” she said. That was a key takeaway for one member, who said his treasury would have to rethink how it wants to position itself.
 
Forget about the 10-year rising. Esteban Burbano, portfolio strategist at PIMCO, said the bond giant sees the today’s low rate environment continuing indefinitely, even if Republicans achieve tax reform or other potential economic boosters. Aging populations, weak productivity growth and loads of debt will result in a world of muted inflation and growth around 2%. In the immediate wake of President Trump’s election, PIMCO’s fixed-income savants wondered whether the trajectory might improve somewhat, and indeed equity markets rose dramatically, apparently pricing in those hopes. But since then, the difficulty of implementing a pro-growth agenda has sunk in, creating a challenging current market. Despite inflation falling in recent months, PIMCO still sees the Fed raising short-term rates twice more this year, if only to build monetary firepower to counter the next economic downturn. 
 
Uncertainties prompt PIMCO to tighten belt. PIMCO’s debt portfolio has leaned more conservative, not because the money manager has a pessimistic economic outlook, but because uncertainties abound: the rise of populism around the world, China’s National Congress meeting later this year and its subsequent leadership changes, possible missteps by the Trump Administration and the list goes on. PIMCO forecasts 2.25% global growth for 2017 compared to 2% last year, “but we’re worried about the tails,” Mr. Burbano said. Consequently, the money manager has lowered its overall investment duration to between five and seven years, while hedging at the front and long ends of the portfolio.
 
Cyber insurance ubiquity. One member asked how many attending companies had cyber insurance, and most responded affirmatively. Members discussed property and errors and omissions (E&O) policies that cover some form of cyber risk. One participant noted that phishing and fraud typically aren’t covered by those policies, and that his firm has a separate policy to cover that risk for up to $1 million, for “next to nothing” in terms of premium. He emphasized, however, that companies must put in place training programs or face higher risk. Another noted an instance where a fraudster changed a remittance instruction and the company sent 350,000 euros to a destination in Poland. Fortunately, Citibank flagged the transfer and recovered the funds. “So we immediately issued a policy where changing the remittance instructions requires making a call to insure accuracy.” Another member took on a $5 million policy last year with a low premium but a $1 million deductible. “It’s important to have this cheap insurance but not rely on it,” he said. 
 
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