Spotlight: The GOP border tax-adjustment proposal

March 2017

Currently, U.S. public companies are subject to a 35-percent tax rate on worldwide income, and to the extent that taxes are paid in foreign jurisdictions, they are allowed a foreign tax credit to avoid having the same income taxed twice.

Both the president and GOP leaders in Congress have said they would like to change this system, and both have embraced to varying degrees the notion of a destination-basis tax system, also known as the border adjustment tax.

While subject to change as the administration further develops its tax reform policies, the border adjustment tax proposal, if passed as it is being proposed, would tax companies on their sales to U.S. customers while excluding foreign sales from U.S. tax entirely. This means sales of imported goods would be fully taxable while the sales of exported products would be exempt from tax.

Take a look at the graphic below for an illustration of the border adjustment concept: 

The objective of a border adjustment tax is ultimately geared to reverse the U.S. trade imbalance. The impact it will have on individual businesses, however, will vary. The best gauge for its impact is a company’s business model: Does its reliance on imported goods overshadow sales revenue from global markets or the other way around?