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What Will Tax Reform Mean for Retail?

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The tax reform that’s been taking up the lion’s share of focus on the Hill has passed the House, been OK’d by the Senate Finance Committee, and now it’s awaiting passage by the full Senate, a decision on which is expected after the Thanksgiving holiday.

President Trump has promised Americans will see a “huge tax cut” by Christmas.

Though two different bills are currently on the table, Treasury Secretary Steven Mnuchin while said speaking at the Ohio Council of Retail Merchants’ annual luncheon last week, that both the House and the Senate “fundamentally have the same plan” for tax reform.

At its simplest, both bills include cutting the corporate tax rate to 20 percent from the current 35 percent—though the House wants that cut to take effect immediately and the Senate wants to hold it off until 2019.

“From our perspective, sooner is better,” the National Retail Federation (NRF) reported Mnuchin as saying on behalf of the White House.

“We think 20 percent is the right rate,” Mnuchin added. “It’s a very competitive rate. If we let our companies compete fairly on a level playing field, they will outperform other countries around the world.”

The idea behind the tax cut for companies is that the potential savings can be re-designated to innovation, to creating more jobs and potentially even to lowering prices at retail. The cut, which is also expected to put more money in consumers’ pockets, should also lead to increased spending, according to Mnuchin.

“I think this will help the consumer,” Mnuchin said. “This will be good for retail. We are looking forward to this impacting growth.”

Leaders at the NRF seem to agree.

“Tax reform is the key to increased prosperity that small businesses, large employers and middle-class workers have all been waiting for more than a generation. This is about jobs, wages and America’s future,” NRF president and CEO Matthew Shay said in a statement.

However, as with most things, the devil is in the details, American Apparel & Footwear Association executive vice president Steve Lamar said.

“The broad message of this language is that they’re reducing rates and when you reduce rates, you should reduce your burden, so the tax rate should go down,” he said, adding, however, that the legislation will do more than just reduce tax rates, it will also make structural changes to underlying tax provisions, and there’s no telling yet exactly how all of that will shake out. Some of the proposed changes are entirely new and they approach tax from an angle that hasn’t been taken before. Changes could also have different impacts on corporations than they do on privately owned small businesses. “It’s hard to predict at this point how this is going to end up.”

What about the BAT or things that look like it?

The unfavorable border adjustment tax proposal that would have eliminated the ability to deduct costs of goods sold and could have raised the tax on a $10 garment from $0.35 to $1.40, met its welcomed death in July, and though it’s not being resurrected in either tax reform bill, there may be elements included that could have similar effects.

Cutting the tax rate from 35 percent to 20 percent is expected to provide less incentive for companies to look outside of the U.S. for lower cost supply chain options. But the Senate’s tax bill includes a base erosion element that could further disincentivize companies from offshoring.

Companies could potentially face a 10 percent base erosion and anti-abuse tax—so BEAT, not BAT—on payments made to foreign affiliates or outlets in different countries, as some money earned from a foreign entity may be considered excess income. The tax is designed to make sure that even if companies do opt to offshore parts of their production, they’ll still be taxed in whichever countries they go to, so the U.S. tax base isn’t eroded.

The House version of the tax bill has similar base erosion provisions in the form of a proposed 20 percent excise tax on foreign imports from company subsidiaries that some have called the “mini-BAT.” They are also looking at imposing a 10 percent foreign minimum tax on U.S. corporations with foreign subsidiaries.

“Both the House and the Senate are trying to move to a territorial system,” Lamar said, which assesses tax primarily on activities that occur inside the U.S. The base erosion provisions are intended to make sure that the move to a territorial system does not inadvertently incentivize companies to reduce some of their taxes by moving to offshore locations. But the BEAT could work to curb that incentive, though the hope is that supply chains don’t suffer too much at the hands of it. “A lot of companies have set up their supply chains in a non-territorial system, so if you change the rules you have to make sure the supply chain isn’t penalized with these new rules.”

What happens next

For now, it’s a waiting game for the full Senate to approve its version of the bill. The problem the bill faces in the Senate, though, is that leaders have attached a health care provision—that would include a repeal of the Obamacare mandate by zeroing out the tax penalty—which could serve to see the bill tied up since there’s yet been much agreement on health care reform.

According to an Associated Press report Monday, however, the White House has said it would be willing to strike the health care provision from the Senate tax bill if it gets in the way of getting tax reform passed.

“There’s a lot of expectation that this is a Congress that’s going to get tax reform done…there’s a lot of pent up demand for them to make a big accomplishment, and this would count as a big accomplishment,” Lamar said, adding however, “Timing matters, details matter, process matters and the ground is shifting constantly.”

If both the Senate and the House approve a tax reform bill, then a conference of House and Senate appointed leaders will meet to debate different provisions of the legislation and come to some reconciliation. From there, the conference will produce a single document that will get reapproved by the House and the Senate. And President Trump wants all of that completed before Congress leaves for Christmas.

“As Secretary Mnuchin said this week, tax reform is all about economic growth,” NRF’s Shay said. “As Congress works to get tax reform onto the president’s desk, we must keep up this momentum and let the details get worked out as the legislation progresses. Workable tax reform that can be signed into law is more important than perfect tax reform that can’t be passed.”

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