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Border adjustment tax reform deemed unlikely: Credit Suisse analysts

21st April 2017 - Author: Marianne Lehnis

Since Trump’s election win last year, creating a border adjustment tax has been top on the Republican’s agenda, and reinsurance industry experts have since speculated on how this would impact offshore reinsurance purchases, with some predicting chaos ahead with insurance prices soaring as carriers pass extra costs down to consumers.

Changes to tax rules on offshore reinsurance purchases from the new U.S. administration could potentially influence how and where insurers would purchase reinsurance protection, rewriting the U.S. insurance industry’s geographic value chain.

But according to Credit Suisse analysts, who’ve just returned from Washington D.C. meetings, this could now all be water under the bridge.

After first-hand investigation into the U.S. political climate, the analysts say the border adjustment tax proposal is unlikely to carry through into reality:

“Border adjustment tax seems unlikely, without BAT, comprehensive tax reform is unlikely. The conversations we had indicated that border adjustment tax is not fully backed by all Republicans, which would be needed to pass a comprehensive tax reform bill.

“Trump’s public support for border adjustment is key in whether Congress will be willing to include it in a tax bill. Though Trump has alluded to supporting the indirect outcomes of BAT, such as favoring domestic production and levying a tariff on imports, the Trump administration has not yet made known its official stance on BAT. Support from the president would be a key catalyst and seems to increase the probability of comprehensive tax reform in the opinion of one expert from 30% to 70% for passing tax reform by the end of 2017.”

The Credit Suisse analysts said they expect some milder version of tax reduction to replace the more unorthodox, and potentially hard-hitting BAT;  “However, we believe the Republicans are pushing for some form of tax reduction. Although comprehensive tax reform is the goal, the experts note that the Republicans would settle for a tax cut, though likely only extending for 10 years and would not be revenue neutral.

“With majority in Congress and the Presidential office, Republicans seem to have a golden opportunity to accomplish the top items on the agenda, i.e. healthcare repeal and replace or a comprehensive tax overhaul, neither of which have been accomplished so far. If neither issue is resolved, we believe the Republicans would still want to pass a simple tax rate cut quickly to claim accomplishment of at least one top agenda item.”

According to the equity analysts, the Border Adjustment Tax has effectively no chance of getting through the Senate’s heavily guarded doors, but a consensus remains that some form of corporate or personal tax reform will yet occur.

Staffing vacancies, particularly at Treasury, have hindered tax reform implementation, Credit Suisse analysts reported, but if a watered down tax reform is to pass through the Senate’s well-guarded doors, it’s expected to happen relatively soon in the coming months of the year, as 2018 will likely see the regime shift its focus to the next election cycle.

“First term presidents usually accomplish large legislative changes before August in the first year. Historically, this has been the honeymoon period when Congress is more likely to further limit the timing of tax reform are periods of time when Congress is in session between now and the end of the year,” said Credit Suisse analysts.

And while the final whys and wherefores of tax reform remain to be seen, Credit Suisse writing the border adjusted tax off as being improbable, will be music to the ears of global re/insurance players, who have been hesitating with advancing a clear U.S. business trajectory until the fog surrounding the BAT reform lifts.

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