Tax-News.com: US Congress Receives Bipartisan Border Tax Bill

by Mike Godfrey, Tax-News.com, Washington

29 September 2016

Two bipartisan lawmakers in the US House of Representatives have re-introduced the Border Tax Equity Act, which would impose a fee on imported goods from those countries that have an indirect tax system that provides input tax credits.

Bill Pascrell (D – New Jersey), a member of the House Ways and Means Committee, and Walter Jones (R – North Carolina) introduced the Bill in an attempt to address what is seen as a large disadvantage for US exporters – estimated to be USD204bn annually in trade with the European Union (EU) alone.

This disadvantage arises because exporters from countries that operate value-added tax-like levies are able to recover embedded tax paid on inputs, through input tax credits. US companies, meanwhile, are unable to recover sales tax paid on inputs. US products sold to a foreign country therefore have sales tax embedded in their cost, reducing their competitiveness. In addition, US exports, for instance to the European Union, may face high value-added tax rates and may not be able to recover that tax, while EU exports encounter a lower tax burden when exporting to the US market.

Pascrell, who introduced similar versions of the Bill in 2007 and 2011, noted that, “when our producers export to foreign markets, they are hit with a value-added tax (VAT). Foreign competitors get rebated at the border for their [indirect] taxes paid, but US companies, paying direct US income tax, do not.”

Current World Trade Organization (WTO) rules allow countries with VAT systems to provide export rebates, while the same rebates are not permitted on direct taxes. “This allows other nations,” it was said, “the benefit of lower US tariffs for their exports, while allowing them to protect their domestic producers by imposing a high VAT on US imports, and also providing a rebate for the VAT their producers pay when they export to the US.”

“Furthermore, EU governments can negate tariff reductions negotiated through trade agreements by increasing their VAT rates.”

The Border Tax Equity Act would instruct the United States Trade Representative (USTR) to negotiate an agreement at the WTO that eliminates the “VAT inequity;” impose a fee on imports from countries that employ indirect taxes and grant rebates upon export if an agreement cannot be reached at the WTO by 2018; make US exporters eligible to receive payments to neutralize discriminatory effect of border taxes; and require a report from the USTR on the status of this issue in the US’s current free trade agreements.

The proposed legislation ties into the trade proposals included in the Republican party’s Tax Reform Blueprint, and recent remarks in support of a border tax by both Kevin Brady (R – Texas), the Ways and Means Committee Chairman, and by Republican presidential nominee Donald Trump.

The Republican Tax Reform Blueprint stated that “all of our major trading partners raise a significant portion of their tax revenues through VAT, [which] include ‘border adjustability’ as a key feature. When a country is trading with another country that similarly imposes a border-adjustable VAT, the effects in both directions are offsetting and the tax costs borne by exports and imports are in relative balance. However, that balance does not exist when the trading partner is the United States.”

A border tax, it concluded, would mean that “products, services, and intangibles that are imported into the United States will be subject to US tax regardless of where they are produced. This will eliminate the incentives created by our current tax system to move or locate operations outside the United States. It also will allow US products, services, and intangibles to compete on a more equal footing in both the US market and the global market.”

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