When US manufacturing companies hold their earnings calls these days, the issue of tax reform inevitably comes up. It would be hard to find an industrial products CEO who was not enthusiastic about the prospect of a lower headline tax rate. Many of the CEOs also express enthusiasm for the new approach to border taxes laid out in the House Republican Blueprint.
Developed before the election without any input from then-candidate Donald Trump, the border adjustability idea nevertheless has the potential to support the new administration’s goal of bringing manufacturing jobs back to the US. It does this through tax changes that would eliminate deductions for imported products and products that use foreign parts.
However, border adjustability also has a carrot – the elimination of taxes on exports. This aspect of border adjustability could provide a welcome tax advantage to US companies that are big exporters.
The fact that border adjustability opens some paths to improved profitability, of course, does not necessarily mean that manufacturers should plan to relocate more of their supply-chain footprints or manufacturing capacity to the US. After all, taxes are only one factor in the where-to-locate decision. There are costs to building new plants, retrofitting existing ones, and generally making changes to operations that are performing well where they are.
There is also the possibility that foreign countries might erect trade barriers of their own, negating some incentives created by the Blueprint, or that the US dollar will appreciate or that the prices of US products will rise in response to new border taxes. These “unintended consequences,” as some import-oriented manufacturers have called them, reduce the rationale for change in the event of border adjustability.
For all of these reasons, and because of the inherent unpredictability of the legislative process surrounding tax reform, our advice to industrial manufacturers (advice we detail in a new article on the Pwc Tax Services site) is to sit tight. This is one of those instances where it’s smart to monitor developments closely but wait before acting.
The Blueprint proposals that have near-universal support among US manufacturers are twofold. The first is a reduction of the corporate tax rate from 35% to 20%. The second is the effective disappearance of a tax on repatriated foreign earnings through the introduction of a territorial tax system. US companies have long operated at a disadvantage in these two areas. As far as manufacturers are concerned, this aspect of tax reform can’t come fast enough.
See our full article: With tax overhaul approaching, US manufacturers weigh their options
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