You are here

The (Border) Adjustment Bureau: Hold On to Your (Imported) Hats

Daniel J. Brody's picture
Published: 01/02/17 - Country: United States

Retailers would be wise to pay close attention to the upcoming tax-plan deliberations of the 115th U.S. Congress. A proposal currently being considered would adjust the U.S. corporate tax by making imports a non-deductible expense. This adjustment is intended to create incentives for domestic production, as companies would no longer be able to reduce their taxable income by deducting their overseas expenditures.

Here’s an example. Currently, if Joe Retailer imports $1 million of goods, spends $500,000 on domestic costs and sells the products for $2 million, Joe could deduct the cost of the imports and all domestic costs from the sales amount, and would pay 35% in taxes on $500,000, for a total tax hit of $175,000. Under the proposed plan, however, Joe would be able to deduct only the $500,000 in domestic costs, and would pay 20% in taxes on $1.5 million, for a total tax hit of $300,000.

Thus, some retailers importing goods made abroad fear a looming tax crunch. Recent media reports have highlighted the potential effects of the proposal on the appareltoy, and electronics industries, although other import-heavy industries find themselves in a similar situation. According to one RBC Capital Markets analyst, cited in a recent Wall Street Journal article, the earnings loss to six large retailers from a “border adjustment” could total $13 billion. Other economists, however, are downplaying these concerns, noting that such companies could recoup any tax losses with gains from decreased importation costs and a stronger U.S. economy. Companies may also attempt to pass increased tax costs through to the consumer by raising the price of goods.

Of course, the final fully-negotiated tax plan may look vastly different from the current proposal. Indeed, President Trump has publicly criticized the border-adjustment component of the GOP tax plan, saying “Anytime I hear border adjustment, I don’t love it.” Even if passed in its current form, the economic effect of the proposal on retailers, consumers, and the overall economy is hotly debated. Nonetheless, it is worth keeping an eye on the result of negotiations concerning the “border adjustment”.

A final thought: Despite the murkiness of the future under the new administration and Congress, one outcome is crystal-clear:

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman
Should five per cent appear too small
Be thankful I don’t take it all

–       The Beatles

Subscribe to The Journal

* indicates required
Areas of Interest
                    

Pragma International will use the information you provide on this form to be in touch with you and to provide updates and marketing. Please let us know all the ways you would like to hear from us:

You can change your mind at any time by clicking the unsubscribe link in the footer of any email you receive from us, or by contacting us at info@pragma.international. We will treat your information with respect. For more information about our privacy practices please visit our website. By clicking below, you agree that we may process your information in accordance with these terms.

We use Mailchimp as our marketing platform. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. Learn more about Mailchimp's privacy practices here.

Article Rating: 
Average: 4.3 (10 votes)
Total reads: 1,685
Daniel J. Brody's picture

Dan’s general corporate practice includes mergers and acquisitions, corporate governance, corporate financing, and compliance. Dan is an Associate in our Corporate group.

Prior to joining Goulston & Storrs, Dan worked as an associate with a law firm in New York.