United States

House tax reform plan includes new "border adjustment" proposal


As 2017 begins, and a new Congress and president are sworn in, a comprehensive tax overhaul appears to be near the top of the legislative agenda. Key to the House GOP’s tax proposal is a move towards a destination-based tax, where income from goods and services are taxed based on where they are consumed, as opposed to where they are produced. As described in the House Republican Tax Reform Blueprint, this would be facilitated by so-called border adjustments which would result in generally taxing imported goods and services while exempting exported goods and services from U.S. tax. However, at this time the specific parameters of this border adjusted tax (BAT) are far from clear, with many potential variations possible.

One of the border adjustments that might be included in a destination-based tax system is an exemption for sales of good and services outside the United States. Thus, a domestic manufacturer that sells a product abroad is not subject to tax on the gross revenues from its foreign sales. Under another adjustment, the taxpayer may deduct its domestic cost of goods sold (CGS) but not its foreign CGS. Determining which costs are foreign vs. domestic is easier said than done but presumably actual legislative language will shed light on this point, whenever it emerges.

Just as a destination-based system would exempt exports from U.S. tax, it would likely subject imports to U.S. tax. The Blueprint does not suggest how this would be achieved, although it does indicate that the move to a destination-based system will not involve a new tax. This suggests that taxation of imports would be achieved by making imported purchases nondeductible.

The debate on the propriety of a BAT is just beginning, and significant questions remain, including whether or not such a tax is legal under World Trade Organization rules. However, both the new president and the Congress have placed great emphasis on passing measures that will stimulate domestic employment and they have both publicly endorsed imposing a tax on goods produced abroad and imported into the United States. Accordingly, we believe there is a significant possibility that a provision containing some form of BAT may be enacted if international tax reform occurs. Because this may happen as soon as later this year, we believe taxpayers should begin to analyze the impact of these proposals as soon as a bill is introduced in the Congress, or sooner.

For more information, see Border Adjusted Tax proposals may impact exporters and importers

Ben Wasmuth

Senior Manager