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Proposed border adjustment tax could increase cost of parts, vehicles

Wednesday, June 14, 2017 - 07:00
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With all the political intrigue and in-fighting happening in Washington, D.C., one piece of the House Republican tax blueprint that has split the party into two camps may have slipped under most readers’ radars: the proposed border adjustment tax (BAT) on imports.

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The BAT, which would impose a 20 percent tax on imports as a replacement for the current corporate income tax, has the support of House Speaker Paul Ryan and other Republicans, but is opposed by others in the party as well as several major, import-heavy industries – including automotive manufacturers, dealers and parts suppliers. As of mid-June, the Trump administration’s tax reform proposal did not include a BAT.

The BAT was the subject of a recent roundtable sponsored by the Motor Equipment Manufacturers Association (MEMA), with economists and industry representatives sparring over the actual effect this destination-based cash flow tax would have.

Under the House proposal, the current corporate income tax would be abolished to incentivize companies to return overseas profits to the U.S. to be reinvested. The BAT would impose a 20 percent tax on all imported goods. Exports would be exempt from taxation. The House also wants to eliminate corporate interest deductibility.

That poses a big problem for importers, says Xavier Muscgat, senior partner and managing director of the Detroit office of Boston Consulting Group. Muscgat noted that international trade in the vehicle industry is relatively balanced. The company examined the potential impact of the BAT on auto parts and vehicles, and found that it would increase costs for consumers without encouraging companies to begin manufacturing more parts or vehicles in the U.S.

“The U.S. market is at peak capacity,” Muscgat said. “The only way this plan would repatriate jobs is if manufacturers shift capacity from one plant to another, and in the U.S. OEM capacity is at 100 percent utilization. They don’t have the space to create new jobs at those plants. They would have to build new plants,” which is unlikely given the cost.

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