Building a Border Battle

Among turbulent legislative times in Washington, D.C., the possibility of a controversial border adjustment tax has resurfaced. By Robert J. Derocher | Summer 2017



Calling themselves the American Made Coalition, CEOs from some of the U.S.’s largest companies and corporations have urged Congress to tackle our outdated tax system, passing “big and bold” tax reform—including a border adjustment tax (BAT).

When it comes to deciphering the details and divining the direction of a so-called BAT—along with the broader issue of federal tax reform—it might be a good idea to have a good accountant, a knowledgeable economist, and a plugged-in D.C. insider on your team.

“There’s a lot of complexity to this, and one of the biggest challenges is tracking it all,” says Joseph Calianno, CPA, JD, LLM, partner and international technical tax practice leader in Washington, D.C. for Chicago-based BDO USA. “There are a lot of things you have to be prepared for. You need to think about all of the potential implications. You can’t just ignore it.”

As Congress and the presidential administration continue to maneuver through turbulent legislative times in the District, talk of tax reform and the possibility of an often controversial BAT has resurfaced.

While the BAT itself didn’t immediately appear on President Trump’s tax reform agenda, tax and finance observers say that doesn’t mean it’s completely off the table.

The question of just what the BAT might mean in the world of corporate finance and trade—particularly for some Illinois firms who would like to see it enacted—remains an open-ended one. It’s also one that has CPAs and finance professionals on edge as they work to help their clients plan for the seemingly unplannable: guidance from Washington, D.C.

BATtling Ideas

The BAT gained traction last year as part of an overall U.S. tax reform package promoted by House Republicans, known more widely as the House Blueprint. The Blueprint’s highlights included cutting the corporate tax rate from the current 35 percent to 20 percent as a means of spurring economic growth and reinvestment.

The idea behind the BAT? Shifting corporate taxes from an “origin-based tax” (where goods are manufactured) to a “destination-based cash flow tax” (where goods are consumed), often referred to as a territorial tax system. In short, a BAT would tax U.S. imports while exempting U.S. manufacturing exports.

“It ignores cross-border payments and is trying to capture the net value of consumption in the U.S.,” explains Rob Clary, principal in the international tax practice for KPMG in Chicago. And, predictably, the BAT has backers—and opponents.

“On the pro side, people say it encourages domestic production of goods in the U.S.,” he says. “On the con side, people say we have a global economy that is built on imports, and the import scenario will lead to higher priced products because of the higher taxes.”

Illinois-based manufacturing heavyweights with significant global sales, such as Chicago-based Boeing and Peoria-headquartered Caterpillar, have joined forces with similar-minded companies in the American Made Coalition, a lobbying and public information group to support the BAT. And while the coalition includes other corporate titans such as General Electric, Johnson & Johnson, MillerCoors, and United Technologies, it also includes smaller but wide-reaching players like Mount Prospect, Ill.-based Cummins Allison Corp., the only U.S.-based manufacturer and supplier of coin and currency handling products.

In a posting on the American Made Coalition website, company Chairman and CEO William Jones spelled out his support for the BAT. “Cutting business taxes and rebating taxes on my exported machines would allow my company to increase sales,” he wrote. “Although my costs would rise somewhat because I have to import certain components that are no longer made domestically, the border tax would compensate for that loss by canceling out the tax-rebate advantage currently enjoyed by my foreign competitors.”

And increased sales, he adds, would lead to more local hiring and more local tax revenues for an improved economy. It’s a theme echoed by American Made Coalition spokesman John Gentzel, who calls the BAT a vital component of the House Blueprint. The BAT, he says, is not a stand-alone tax and is part of overall tax reform.

“People recognize that the current tax code is broken and that it’s too complex,” Gentzel says. “Our broad hope is for pro-growth tax reform. That’s what we’re hoping to see accomplished here.”

At the same time, the National Retail Federation (NRF), whose members range from big-box retailers to mom-and-pop shops, has also launched a strident anti-BAT campaign, predicting that a BAT would substantially drive up the tax bills of many import-dependent retailers—particularly small business owners.

The NRF has produced a series of As Seen on TV-style commercials taking aim at the BAT:

“It’ll tax your car, your food, your gas, your medicine, your clothes—you name it, BAT will tax it! And that’s not all. As a special bonus, we’ll include the new job-killing formula—for free! You’ll get it all—the income-chilling, tax-bringing, job-killing BAT.”

Further pressing the concern, a survey of the University of Chicago’s Initiative on Global Market Economic Experts Panel in April found that 40 percent of respondents agreed that a BAT would “substantially raise prices for U.S. consumers,” with just 19 percent disagreeing. “The big concern is that if you’re a net importer, this could have a significant impact on your tax position,” Calianno says.

BATtling Uncertainty

While the University of Chicago’s panel findings raised concern about rising prices under the BAT, they also highlighted the biggest: uncertainty. Because, while 40 percent of those surveyed said higher prices were likely under the BAT, the same percentage said that they just weren’t sure.

And for many financial observers, that’s just where the problem lies now—tax reform has become an unpredictable waiting game.

“It still isn’t clear where the administration is on this,” Clary says. “We have a lot of proposals out there in the Tax Reform Sweepstakes, and the BAT is still out there.”

Questions also linger about the survivability of a BAT, either as proposed or in an amended form.

“How will it affect importers? How will it affect costs? This is something that is outside of the scope of tax geeks,” Clary adds. “The economists are continuing to deliberate on this.”

Calianno adds that the complexity of modern global trade only increases uncertainty. Many companies regularly import and export raw materials and goods to create products, he says, which could blur the lines of what’s taxable and what isn’t. Questions also remain about services, aside from physical products.

As a result, Clary and Calianno say that accounting firms are spending more time with their clients talking about what may or may not happen, and how to prepare for what comes out of Washington, D.C.

“Our clients are preparing for multiple scenarios. We’re sitting down with them and helping them understand the potential impacts to their business,” Clary explains.

And all that complexity and those concerns could bring a mixed bag for accountants, as well, Calianno says. “To a large degree, accounting firms are providing a service, and they’re providing this service all over the globe,” he says, meaning, while many CPAs would do well to develop sophisticated tracking systems for their clients, firms themselves need to consider their own tax implications.

To a great degree, this all adds up to a great deal of uneasiness for finance professionals. “It’s a challenging pill to swallow,” Clary says. “And businesses don’t like uncertainty.”