2017 may be the year when we finally see the first major tax reform since 1986. In the lens of this year’s version is a program called the Border Adjustment Tax. This feature, which was developed by the House of Representatives, is designed to improve the USA’s trade position, i.e. increase exports and diminish imports. It is also meant to bring money back home that is held outside of the country to avoid U.S. tax on the funds.
In short, the Border Adjustment Tax would be a corporate level tax feature wherein goods sold in the U.S. for export would not be subject to any corporate tax, while goods imported and used in products sold would not be eligible to be tax deducted by the importing corporation. In other words, wholly domestic sales of products with no nexus to a foreign country would be taxed at whatever the corporate rate is determined to be per this year’s ultimate Tax Reform Bill. However, exports would not be taxed at all and imports would essentially be taxed at the corporate rate without benefit of deducting the cost of imports used.
The above system will likely have a positive effect on exporter sales and a negative effect on importer sales. Importers will be faced with a decision whether to attempt to pass on their tax effect of the Border Adjustment Tax to their customers in the form of price increases. However, before they consider that remedy, they will need to consider the likely effect of the Border Adjustment Tax on the value of the U.S. dollar. It has been considered likely that the dollar will rise in value due to the Border Adjustment Tax. If that occurs, importers added cost due to Border Adjustment Tax will be offset by the greater value that importers receive from their import transactions due to the increased dollar value. On the other hand, exporters will face a detriment due to the dollar value increase, which will offset the benefit they derive from the Border Adjustment Tax.
The final Tax Reform Bill may change the game described above. Additionally, there a number of other important features connected with the Border Adjustment Tax. We’ll have to wait and see.
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– Steve Masler, CPA