House Border Adjustment Tax
Introduction
President Trump has taken a populist approach to tax reform by linking pro-growth tax reform and regulatory relief to a preservation of U.S. domestic manufacturing jobs.
In addition, House Republicans released a 35-page tax reform plan (the “Blueprint”) that proposes to lower corporate and pass-through business tax rates, reduce individual tax rates, and provide full expensing for certain business costs under a border-adjustable destination-based cash-flow business tax system (“House Border Adjustment Tax”). In addition, the Blueprint would move the United States from a worldwide international tax system to a “territorial” dividend-exemption system.
House Border Adjustment Tax
As it currently stands, the United States assesses income tax on a worldwide basis for domestic taxpayers. By imposing a Border Adjustment Tax, the United States would shift towards a territorial taxing system and potentially lower the corporate tax rate to 20 percent.
Goods produced domestically in the United States and then exported would no longer be subject to income tax in the United States. However, foreign goods that were produced internationally and imported to the United States for sale would be subject to U.S. income tax. Under the Blueprint, all capital expenses would be fully expensed and net interest payments would not be deductible,eliminating a preference for debt financing instead of equity financing. The domestic production activities deduction would also be eliminated. However, the Blueprint maintains the current law for the research credit.
The policy behind the tax is that profits would more accurately reflect the location of the goods consumed. This would reduce the incentive for U.S. companies to create tax inversions in order to shift profits to low-tax countries.
The shift in tax is illustrated in the table below:
|
Current Tax Code |
Tax Code with Border Adjustment Tax |
|
|
Importing Foreign Goods to Sell in the United States |
Not Taxed |
Taxed |
| Exporting Goods Produced in the United States to sell in Foreign Countries |
Taxed |
Not Taxed |
Note
Despite similarities, the Border Adjustment Tax is not the same reform that President Trump has considered implementing. However, due to the movement that the proposal has had within the House of Representatives, it has received a large amount of attention. The theory behind President Trump’s proposal is much like that of the Border Adjustment Tax except that his reform is applied by a different tax that would be imposed on foreign goods sold in the United States.
The border adjustment proposal has faced criticism from import-dependent industries concerned that the border adjustment would increase the price of their products to U.S. consumers. Many market analysts believe the Border Adjustment Tax would strengthen the value of the U.S. dollar, thereby lowering the cost of imported products so that there could be little or no net change in the after-tax cost of imports, and thus no significant increase in consumer costs arising from the border adjustment.
The Border Adjustment Tax would remove current law incentives to locate business activities outside of the United States in an effort to reduce U.S. tax liability. In combination with full expensing, the Blueprint could provide strong incentives for businesses to increase their U.S. activities, both for production of goods and services for U.S. consumers and for exporting to foreign customers. However, the effectiveness of the Border Adjustment Tax remains the subject of much debate.
Waiting Game
The Border Adjustment Tax is not currently in place. In fact, there isn’t even a legislative bill yet. It is currently a proposal in the House of Representatives. Orrin Hatch stated “We’ll basically need universal Republican support to pass anything through reconciliation. That’s difficult to accomplish under any circumstances, let alone on something as complicated as tax reform.” Currently, U.S. importers are watching to see if the proposal will progress through the House.
Let’s Talk
If you believe this issue may directly affect your business, please contact:
Tax Senior Associate
+1 (801) 494-6098
benjamine@squire.com
Tax Supervisor
+1 (801) 494-6088
josephs@squire.com
Tax Partner
+1 (801) 494-6072
joeh@squire.com