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International Tax

Border Tax Versus Import Tariff – Which One Will Impact Proposed Tax Reform?

This article is published by Skoda Minotti’s Manufacturing & Distribution Group.

A Republican “border adjustment” tax proposal that is intended to boost exports over imports has several major U.S. corporations up in arms, and that has put members of Congress under intense pressure from key corporate constituencies.

What’s all the fuss about? It centers on a key component of the Republicans’ “A Better Way” tax reform blueprint—specifically, a border adjustment tax. This tax is meant to exempt companies from paying federal income tax on export revenues while also ending the deductibility of import costs from taxable income.

President Trump, meanwhile, has put forth mixed signals regarding this proposed border tax and hasn’t taken a well-defined stand on border adjustment. Instead, he generally has supported a tariff on imports, and without offering many specifics, has proposed raising tariffs on all imported goods and instituting a high tariff on the imports of companies that move factories outside of the U.S.

To try and make sense of where this all stands, let’s dig a bit deeper into some of the key differences between a border adjustment taxes and import tariffs. A border adjustment tax is a value added tax levied on imported goods. This tax is levied depending on where a good is consumed rather than where it is produced and is designed to smooth out imbalances in money flows across borders and reduce corporations’ incentive to off-shore profits.

The Constitution vests taxing power exclusively in Congress. Therefore, any implementation of a border adjustment tax would require congressional action.

Related: Take Advantage of A Tax Deduction for International Sales

An import tariff, meanwhile, is defined by the Congressional Research Service (CRS) as a schedule of duties imposed by the government on imported goods. The particular duty imposed on a good depends on its classification in the U.S. tariff schedule.

According to the CRS, the GOP’s tax reform blueprint includes proposals for a border adjustment tax that would impose a tax on imports while exempting exports from tax. That CRS assessment also observed that this tax would be implemented in conjunction with lowering the corporate tax rate to 20% and switching to a territorial tax system—in other words, a tax system that taxes domestic income but not foreign income.

All of which brings us back to the objections raised by several of the country’s largest employers—namely, Wal-Mart, Costco, Nike, Target and Macy’s. Additionally, oil refiners and automakers have come out against the border adjustment tax. Their concerns have caused a widening political split—particularly in the narrowly divided Senate. To date, at least eight Senate Republicans have expressed concern about the proposed tax, and if more lawmakers follow their lead, tax code reform, which is a key 2017 goal for Congressional Republicans, could be in deep trouble.

Conversely, many U.S.-based multinational exporters, including Boeing, Caterpillar, Dow Chemical, General Electric, Honeywell International, Johnson & Johnson, Pfizer and United Technologies, support the border adjustment tax through their membership in the American Made Coalition trade association.

As you can see, while there is uncertainty in the specific outcomes, we can be certain that the taxing system of the U.S. will change. The current system is very complex and there isn’t an easy solution. Individuals and companies alike await additional details and specific proposals to determine how to proceed, and on the overall direction of the U.S. tax system revisions.

Skoda Minotti will continue to monitor this important issue and keep you updated as news develops.

Do you have questions about the proposed border adjustment tax, import tariffs, or other manufacturing and distribution or international tax issues? Please contact Jason Rauhe, CPA, at 440-449-6800 or email Jason.
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