FACTBOX-What is U.S. Republicans' 'border adjustment' tax plan?

by Reuters
Tuesday, 28 February 2017 20:24 GMT

Feb 28 (Reuters) - Senior Republicans in the House of Representatives are pushing a "border adjustment" tax proposal that favors exports over imports as part of a plan to overhaul the U.S. tax code.

The proposal is under attack from import-heavy businesses but it is supported by large exporters, such as manufacturers.

President Donald Trump has not clearly endorsed or opposed border adjustment, although he spoke favorably about it in a Reuters interview. He has also called the proposal "too complicated."

The following are some basic facts about the complexities of the border adjustment tax proposal:

IMPORT COST DEDUCTIBILITY

Companies pay tax on their taxable income. This is revenue minus deductible items such as wages, interest, advertising and depreciation. Also deductible is cost of goods sold, which includes the expenses of making products and buying them for use or resale, including imported goods. The proposal would end the deductibility of import costs.

EXPORT INCOME EXCLUSION

The proposal would let companies exclude from their taxable income the portion of their revenues derived from outside the United States. Only revenues derived from sales inside the United States would be taxable.

BUSINESS TAX CUTS

The top corporate income tax rate, under the House Republicans' multi-faceted tax reform plan, would fall to 20 percent from its present, statutory level of 35 percent.

Also, a top 25 percent rate would be set for "pass-through" businesses, such as sole proprietorships, partnerships and S corporations. If the top individual tax rate stayed at 39.6 percent, critics say the new pass-through cap would incentive people to dodge taxes by converting wages to business income.

IMMEDIATE EXPENSING

Companies now must depreciate, or reduce, the value of machinery and inventories over time for wear and tear. This occurs over several years, depending on the asset. These depreciation costs are deductible. The Republican proposal would allow companies to immediately deduct the full cost of new capital, instead of writing it down over time.

OTHER DEDUCTIONS

The deduction for net interest expense on new loans would end, a change meant to reduce incentives for corporate "inversion" relocations abroad. This is raising concerns among some financial firms. Wage costs would remain deductible, which some critics say could violate World Trade Organization rules.

FOREIGN INCOME TAX-FREE

Income, whether domestic or foreign, derived from overseas sales would not be taxed, a big change from today's worldwide tax system.

REPATRIATION

Companies would no longer be taxed on foreign income brought into the United States. About $2.6 trillion in profits now parked abroad would be repatriated and taxed, at 3.5 percent to 8.75 percent, payable over eight years.

CORPORATE AMT

The corporate alternative minimum tax would be eliminated.

CONSUMER PRICES

Critics of the tax plan say importers would pass on higher tax costs to consumers by raising prices.

DOLLAR

Advocates of the plan say any inflationary effect would be offset over time by a higher dollar value.

INDIVIDUAL TAX CODE

Republicans also want to change tax law for individuals by reducing the number of tax brackets; consolidating standard deductions and exemptions; cutting capital gains and dividend tax rates; eliminating the estate tax; eliminating most itemized deductions, except mortgage interest and charitable giving; killing Obamacare taxes; putting a new limit on tax exclusion for employer-provided health care. (Reporting by Kevin Drawbaugh; editing by Grant McCool)

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