By Richard Rubin
WASHINGTON -- Fault lines inside the corporate world are
emerging over a proposed rewrite of the U.S. tax code, pitting
importers against exporters.
At the heart of the fight is a Republican plan in Congress that
would impose corporate taxes on imports while eliminating them from
exports, a move that would upend decades of tax policy.
The proposed shift in effect would curtail existing incentives
for U.S. companies to move profits and operations abroad, but it
would also pose new challenges for some global businesses.
Retailers selling imported products and refiners using imported oil
could be hardest hit, while some exporters could see their tax
bills vanish.
"You're going to have the big importers fighting the big
exporters," said Lisa Zarlenga, a former U.S. Treasury official and
now a partner at international law firm Steptoe & Johnson
LLP.
The proposal is part of House Republicans' blueprint for
overhauling the entire U.S. tax code and has been around since
June. While still not legislation, it has gained fresh momentum --
and scrutiny from corporations -- since the November election sweep
gave the GOP the chance to advance its ideas with its newfound
one-party control of Congress and the White House.
Lawmakers must now weigh competing business interests to achieve
the country's first major tax revamp since 1986. "Tax reform always
hits different industries differently," said Republican economist
Douglas Holtz-Eakin. "It's the ability to rise above those
differences that makes tax reform hard."
Other crucial elements of the business-tax plan would also be a
major departure for the U.S. and include dropping the corporate tax
rate to 20% from 35%. Companies would also be able to write off
capital expenses immediately but couldn't deduct net interest.
At present, U.S. corporate taxes are based on where profits are
earned, which often isn't the same as where products are sold.
Because the proposed taxes would be based on the location of sales,
where a company establishes its formal headquarters would matter
less. So the plan could deter the practice of putting a company's
legal address in a low-tax country, a move known as an inversion.
Under the plan, the U.S. would also give up any claim on taxing its
companies' foreign sales.
The location of profits wouldn't matter either, sharply limiting
the benefit companies have gained from putting intellectual
property in tax havens. Instead, the system might encourage
companies to locate manufacturing in the U.S. to export to foreign
markets.
"This is a significant break with the past," Rep. Kevin Brady
(R., Texas), chairman of the House Ways and Means Committee, said
in an interview. "America, in our blueprint, will no longer stand
idly by and watch our jobs, innovation and headquarters be chased
overseas because of our uncompetitive tax code."
The proposal would operate like provisions other countries use
to border-adjust their value-added taxes so those levies apply only
to domestic consumption. President-elect Donald Trump has
complained that Mexico's value-added tax system -- a consumption
tax at each stage of production that is then removed at the border
-- advantages its exports to the U.S.
Unlike separate import tariffs the president-elect has proposed,
the tax in the House plan would apply equally to all goods sold in
the U.S.
For companies selling goods in the U.S., the new system would be
neutral between U.S. and foreign production because both would be
subject to the same 20% corporate tax rate. The change from the
status quo, however, wouldn't be, Mr. Holtz-Eakin said.
The proposed system might create competitive advantages for
U.S.-made products. Exports to France, for example, would bear no
U.S. tax when the French VAT is applied, while competing products
made abroad would bear the French VAT and a non-U. S. corporate
income tax.
Other countries could challenge the U.S. system envisioned under
the Republican plan at the World Trade Organization. But the U.S.
might then argue the system it is close enough to a value-added tax
to pass legal muster, while insisting at home that it isn't a
politically toxic VAT. Mr. Brady said he is confident the
envisioned tax plan would win any challenge.
Economists say changes to America's balance of trade would be
modest because currencies would adjust. It isn't exactly clear what
would happen to prices. Mr. Brady said he expected global supply
chains and currencies to adjust efficiently, and the committee is
working on transition rules, though for individual companies and
industries, the effects may be pronounced and disruptive.
There already is some resistance in the U.S. to the GOP
approach. "While we appreciate that both the president-elect and
new Congress want to move forward on comprehensive reform, the
problematic tax on imports contained in the House blueprint is
cause for concern," the Retail Industry Leaders Association, whose
members include Target Corp. and Whole Foods Market Inc., said. "We
will work to highlight its harmful impact on consumers and the
industry."
Retailers, especially those that can't substitute domestic
products for imports, are "very concerned" as they study the plan,
said Rachelle Bernstein, vice president and tax counsel at the
National Retail Federation.
Border-adjusted taxes would be "extremely harmful to the
refining industry," said an executive at a large oil refiner.
Imported products would face the new tax, and domestic refiners
would be disadvantaged when domestic oil producers decide whether
to sell to firms subject to U.S. taxes here, or in the tax-free
export market.
Rep. Jim Renacci (R., Ohio), a Ways and Means member, said he
has been hearing from companies already. "When you drive costs up
on a refinery, the consumer's gonna pay for it," Mr. Renacci said.
"I am getting a lot of companies that are very concerned about
it."
Others would benefit, though. Combined with the cut in the
corporate tax rate and access to stockpiled foreign earnings, the
GOP plan would "level the playing field" for U.S.-based companies,
said Bob McGovern, senior vice president of tax at Merck & Co.,
a major drugmaker that imports and exports. "There seems to be more
incentives to be in the U.S. and therefore it's much more
attractive than it would be today," he said.
Pharmaceuticals, medical devices and consumer products company
Johnson & Johnson is optimistic about the House proposal, which
would create incentives for U.S. innovation and manufacturing,
spokesman Ernie Knewitz said.
And the changes to the tax system could be quite complex for
those with global supply chains that import and export components
and products, such as auto manufacturers and Apple Inc.
Still, the plan's path forward is uncertain. While it has
support from House Republicans, senators and Mr. Trump haven't
weighed in.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
November 24, 2016 09:14 ET (14:14 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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