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Border Adjustment Could More Than Quadruple Your Taxes

When trade experts are devoting the bulk of their time to decoding and setting up to fight border adjustment—despite it being just one portion of one reform that’s one part of the greater overhaul to trade—it’s worth paying very close attention to.

If the Trump administration enacts the proposed border adjustment tax (BAT), it could more than quadruple companies’ tax liability.

That’s the truth that set the tone for an American Apparel and Footwear Association-hosted session on the issue at Sourcing at Magic last week. The House proposed plan promises to lower the corporate tax rate from 35 percent to 20 percent, but retailers will hardly be saving if the plan goes forth as is.

“Of all the issues our industry has had to deal with and face, this has risen to the top. And it’s risen to the top in very, very short order,” AAFA executive vice president Steve Lamar said. “Your rate goes down and your burden goes way, way, way up. That doesn’t sound like a good deal.”

What the House claims will be good about it, is all the money the tax could bring in for the country.

Last year, the U.S. collected $34 billion in duties across all industries, $14.5 billion (or 42 percent) of which came just from apparel and footwear. A border adjustment tax could drum up $1.2 trillion for the U.S.—which is why the House is saying it’s needed.

Of the House’s proposed 35-page “blueprint” on tax reform, dubbed “A Better Way,” just three small paragraphs make up the portion that stands to have the biggest repercussions for retailers. In those three paragraphs on border adjustment, the House essentially says companies will no longer be able to deduct their cost of goods sold.

“This means that products, services and intangibles that are exported outside the United States will not be subject to U.S. tax regardless of where they are produced. It also means that products, services and intangibles that are imported into the United States will be subject to U.S. tax regardless of where they are produced,” the official language says.

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In simpler terms, it means income taxes will be border adjusted to make export revenue tax free, but there will be an extra cost imposed on the import side, Lamar explained.

Breaking it down by numbers, AAFA president and CEO Rick Helfenbein said, for a $10 item, if $7 is your cost of goods sold, $2 is your overhead, your profit is $1. Under the current 35 percent tax rate, companies would pay 35 cents on that $1 of profit. Taking the same scenario under the border adjustment plan, what happens, without the ability to deduct the cost of goods sold, is companies would now pay tax on that $1 of profit, plus tax on the $7 cost. Even with the “lowered” 20 percent tax rate, on $8, a company’s tax liability would jump to $1.60. That’s more than four and a half times what retailers are currently paying.

Hoping to clear up some of the confusion surrounding the floated tax strategy, Lamar said, “They’re not proposing to charge a 20 percent rate on imports. What they’re proposing to do is to border adjust your import tax so there’ll be an after-the-fact adjustment on your calculation.”

If companies are bringing in a $1 profit but paying $1.60 in taxes, they’re either going to go out of business, raise their prices by 20 percent or scale back on staff. One problem there, among the many, is that consumers won’t be willing to pay 20 percent more, so sales volumes will suffer.

Already searching for exemption from a tax storm that hasn’t even hit, companies are trying to probe Washington leadership to find out whether carve outs or similar modifications will be made, but so far that hasn’t been the case.

“Absent changes, the trajectory they’re going on for right now is no carve outs, no exclusions for FTA preference countries,” Lamar said.

That means, for example, that countries under trade preference programs that aren’t under attack, like the African Growth and Opportunity Act (AGOA), which affords eligible nations duty free export to the U.S., would also be faced with a 20 percent border adjustment tax.

“This is going to take duty free arrangements and impose a cost on that,” Lamar said.

Whether a border adjustment tax would stand up in the World Trade Organization (WTO) considering existing tariff commitments has been debated on both sides, with supporters saying the plan is consistent with the WTO because it’s similar to value added taxes (VAT), which the WTO is OK with. Critics, however, disagree entirely because of how calculations for the BAT are done.

Experts trying to do their own calculations wonder what a retaliation in the WTO would look like in the event a country—or countries—were to file a case with the trade organization, found that the U.S could be facing as much as $385 billion in retaliation costs.

President Trump has had mixed reactions to the border adjustment tax and some senators have come out against it, but there’s no way of telling what’s next.

For now, companies opposed to what border adjustment could bring are contacting their Congress members to tell them so. And in the interest of fostering ease, complainants don’t even need to write their own email on the topic. Pre-written emails opposing the tax could help generate enough opposition to get people on the Hill listening.

“The more you’re engaged on this, the more you raise a ruckus,” Lamar said.