* We consider three aspects of the potential US tax reforms: a cut n to the corporate tax rate; repeal of interest deductibility; and a territorial regime of taxation.
* We estimate a US corporate tax cut of 5 pp would add around 2% to STOXX Europe EPS. For companies with high US exposure (see our US-exposure basket, GSSTAMER), it would add c.4% to EPS.
* However, repeal of interest deductibility would offset half of this, giving an overall impact of around +1% on EPS for SXXP. The annual standard deviation of EPS growth in the last 25 years has been 21%; so this impact is negligible.
* The Republican proposal is to introduce a destination-based tax with border adjustment (DBTBA). Under this system, US firms would no longer be able to deduct import costs when calculating their tax bases. It is this aspect of the tax
reform which most interests European investors.
* The likelihood of this being enacted however is low; our Economists think around a 20% chance. However, there are various alternatives which have some degree of equivalence – VAT taxes and Import tariffs.
* For importers into the US it would have a very material impact. On conservative assumptions a company with 50/50 US/Europe exposure that imports just 10% of COGS into its US operation would see group profits fall 8%.
* But large listed European companies do not in general manufacture in Europe and sell into the US. Most with large US exposure are either in services or just happen to own a US-based business which operates largely as a separate entity.
* The 45 stocks in our US-exposure basket (GSSTAMER) have an average US sales exposure of 50%. But they also have c.40% of their total employees in the US, and 50% of total assets (see Appendix for stocks).
* Moreover, if the aim is to bring jobs back to the US, a large proportion of US imports of goods with a high labour component are from Asia (c.70%) whereas the EU represents only 8% of US imports of labour-intensive goods.
* EU exports to the US are far higher in high-tech and skill-intense industries. This mix is likely to mean European imports into the US are higher margin, with better pricing power and greater ability to pass on a tax or tariff adjustment.