Denice R. Preston
This article analyzes border adjustment taxes and the recent House proposal. This article provides an economic analysis and historical comparisons in order better to understand the impact on you and your company.
BAT taxed imports but not exports.
According to the nonpartisan Tax Foundation, a border adjustment tax adheres to the principle of “destination-based taxation,” whereby taxation is based on the place where the product is consumed rather than where it is produced. A BAT taxed imports but not exports. This created incentives to encourage companies to export more and import less.
The House proposal includes a border adjustment for the U.S. Corporate Income Tax. According to the plan, U.S. companies would not be able to deduct the costs of purchases made abroad (imports), and they would not be taxed on revenues attributable to international sales.
Contrary to popular misconceptions, a border adjustment tax (or border adjustment tax) is neither a tax nor a VAT. Tariffs are taxes that only apply to imports and can be selectively applied to specific products, companies, or countries. The border adjustment taxes in question would apply to all senses and exported goods, as well as all countries.
The border adjustment tax is not the value-added (VAT) tax, a system of taxation widely used around the world ( by 140 out of 193 countries). The VAT does not allow payroll deductions. However, the proposed plan provides payroll deductions. This seemingly small detail can have significant compliance implications for the existing World Trade Organization (WTO), which will be discussed in the next section.
The border adjustment is part of the larger house proposal.
The House proposal is composed of:
The corporate tax rate will be reduced from 35% to 20 %.
Interest expenses no longer being deductible.
Capital investments can be written off immediately or deducted in full instead of being spread out over time.
It is important to note that border adjustment is just one element of a larger House proposal. Some commentators tend to confuse this point.
The new tax system will essentially be a “destination-based cash flow tax.” This is the breakdown:
Destination-based refers to the border adjustment component.
Cash Flow is a term used to describe the changes in interest and depreciation deductions.
Apply the BAT in three hypothetical situations.
Another consideration is that the dollar could appreciate. According to economic theory, the adjustment at the border would increase demand for U.S. products and dollars initially by exempting U.S. exports from tax. Taxing imported goods would simultaneously reduce demand for foreign currencies and goods.
The expected result of this combination would be an increase in the value of the dollar. The economists disagree on whether this would happen. If the exchange rates are working as intended, then the dollar’s value will increase, and the cost of imported goods will decrease.
The BAT is designed to increase tax revenue, reduce incentives for offshore profits, and simplify the existing tax code.
Increase tax revenue. Within the context of a broader proposal, border adjustments would generate approximately $1.1 trillion in the next ten-year period, which could then be used to compensate for the revenue loss due to the lower corporate rate.
Eliminate incentives for companies to shift profits offshore. This would eliminate the profit-shifting tactics currently used by multinationals such as Apple and its Irish subsidiaries. Import expenses are not deducted from the taxable income. Therefore, they cannot affect its domestic tax liability. Exports are not included in taxable income. Therefore, tax liability is also unaffected. The proposal would eliminate the incentives for companies to move intellectual property overseas or burden domestic operations with debt.
Simplify current tax code: It may seem counterintuitive, given the complexity of border adjustment taxes. It is more convenient for corporations to know where their sales take place than where they are produced. The Tax Foundation states:
The tax laws that govern business today are likely to become much simpler. The border adjustment would remove the need for companies to comply with complex rules that govern controlled foreign corporations (CFCs), foreign passive income (Subparts F), transfer pricing and interest allocation, foreign tax credit, and accounting of deferred taxes. A border adjustment would only require companies to keep track of what they buy from abroad and which products they export.
The BAT is not without its risks.
WTO infraction: The proposed plan was inspired by the consumption-based VAT. However, the income-based VAT may be implemented. This is the source of controversy. Payroll, interest, or depreciation are not allowed for consumption taxes since they do not relate to taxable income but rather to consumption. It is a key part of the House proposal. It includes a provision that allows payroll deductions.
According to KPMG, it is not clear whether the proposal would substitute the current income taxes with a tax on consumption or if it would remain a tax on income that closely resembles a tax on consumption. This distinction could lead to inconsistencies between current World Trade Organization commitments on protectionism. Compliance depends on whether labor costs can or cannot be deducted to determine taxable revenue. If this is the case, then it would be an income tax on corporations with a 100% immediate depreciation. This would disqualify it as value-added and be considered a breach.
Higher Consumer Prices: Experts disagree on whether border adjustment tax will increase consumer prices. Some experts believe that the border adjustment tax would raise consumer prices. David French, SVP for government relations at the National Retail Federation, commented: “I hope everyone understands that they are really talking about a 20% tax to the U.S. Consumer.”
This cost burden is expected to be especially difficult for middle-class and working-class families. If the tax included oil imports, for example, rural Americans would be affected more than those living in cities.
