The Border Adjustment Tax

The Border Adjustment Tax
By: KTC Attorney J. Dino Vasquez

The Border Adjustment Tax is a value added tax (VAT) only on goods imported into the United States (1).  It is also known as a destination tax –  as opposed to the current corporate income tax structure which is an origin-based tax.  The border adjustment eliminates the tax on income attributable to exports, while taxing imported goods sold domestically in the United States. The corporate income tax shifts from tax on the production of goods and service in the United States to a tax on the consumption of goods and services in the United States.
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(1)  Countries which employ a VAT usually apply it equally to foreign and domestic goods.

How It Works
The Border Adjustment Tax levies taxes on goods depending upon where they are used, not where they are made.  For example, if an airplane manufacturer buys components from outside the United States, the government taxes money that the airplane manufacturer makes when the plane is sold in the U.S. The company cannot deduct the cost of the imported components as a business expense.

Conversely, if airplane parts manufacturers sell their goods outside of the United States, the profit made on those exports is not taxed.

Why a Border Tax
Presumably, it balances money flows in and out of the border, and it reduces any incentive to move profits off-shore. In order to make this effective, the rate of border adjustments between the import tax and the export subsidy need to match and be implemented simultaneously. This simultaneous process allows the tax and subsidy to offset each other, and therefore should create no distortions on trade. As the border tax is applied, either the U.S. dollar appreciates or the cost of domestic goods increase.

Advantages and Disadvantages
Advantage

• The incentive to export goods from the U.S. should create foreign demand and strengthen the dollar.
• Strengthening the dollar will increase the demand for imports and offset the change in prices for imports created by the border adjustment.
• The border tax broadens the tax base.
• The tax reduces or eliminates the trade deficit.
• If the dollar increases, the trade effect should be neutral.

Disadvantage

• May not be allowed under WTO rules because of the perceived trade advantage gained by a border tax.
• The export subsidy and import tax need to be neutralized.
• Consumers will pay higher product costs if the dollar does not strengthen substantially.
• Countries could retaliate by employing their own Border Adjustment Tax on goods imported from the U.S. thereby creating a trade war.

If you have any further questions or comment regarding this topic, please reach out to your KTC attorney. 

Dino Vasquez has extensive experience dealing with the U.S. State, Commerce, and Treasury Departments on behalf of exporters. He helps clients evaluate whether they are subject to these regulations and works with them to bring their operations into compliance. He also litigates matters with these governmental agencies on trade and customs disputes.

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