Though it’s teetering somewhere between dead and alive, it seems there’s more than one way to skin a BAT.
The belabored border adjustment tax hasn’t yet found footing among a divided Congress, but the apparel industry is certain its passage would blindside an already suffering sector.
At a breakfast discussion on the BAT and tax reform hosted by MMG Advisors in New York City Tuesday, experts had much to say about the tax’s potential impact on retail but little concrete about whether any of that will come to pass at all.
As Ron Sorini, principal of consulting law firm Sorini, Samet & Associates, explained, the BAT tax is still alive for two reasons: one, there’s still a strong feeling among the Trump Administration that the country’s current income tax system disadvantages manufacturers; and two, the money to foot the rest of the tax bill (for things like lowering the corporate tax rate from 35 percent to 20 percent) has to come from somewhere.
What’s more, as Rick Helfenbein, CEO and president of the American Apparel & Footwear Association explained, certain leaders on the Hill, like House Speaker Paul Ryan and Representative Kevin Brady, chairman of the House Ways and Means Committee, which has jurisdiction over taxes, are in powerful positions, and both are backing the BAT. In the Senate, according to Helfenbein the feeling toward the tax is one of general opposition.
When it comes to President Trump, he’s “been all over the board on it depending on what day you ask him,” Helfenbein said.
(Read more about what’s ailing the BAT et al: Update from Washington: BAT, NAFTA and What’s Dead or Alive)
For now, the BAT isn’t wholly backed in its current form and the administration may try to bend it to make it fit.
“If it’s not going to work as a BAT, perhaps they will consider a value added tax,” Sorini said.
Could the BAT just become a VAT?
As it stands, the BAT tax on the table now would raise the tax on a $10 T-shirt, for example from $0.35 to $1.40 since companies would no longer be able to deduct their cost of goods, which would render the tax liability higher even though the corporate tax rate would come down from 35 percent to 20 percent.
Companies should be able to deduct the cost of U.S. inputs in their product, but that hasn’t yet been settled and panelists were divided as to whether a jean sewn in Honduras made with U.S. denim would still be an import and fully subject to BAT.
“If some components are made in the U.S., that portion of your cost of sales is going to be deductible,” said Carol Lapidus, partner and national consumer products leader of RSM US LLP.
Running counter to that, however, Sorini said, “The importer will not be able to deduct anything, but the exporter of the fabric will be able to deduct it.”
Which way that will shake out, there’s still no telling yet.
“We don’t know at this point if there’s going to be any tax, if the border adjustment tax is going to be phased in over a period of five to 10 years or if it’s going to come through as a VAT tax—like a sales tax—and the consumer is going to pay the price,” Lapidus said.
A VAT tax, used by as many as 160 countries around the world, including the U.K., is essentially a domestic consumption tax. So, say you’re sourcing and manufacturing T-shirts entirely in the U.K.: the yarn manufacturer would charge the fabric mill its gate price plus VAT, the fabric mill would charge the garment maker its price plus VAT and the garment maker would charge the retailer its price plus VAT. From there, the consumer foots the bill for the VAT at retail since they’re the only ones not adding value. To ensure inputs aren’t being charged fourfold, companies can reclaim VAT on their purchases.
If the same company decides to instead source the yarn for its T-shirts in the U.S., where there’s no VAT, they would still pay the same VAT on those imports—something the U.S. does to keep the playing field fair for its domestic suppliers.
Now, a proposed BAT, on the other hand, would put a 20 percent tax on imports but not exports, and suddenly the price U.S. companies pay for foreign inputs would be 20 percent higher than what they’d pay domestically, which some are saying would be an unfair trade subsidy under World Trade Organization rules.
“A VAT is essentially still a consumer tax, a tax on everybody, importer and exporter,” Helfenbein said, adding that the administration may have put BAT on the table simply to make a VAT seem more agreeable. “They could slip a mickey on you and get you crazed about the BAT tax and then slip in a VAT tax…but it’s still a tax.”
One way to beat the BAT
Regardless of whether the tax ends up with a “B” or a “V” as its first letter, companies will start finding the loopholes they need in order to survive, and those loopholes could effectively send them running for the same borders Trump wants to keep them within.
“There are going to be companies that are not going to have a presence in the United States because that’s going to be one way of not having to be subject to this BAT,” Lapidus said.
For companies that decide to pick up and head abroad, leaving no taxable presence in the U.S., and manufacturing overseas and selling via e-commerce, they wouldn’t be filing U.S. tax returns, which makes it challenging to see how they could be subject to a BAT on their taxable income.
“What you’ve unearthed is a way to beat the BAT,” Helfenbein said. “If you are a foreign company shipping on the Internet into the United States, a BAT tax wouldn’t be applicable because you’re not going to deduct your cost of goods sold if you’re not a U.S. entity.”
If forced between the BAT and going out of business, U.S. companies could have little choice than to put Business First over America First.
“That’s really one of the ways of potentially not being subject to the border adjustment tax,” Lapidus said. “If it does pass, we’re going to see more and more international tax planning.”