Is a Border Adjustment Tax on the Horizon in the U.S.?

As has widely been reported,  the White House and Congressional lawmakers are working on plans to reform corporate tax rates that includes some form of a border adjustment tax (BAT).  While the idea, initially included in House Speaker Paul Ryan’s (R-WI) “Better Way” tax reform plan in 2016, has been called “too complicated” by President Trump, support for a BAT is building and could be included in final tax reform legislation.

What is a border adjustment tax?

A BAT would impose a tax on imported goods and could also include cross border transactions involving services and intellectual property. At the same time, the gross revenue of exports would be exempted from taxes. The objective is to level the playing field against countries that relay on a value-added tax (VAT) which essentially has the same impact. The difference is that the proposed border adjustment tax is a 20 percent direct tax on imported goods while a VAT is an indirect tax. Under current World Trade Organization (WTO) rules, only indirect taxes such as the VAT are allowed, and the WTO could challenge the proposed BAT if it goes into effect.

What is the effect of a BAT?

Currently, when a U.S. based company buys goods from a domestic supplier, that supplier pays a tax on its profits; however goods purchased from a foreign supply are not subject to a tax. In short, the BAT would impose the same tax rate on imported goods. Those who support this proposal believe that it will address the unfairness of countries that use a VAT and put domestically produced goods on an equal footing with imported goods. On the other hand, opponents argue a border adjustment tax will have an adverse impact on the U.S. economy and ultimately harm consumers.

The Takeaway

The proposed BAT is just one aspect of a comprehensive tax reform plan that would also dramatically reduce the business tax rate from 35 to 15 percent and tax the repatriation of corporate profits held offshore at a one-time rate of 10 percent. In the final analysis, the laws governing cross-border transactions are complex, and it is uncertain if the proposed border adjustment tax will be included in a final tax reform proposal. In the meantime, attorneys with expertise in cross-border tax transactions will continue to monitor these developments.

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