April 04, 2017

Four Ways the Border Adjustment Tax Affects You… Yes, YOU!

Close up of customs declaration form

President Donald Trump won the election, in large part, because of his promise to bring manufacturing jobs back to the United States. Within his first 30 days, the president took steps toward making that campaign promise a reality by posing the Border Adjustment Tax. What is this tax and how does it affect your import duties? Let’s dive into that!

First, we’ll define the border adjustment tax. Take a sip of your coffee and try not to fall asleep on me.

The destination-based cash-flow tax, better known as the border adjustment tax, is similar to the United Kingdom’s value-added tax (VAT) in that it aims to tax goods that are manufactured internationally and sold domestically. At its core, it speaks directly to Trump’s goal. It taxes overseas production of goods in an attempt to neutralize international cheap labor costs and encourage companies to manufacture in America.

For example, Apple sources material and labor for the iPhone from Japan, South Korea and Taiwan just to name a few countries (it actually makes its list of suppliers public).

Apple, then, imports the iPhones to the United States to be sold at retail. Those phones will be taxed at a higher rate. What Trump would like is for Apple to avoid that tax and to bring its supply chain home to employ Americans to make the phones.

And then there is the flipside of this tax. Goods manufactured in the States but exported and sold overseas will be taxed at a much lower rate. This is an attempt to attract American and international companies to produce goods on U.S. soil. You see how this encourages bringing jobs home?

A company like Whirlpool manufactures hand mixers in Ohio and sells them all over the world. Those hand mixers would be taxed at a significantly lower rate because they were made in the USA.

Now that you understand the tax, here are four ways it will affect you.

1. A 20 percent tax hike

Ouch! The Trump administration is expected to announce an increased tax rate of 20% or more on goods made outside the country and sold to American buyers. If your business imports, this will undoubtedly cut into margins and profit.

2. No income tax

You read that right. If you export your goods to foreign customers, Trump might enforce a zero percent income tax rate on the sale of those goods. Even if you have a superficial understanding of economics, you can understand how much of an incentive this is to bring jobs to the United States.

3. Higher prices at the register

Companies that import, like Walmart, Target, Nike and Apple, will be paying more in taxes. In order to offset the tax, they will more-than-likely pass this cost to the consumer by raising retail prices. Another industry that will be greatly affected is the automotive industry. The majority of cars purchased in America are made overseas. That means the price of your next car will jump up. And, the price of gas you put in the new car will be more expensive since we import most of our oil.

4. Stronger American dollar

Economists speculate that, under this plan, the American dollar will get a boost. And, in a strange turn of events, retailers like Walmart and Target will benefit from the strong dollar, wielding more buying power to continue their importing businesses.

If your head is spinning, you’re not alone. Rumor has it, the president himself was so miffed by the situation that he placed a call at 3:00 am to his national security advisor to get a better understanding of the pros and cons of a strong American dollar.

If you don’t have access to the national security advisor, you can contact customs brokers who can help make sure you are compliant with the regulations. A broker will prepare your import and export documents and calculate the exact amount of tax you owe. Make sure you’re taking the right steps to protect our business and increase your bottom line.