While new international corporate tax discussions unfold in the US Congress, American businesses brace for a tax scheme that could change some of the fundamentals of international business and associated Effective Tax Rates or ETRs.  The majority party in Congress favors a “destination-based cash flow tax.”  Are we really moving toward a Value Added Tax (VAT) model that has increased the cost of doing business for many business entities around the globe?

Under the proposed new international corporate tax structures, expenses would in effect become “border adjusted” so that deductions are based upon whether a component, good or service was exported or imported.  Under this new proposal the cost of creating exported goods and services is deductible, but the cost of goods or services which are imported to create products and services are not deductible.

So if a San Diego or US multi-national business imported products or components it would not be able to deduct the cost of those goods from the income generated by reselling them or integrating them into a product or service offering here in the United States.  However, if that same company exports goods and/or services the revenue received from a foreign source might not be taxed but the cost of making those goods and services here in the US would be deductible.  Simply put, the new international corporate tax structure is designed to increase production of goods and services here in the US while discouraging imports.  Another goal of the new tax proposal is to eliminate transfer pricing issues for the IRS, tightening controls over how affiliated companies transfer goods and services between one another in an attempt to manipulate or reduce taxable events.  International business tax policy would substantially and forever change.

Carried to its logical conclusion, the “destination based” cash flow tax model will substantially increase the price of all foreign products and services, from cars to televisions to smart phones.  If a business person cannot deduct the cost of the product when calculating profit – and the tax that must be paid on profit – the amount paid in taxes dramatically rises.  The US business has no choice but to drastically boost the price to offset this.

The President believes this policy will also strengthen the US dollar against foreign currencies, and ultimately these things will balance out so that our dollar buys more.  However, a stronger US dollar makes our domestic exports less competitive on the international market which is directly the opposite of the stated goal of the new international corporate tax plan’s proponents.

This proposal will immediately and significantly increase the cost we pay for almost all technology, clothing, gasoline, and most of the goods and services we consume.  The creation of US production and manufacturing capacity which this strategy incentivizes will take years.  This proposal changes many transparent market factors in a negative manner for US consumers.  It will affect the international monetary system and balance of trade.  The resulting uncertainty in domestic and international markets, currency valuation and trade practices will take years to play out.  The short-term consequences for US businesses and consumers could be nightmarish.

This strategy has another major flaw: it assumes the rest of the world will continue business and tax practices as they exist today.  This simply cannot and will not happen.  China, Japan and the far east will react to these changes and change trade, monetary and tax policies.  They must.

In basic economics uncertainty is not the foundation of growth, but of decline and in many cases ruin.  Make no mistake, risk and reward is an important element of all business and our fundamental American business beliefs.  Well informed and proportionate risk supported by effective strategy should result in profit.

However, unfounded risk supported by untested and unproven strategy leads to financial ruin for any business.  There are too many uncertainties associated with this proposal.  There are dozens of other well-conceived new international corporate tax alternatives in Washington D.C. that would address the underlying goals without isolating US business and American markets.

These times require highly skilled and expert legal, tax and accounting business partners who can provide informed and accurate insight into your international business operations, accounting systems, international business structures and resulting tax implications.  We invite you to contact Allen Barron for a free consultation at 866-631-3470.  Learn more about our integrated professional service strategy and how our international business and tax expertise can support your offshore business and investment strategies in 2017.

What will a domestic wall around US business and tax strategy do for you?

Contact an Estate Planning, Business Law Or Tax Attorney Today

To set up a free, no-obligation consultation with one of our knowledgeable San Diego based estate planning, business and tax lawyers, or learn more about our tax preparation, accounting and business advisory services call us at 866-631-3470 or contact us.