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Trump’s Wall: Border Tax Talk
After just over a week in office, President Donald Trump has been busy issuing executive orders across a number of platforms. One priority as evidenced during his campaign is on building “the wall” between the US and Mexico to reduce the influx of undocumented immigrants.
Mexico and the US share a border running approximately 2000 miles (3200 km) some of which is already fenced either for vehicles or pedestrians. The estimated cost of building a state of the art wall along the entire border approximates $10 billion (USD) not to mention the cost of maintaining such a structure over the years.
On January 26, 2017, White House Press Secretary Sean Spicer told reporters that the administration might pay for the wall by levying a new, 20% border tax on imports from Mexico but is still weighing other options. This news created a significant amount of diplomatic fallout and confusion.
During President Trump’s campaign, he stated he not only wanted the wall, but he also wanted Mexico to pay for it. President Trump had an upcoming meeting scheduled with Mexican President Enrique Peña Nieto to discuss NAFTA. Once the executive order (Executive Order 13767: Border Security and Immigration Enforcement Improvements) was formally announced on January 25, 2016, regarding the plan for building the wall, Peña Nieto cancelled his planned meeting with President Trump.
Mexico’s exports to the US in 2015 were valued at over $316 billion. Mexico is considered one of the significant trading partners to the US.
A potential border tax adjustment plan is broader than just the potential tax on imports from Mexico. There are also possible implications on imports from other countries (Canada, Germany, and Japan). This is one part of a major US tax reform proposal currently under debate in Congress.
Tax Reform is on the Agenda
Comprehensive US tax reform has been a longstanding priority. One of the most complex in the world, the current US federal tax code consists of over 74,000 pages. By comparison, it was only 27 pages at inception in 1913 and 26,300 in 1984. Coupled with its length is its complexity. It is now full of perks and benefits to select special interest groups and other socio-economic influences giving rise to loopholes and elimination or reduction of tax for certain parties. US businesses spend $150 billion annually complying with the US tax code.
In June of 2016, the Ryan-Brady Blueprint was published by House of Representatives Republicans House Speaker Paul Ryan and Ways and Means Committee Chair Kevin Brady. Its main objective is to switch out the corporate income tax with a destination-based cash flow tax (DBCFT), which is an alternative tax on business. It is quite similar to the value-add tax (VAT) in use by over 150 countries worldwide with at least one major difference. It could be equal to a 20% VAT with a wage allowance permitting only sales from US-producing companies to deduct their US labor costs from their tax bill.
The possibility of discrimination exists if there is no adjustment for a foreign-produced item. For example, an item such as a vehicle produced in another country and imported to the US could qualify for the 20% tax but could not be eligible for the wage deduction. Such discrimination magnifies the possibility of potential adverse effects from international trade agreement rules such as NAFTA and the World Trade Organization.
Benefits of tax reform include efficiencies in tax collection, application, and reporting. Another note to consider is the border tax adjustment could nullify current incentives for US multinational corporations resulting in abuse of transfer-pricing rules and undergoing corporate inversions solely to minimize their tax liability.
What is the potential impact to US businesses?
Any type of perceived, quick punitive action such as an import tariff or border tax adjustment directed at Mexico brings with it a number of concerns chiefly potential for political escalation, lack of willingness to negotiate on policy, and trade disputes. Costs associated with US imports could increase and likely be passed on to the consumer. Additional time and costs relating to the management of the new tax could impact US businesses. Economists believe a stronger US dollar could be gained by a border adjustment, making it cheaper to import goods and thus canceling out the higher taxes on imports.
Cross-border trade is routine for companies who ship products back and forth multiple times while adding value along each step. That means goods manufactured in the US, sent to Mexico for additional assembly, and shipped back to the US could also be subject to the proposed 20% import tax. This could hurt US industrial performance rather than improve it.
Additionally, consider the impact on the state of Texas where 33% of US imports from Mexico cross through and 37% of US exports to Mexico originate. Communities, companies, and families who rely on cross-border trade and its benefits could be the ones to suffer.
What should you do now?
Much clarification on the details of the proposed border tax remain to be seen. Many questions are unanswered and speculation continues. Businesses who import goods into the US must remain aware of the impact that a potential border tax or VAT could have on their operations and be prepared to act with a plan to mitigate costs and minimize its tax burden.
With the start of the Trump administration and the executive orders that have been signed in the first 10 days, it seems evident that many big changes are on the way. As a tax and trade professional, this makes for exciting times.
Tips for the Taxpayer
Stay up-to-date with the latest tax and trade news and legislation. Look for planning opportunities and exemptions that might be applicable to your company. For information, please feel free to contact tax@allynintl.com.
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Sources Referenced
https://www.census.gov/foreign-trade/statistics/state/data/imports/tx.html#ctry
https://www.census.gov/foreign-trade/statistics/state/data/tx.html#ctry
https://www.cch.com/wbot2013/factsheet.pdf
http://www.globalsecurity.org/security/systems/mexico-wall.htm
http://www.pbs.org/newshour/making-sense/column-trumps-border-tax-not-right-fix-u-s-mexico-trade/