BGBC Partners, LLP Tax Update: The Proposed Border Adjustment Tax
A business tax reform proposal by Republicans in the U.S. House of Representatives, and championed by Speaker Paul Ryan, has caused quite a stir in certain retail industries. To be sure, the tax reform proposal is novel in its destination-based cash-flow approach that resembles a value-added tax (or “VAT”) more than a traditional income tax. VATs are used throughout the world in lieu of income tax regimes. During this past election cycle, Republican legislators have pledged to reform and simplify business tax law. While not all House Republicans are in favor of it, this plan represents efforts by House leadership to get tax reform on the agenda this year.
The component of the plan that causes the most indigestion with retailers is the notion of a Border Adjustment Tax (“BAT”). A BAT imposes tax on imported goods and supplies while exports are exempt from the tax. In effect, a BAT subsidizes export industries while penalizing industries that rely heavily on imports. Supporters claim that the BAT will encourage U.S. companies to keep production in the U.S. and curtail jobs moving overseas.
Retailers that sell imported goods are very concerned that a BAT will ultimately increase the cost of goods for consumers. Companies like Wal-Mart, Target, and Meijer are joining together with other retailers into a coalition in opposition to the BAT called Americans for Affordable Products.
As retailers who frequently sell food that is grown outside of the U.S., grocers have a particularly critical interest in the debate. As much as 30 percent to 40 percent of fresh produce items sold in U.S. grocery stores are imported at some point throughout the year. Some produce is simply not grown in the U.S., while other produce is only available here seasonally and must be imported during the off season. Almost all bananas, mangos, coffee, cocoa, tea, and spices are imported. Olive oil, grapes, melons, and tomatoes are also often imported. Other items that are routinely imported are fish and shellfish, fruits and nuts, sweeteners, and wine.
A BAT imposed on these imported goods would certainly drive up their cost to consumers. Some experts are predicting that consumers will have to pay as much as 20 percent more for food staples, while others are concerned that U.S. retail jobs will be put at risk. Overall, grocers and other businesses are in favor of business tax reform, but some retailer groups believe that creating a BAT is not the right move. In fact, some retail groups have banded together to educate policy makers and legislators on the potentially devastating effect of a BAT on American businesses and consumers.
No matter which side of the political spectrum you might fall, this proposed BAT idea is certainly important to keep an eye on. Contact a qualified CPA to help you monitor this and other components of the current “Tax Reform” movement which many believe might come to fruition this year or next. You don’t want to be caught off-guard on this one!
