Tax reform is a primary focus in Washington right now, so it is important that U.S. manufacturers understand how changes could impact their business — particularly with regard to imports and exports.
To prepare for these new tax rules, let’s examine how proposals such as raising import tariffs, the Border Adjustment Tax and indirect tax collections could cause greater tax burdens for manufacturers.
During the presidential campaign and since the new administration took office, there has been a lot of discussion – and uncertainty – around tax reform. The ongoing debate on the level of taxes for both U.S. and foreign businesses has raised several questions, such as:
- Are U.S. manufacturers at a disadvantage when selling goods to indirect (VAT/GST) tax regimes?
- Do importers receive an indirect tax advantage from the country from which they operate or ship goods?
- Can taxes and tax policy change the trend of global manufacturing supply chains?
Currently, sellers that import goods into the U.S. do not have VAT obligations upon import and receive indirect tax credits on their exports. However, U.S. sellers may soon benefit from other types of tax rules designed to incentivize American manufacturing.
With a variety of new tax and tariff proposals on imports still up for debate, manufacturers based in the U.S. that import materials from around the globe may have to pay a significantly larger tax bill.
The proposal for a broad import tax would hit retailers importing from China and other countries the hardest, in addition to manufacturers – particularly in the automotive sector – that largely import parts from Mexico and other regions outside the U.S.
Border Adjustment Tax
In an effort to encourage them to purchase goods manufactured within the U.S., the Border Adjustment Tax proposal will force businesses to make a critical supply chain decision: Induce higher costs to continue purchasing goods outside of the country or discontinue buying from international suppliers.
With the latter choice, manufacturers risk hurting their relationships with suppliers and will be forced to take on the necessary processes involved with vetting new suppliers to ensure the quality of their goods. Further, the proposed border adjustment tax — which is ultimately a destination-based cash flow tax — would likely leave businesses forced to pass along additional costs to consumers.
Domestic Business Protection
Globalization has fueled the opportunity for global supply chains, allowing businesses all over the world to take advantage of lower costs and higher quality of certain goods based on where they’re produced. While these tax proposals are aimed at protecting American jobs and businesses, this act of prioritizing domestic business is being embraced by many other countries as well.
If the Border Adjustment Tax moves forward and countries around the world follow suit with greater domestic protection efforts, we could see a massive shift in global supply chain structures that have been built over the past two decades.
Contact us to learn more about the proposed new tax rules and how to prepare for likely shifts in the global supply chain.
About the Author
Matt Walsh is the Principal of Indirect Tax. Matt and his department ensure that all Sovos tax and reporting solutions are compliant with global indirect tax laws. He also provides strategic direction, guidance and recommendations for product enhancements and development. Matt is also focused on fostering and managing government and industry relationships.Matt has over 17 years of experience in compliance, including starting as a tax counsel in the tax department and then advancing from Manager to Director of Tax Research and from there to Senior Director of Tax to his present position. He also was formerly a Team Manager at John Hancock Financial Services. Matt is currently a member of the Technical Advisory Group of the OECD (Working Party #9), which drafts model legislation and implementation guidelines for the taxation of cross-border services.Matt has a BS in Business Administration from the MA College of Liberal Arts as well as a JD from the New England School of Law.More Content by Matt Walsh