Economists, policymakers, and business owners hold differing views of the border tax and its possible impact — for better and worse.

The economic debate around the border adjustment tax reminds me of an apt George Bernard Shaw observation: “If all the economists were laid end to end, they would not reach a conclusion.”

Those who oppose the border tax argue that, on its face, it could prove damaging to businesses operating strictly as importers of goods into the United States. With the loss of deductions related to imported goods, importers would be taxed on a gross basis at 20 percent, but a 20 percent tax rate is higher than the profit margins earned by most importers.

Border tax proponents, however, argue that the increased taxation on imports would be offset by a projected 25 percent rise in the value of the dollar. The increase would be caused by the surge of exports from the United States that would require U.S. dollars to purchase, while the reduction in imports would diminish the demand for other currencies.

Practitioners of the “dismal science” note that while this analysis may be technically accurate, it may also be somewhat simplistic and that, if the border tax is enacted, currency exchange rates could prove more fickle than expected. A number of other factors would potentially come into play that could mitigate the impact of the tax on the value of the dollar:

  1. Enactment of the border tax could provoke retaliatory action, diminishing demand for U.S.-manufactured products and weakening demand for the dollar.
  2. The demand for the dollar could also be impacted via capital markets if foreign governments retaliate by disinvesting in U.S.-dollar-denominated investments.
  3. It’s likely that changes in currency values wouldn’t move in lock step with changes in the balance of trade. An analysis conducted by Citibank indicated that changes in the U.S. dollar lag changes in the trade balance by up to five years.
  4. Petroleum markets are denominated in the U.S. dollar. Products with significant petroleum-based content wouldn’t benefit from a change in currency exchange rates. The economic dislocation in energy markets would be significant.
  5. The border tax could be subject to challenge under World Trade Organization rules and might not survive. A change in government in the United States could also shorten the life of the border tax. Given the uncertainties, companies would likely wait until it’s clear the border tax is permanent.

One hopes that as legislators consider tax reform, they heed the warning of inventor and entrepreneur Charles Kettering: “We should all be concerned about the future because we will have to spend the rest of our lives there.”

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As lobbying efforts grind on, here are the steps businesses can take to best position themselves for coming tax reform.

“Time is nature’s way to keep everything from happening at once.” This quote has been attributed to Woody Allen; John Archibald Wheeler, a physicist and contemporary of Albert Einstein; and to Ray Cummings, a science fiction author. Regardless of the actual original source, the observation is spot on when it comes to tax reform.

As lobbying efforts grind on, the shape of tax reform remains somewhat hazy. What can businesses do now, while they have time, so that everything doesn’t happen at once?

So far, we know a few things are certain. While the policy details of healthcare reform and infrastructure spending are yet unresolved, tax reform must come as close to revenue neutral as possible. There’s also a powerful desire to reduce overall corporate tax rates so that the United States better aligns with those of other developed countries. But there must be a “sweetener” to allow for an overall rate reduction.

The border tax adjustment could prove to be a significant revenue generator, but it’s mired in controversy. A better bet would be the repeal of tax deferral on earnings from foreign subsidiaries. Both the House GOP plan and the Trump proposal call for mandatory recognition of deferred income, albeit at a lower rate, followed by a repeal of deferral of future earnings. Clever taxpayers will prepare for this provision now — while they have time.

But how to prepare? Check and make certain your tax attribute calculations are up to date, such as the “earnings and profits” of foreign subsidiaries (with retained earnings calculated using tax accounting principles). Understand your company’s foreign tax credit position — in other words, are you able to take a credit? Determine whether it’s possible to repatriate income now, with certainty of the results. Model multiple forced repatriation scenarios to determine how best to position the company.

Taxpayers who prepare for tax reform can ensure that everything doesn’t “happen at once” and exemplify this quote, most certainly from Zig Ziglar: “Expect the best. Prepare for the worst. Capitalize on what comes.”

Your Plante Moran International Tax team has new, state-of-the-art tools to help you prepare for coming changes. Please give us a call.

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A new Top Ten list – just in time for tax reform

April 7, 2017

Not quite as funny as David Letterman’s tax-themed Top Ten list, the OECD and IMF recently released their own list for promoting tax certainty. Just in time for U.S. legislators working on tax reform. Letterman was renowned for his “Top Ten” lists, so it’s hardly surprising that he had a tax-themed list. Here are a […]

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Japanese companies continue to invest in Mexico

April 4, 2017

To invest or not invest? Amid uncertainty in U.S.-Mexico trade relations, companies shouldn’t make rash decisions. With less than 100 days in office, President Trump’s administrative agenda has created concern among international companies. Many businesses that had planned investments in Mexico have put those plans on hold or dropped them entirely. Despite the uncertainty in […]

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Form vs. substance plays out in tax court — with international tax implications

March 31, 2017

One family puts a clever twist on an IC-DISC — but the IRS quickly disputed its creativity. Who will emerge triumphant? Conflict lies at the heart of every good story. How interesting would Moby Dick be without Captain Ahab? And Batman is just a goofball with a cool car absent the Joker. In the tax […]

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Predicting the shape of 2017 tax reform: Read the tea leaves or drink the tea?

March 24, 2017

Amid uncertainty and a full congressional agenda, we’re running out of tools to predict changes in tax legislation. Today’s word of the day is “tasseography,” a fortune-telling method based on interpreting the patterns in tea leaves, coffee grounds, or – perhaps more fitting for those of us working to stay abreast of forthcoming tax legislation […]

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Subterranean homesick blues: Changing winds of corporate tax planning

March 17, 2017

Do your tax strategies reflect your business operations and brand you a good corporate citizen? In 2016, the U.S. Department of the Treasury announced plans to remove President Andrew Jackson from the face of the $20 bill. A reexamination of Jackson’s history as a slave owner and proponent of the Indian Removal Act led some […]

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The Tail Wags the Dog

March 10, 2017

While it might look great on paper, the proposed Border Tax Adjustment could have some unintended consequences. Learn more about how, if implemented, the adjustment could change the U.S. business landscape. Charleston, South Carolina is well known for a particular architectural style known as the “Charleston Single House.”  Built in the 1700s, the houses are […]

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New rules for IMMEX companies importing sensitive goods

March 6, 2017

Summary: These come with a narrow, four-month authorization period, so be sure to keep track of all sensitive goods imported on a temporary basis. At the end of January, new rules went into effect for companies operating as maquiladoras and temporarily importing sensitive goods under Mexico’s IMMEX program. The most notable change is the new […]

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21st century Icarus: Alignment is critical to international tax planning

March 6, 2017

Summary: The raid on Caterpillar’s headquarters by federal agencies highlights the critical need for alignment between business operations and international tax strategy. Caterpillar’s tax woes have culminated in a raid on their corporate offices by agents from the IRS and the Department of Justice, who are seeking information on the company’s international tax planning strategies. […]

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