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Border Adjustment Tax Proposal Discarded

Monday, July 31, 2017
Sandler, Travis & Rosenberg Trade Report

Trump administration officials and congressional leaders announced July 27 that a border adjustment tax is being dropped from a proposed overhaul of the tax code in an effort to move that reform forward.

Under a House Republican plan unveiled in 2016, the U.S. corporate income tax would have been converted from an origin-based tax (based on where goods are produced) to a destination-based cash flow tax (based on where goods are consumed). This shift was to be achieved via the BAT, which would have disallowed the existing tax deduction for costs associated with imported articles or inputs while exempting export revenue from corporate income tax calculations. This change would have brought the U.S. tax system more into line with those of major trading partners, which impose value-added taxes that are rebated when a product is exported and imposed when a product is imported.

The BAT met with opposition from a number of businesses and trade associations, who warned that it would “significantly hurt” U.S. consumers and employers by increasing the cost of everyday products such as food, gas, and clothing by up to 20 percent. There was also concern that the BAT could run afoul of World Trade Organization rules, particularly those that prohibit discrimination against imports in favor of domestic goods, which could have led to foreign countries levying an unprecedented amount of retaliatory duties on U.S. exports.

The July 27 announcement expresses confidence that with this change there is “a viable approach for ensuring a level playing field between American and foreign companies and workers while protecting American jobs and the U.S. tax base.” The goals of this approach include reducing tax rates as much as possible and creating a system that encourages U.S. companies to repatriate jobs and profits from overseas. The announcement said tax reform legislation could move through the Senate Finance and House Ways and Means committees this fall and then be taken up by the full House and Senate.

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