Tax Break on Imports Could be Eliminated Under GOP Proposal
Costs associated with imported articles or inputs might no longer be deductible from corporate income taxes under a controversial proposal being developed by congressional Republicans. There are currently few details on how this concept might be implemented, but with the GOP controlling the House, Senate, and White House and intent on passing the most sweeping reforms to the U.S. tax code in 30 years it is likely to see further discussion and refinement. Companies with international supply chains should closely monitor the Sandler, Travis & Rosenberg Trade Report for further developments.
A blueprint released by House Ways and Means Committee Chairman Kevin Brady states that all of the United States’ major trading partners raise a significant portion of their tax revenues through value-added taxes that include a border adjustability feature, meaning the tax is rebated when a product is exported and imposed when a product is imported. When trade is conducted between two countries that both have border-adjustable VATs, the effects in both directions are offsetting and the tax costs borne by exports and imports are in relative balance. However, the blueprint states, the U.S. tax system includes no such border adjustability measures, which “amounts to a self-imposed unilateral penalty on U.S. exports and a self-imposed unilateral subsidy for U.S. imports.”
The GOP’s draft proposal would make the U.S. corporate tax system more like those of its foreign competitors, which the blueprint states would enable the U.S. to apply border tax adjustments as they do. As a result, products, services, and intangibles imported into the U.S. would be subject to U.S. tax regardless of where they are produced, while exports would not. Congressional Republican leaders appear to see this change as an alternative to President-elect Donald Trump’s threat to impose 35-45 percent tariffs on imports from countries like China and Mexico.
Other aspects of the proposed tax reform include lowering the corporate tax rate from 35 percent to 20 percent and allowing U.S.-based companies to repatriate foreign earnings without additional tax cost. The blueprint states that the goal of these changes is to eliminate current tax incentives to move or locate operations outside the U.S. and to improve the global competitiveness of U.S. products, services, and intangibles.
Few additional details about the proposed changes, including the possible mechanism for the border adjustments, are yet available. However, tax reform is one of the top priorities of Republican leaders, so further developments are anticipated in the next few months.