United States

Border tax now seems unlikely to survive

TAX ALERT  | 

The border adjusted tax (BAT), a key part of the Ways and Means Republican’s tax plan since it was introduced in June 2016, now appears unlikely to be a part of the current tax reform effort. Long championed by Speaker Paul Ryan (R-Wis.) and House Ways and Means Chairman Kevin Brady (R-Texas), the BAT suffered several setbacks this week as President Trump’s administration clarified its lack of support for the proposal and Speaker Ryan conceded that tax reform legislation may move forward without the BAT. The potential effects of a destination-based tax system had caused much debate and concern for the past year. Major U.S. corporations had come out with strongly worded policy statements on either side of the debate and many economists expressed concern that the U.S. dollar could potentially fluctuate by as much as 20 percent upon the enactment of the BAT. Based on these recent statements by policy makers, it appears that the momentum behind the BAT is diminishing rapidly, at least for now.

Making several appearances before Congressional tax-writing committees this week, Treasury Secretary Steven Mnuchin expressed the administration’s concerns with the BAT and raised doubts about whether there was even enough Republican support in the House for it to pass. A lack of Republican support in the House became apparent this week as the Ways and Means Committee continued their public hearings on tax reform with a special session focusing on the BAT. During this hearing, Rep. Erik Paulsen (R-Minn.) said he could not support the provision as it currently stands and Rep. Adrian Smith (R-Neb.) expressed his concerns that the BAT would represent a significant ‘barrier’ to economic growth. While Speaker Ryan is not dropping his support for the BAT, his acknowledgement that he and other Republicans are discussing ways to move forward with comprehensive tax reform is a strong signal that he is open to moving tax reform without the BAT.

In order for bold and comprehensive tax reform to move forward without the BAT there will need to be another mechanism to raise revenues—the BAT was expected to raise over $1 trillion in tax revenue. Pressed on this issue, Mnuchin reiterated several times this week that the White House is “looking at everything” and “nothing is off the table.” On prior occasions both Mnuchin and President Trump have expressed support for value-added tax (VAT) regimes. Publically the administration is “looking forward to potential changes” that Chairman Brady may make to the tax reform proposal. However, Secretary Mnuchin’s statements suggest that the administration is willing to accept a VAT, a tax that has never been popular in the United States but that has long been used in European countries as a significant revenue raiser.

Despite the current political environment and various setbacks, tax reform continues to move forward. While the BAT may not be part of this tax reform effort, it is possible that it will find support in the future. For example, if tax reform is tackled in multiple steps, the BAT might emerge again perhaps in a less ambitious form. Moreover, passing tax reform in multiple steps might be easier than passing a single large package. For example, there is wide agreement among democrats and republicans on corporate rate reductions and a repatriation holiday, and a smaller package around those reforms might be easier to pass especially since a repatriation holiday would raise revenue. In this regard, taxpayers may wish to consider their options should a repatriation proposal take hold. For example, reviewing foreign earnings and profits and foreign tax pools would help taxpayers prepare for rules that would exempt all or a portion of foreign earnings. Years ago, when congress passed a repatriation holiday, understanding foreign attributes was central to maximizing the benefits available under the tax holiday. We expect this to be the case with any repatriation package that the current Congress is likely to pass. In addition, taxpayers may wish to engage in proactive planning to ensure that they are able to maximize their ability to claim foreign tax credits before any legislation is proposed. New legislation may contain retroactive effective dates that may limit planning after legislative language is ‘marked up’ in congress. Taxpayers that need help understanding how these proposals may impact them should talk to their tax advisors immediately.

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