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The Proposed Border Adjustment Tax Heads to the Freezer While the Renegotiation of the NAFTA Heats Up

Posted By Administration, Thursday, August 10, 2017
Updated: Tuesday, August 8, 2017


by Melissa Proctor, Polsinelli, P.C.


July ushered in significant new developments on the international trade front involving the controversial proposed Border Adjustment Tax and the renegotiation of the North American Free Trade Agreement (NAFTA). U.S. companies with international supply chains are urged to stay abreast of these new developments as they arise, assess how proposed changes to the NAFTA may impact their operations, and voice their interests to ensure that they are considered by key decision-makers and protected.

1. The Proposed Border Adjustment Tax Has Been Shelved
On July 27, 2017, House Speaker Paul Ryan (R-Wis.) announced that the previously proposed Border Adjustment Tax (BAT) would not be included in the upcoming House tax reform effort. The announcement, which was made by way of a joint statement issued by Speaker Ryan, Treasury Secretary Mnuchin, Senate Majority Leader McConnell (R-Ky.), Senate Finance Committee Chairman Hatch (R-Utah), House Ways and Means Committee Chairman Brady (R-Texas) and National Economic Council Director Cohn, stated that –

While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.

By way of background, the concept of a BAT was originally rolled out in June 2016 in the House Republicans' "A Better Way" publication (otherwise known as "the Blueprint"), which was intended as a means to encourage companies to manufacture their products in the United States. Generally, under a BAT scenario, the corporate income tax would not be assessed on worldwide income; rather, a U.S. company would pay the tax based on its domestic revenues minus its domestic costs – thus, the tax would be calculated on the place of production and sale of the goods (i.e., the destination). Both foreign and domestically produced products would be taxed, and the costs associated with any imported goods or supplies used in sales in the U.S. would no longer be deductive. At the same time, the BAT would not be levied on export sales at all.

Although only murky details were released about the BAT, it was speculated that a BAT could have increased taxes by almost 20% on goods imported into the United States, while offering significant tax incentives to U.S. companies supplying goods to overseas markets. Many in the trade industry also believed that the implementation of a BAT would likely be challenged by other WTO member countries as a prohibited subsidy under the rules of the General Agreement on Tariffs and Trade (GATT). Many industry sectors dependent on imports voiced their opposition to the BAT, including the textile apparel, footwear, computer and automobile industries whose supply chains depend on imports of raw materials and finished goods. The BAT proposal was also opposed by many in Congress, as well; thus, the decision to abandon the controversial BAT will also likely make it somewhat easier for Congress and the Trump Administration to move forward with an overhaul of the tax code.

2. The Renegotiation of the NAFTA May Launch in Mid-August
A recent U.S. Trade Representative (USTR) news release stated that the NAFTA renegotiation is planned to commence between August 16th and 20th, and it has been reported that there will be seven rounds of talks which will be held every three weeks in order to conclude the process before Mexico's 2018 presidential elections.

Previously, on July 17, 2017, the USTR published its specific objectives for the renegotiation of the North American Free Trade Agreement (NAFTA) as required by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015. Acknowledging that the NAFTA, since its entry into force in 1994, has linked the continent through trade and provided new market access opportunities for American farmers and ranchers, the USTR nonetheless stated that the NAFTA has also created new problems for many American workers. The USTR requested public comments from interested parties with regard to the modernization of the NAFTA, and held a public hearing at the International Trade Commission. The USTR received more than 12,000 written responses and heard the testimony of more than 140 witnesses during the hearing, representing various industry sectors. The majority of comments that were submitted, as well as the testimony presented, reflected U.S. industries' support of the NAFTA because of increased U.S. exports to Mexico and Canada since 1994. They also urged that negotiations should not jeopardize existing market access gains and that the key negotiating principle should be, "Do No Harm" as suggested previously by USTR Lighthizer during his testimony before a House of Representatives Committee in June.

The USTR stated that its overall goals will be to break down barriers to American exports through the elimination of unfair subsidies, market-distorting practices by state-owned enterprises, and burdensome restrictions of intellectual property. The USTR also intends to work to modernize the NAFTA, address America's trade imbalances in North America, and ensure that the United States obtains more open, equitable, secure, and reciprocal market access. The stated objectives reflect many (though not all) of the items on the wish lists of various U.S. industry sectors, as offered in the public comments and testimony provided to the USTR. Even though the USTR would maintain existing reciprocal duty-free market access for trade in goods (including agricultural products), there was no specific mention of the application of the "do no harm" principle for the jobs, businesses and industries that currently depend upon that trade with Canada and Mexico. Many industry sectors urged the Administration to maintain current NAFTA benefits and to avoid disrupting the demand for U.S. exports. U.S. exporters, importers and retailers should continue monitoring the NAFTA renegotiation closely.


Melissa Proctor is a Shareholder with Polsinelli, P.C. With significant experience in the customs laws and regulations, export controls, economic sanctions, and international trade, Melissa is committed to understanding companies' operations and providing assistance geared toward helping them reach their specific business and operational goals. She may be reached at (602) 650-2002 or via e-mail at mproctor@polsinelli.com.

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Tags:  Border Adjustment Tax  Exports  Imports  NAFTA 

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No Stranger to Outside Pressures, Retail Supply Chains Must Adapt as BAT Approaches

Posted By Administration, Thursday, March 9, 2017
Updated: Wednesday, March 8, 2017


by Bryan Nella, GT Nexus


Retailers and their supply chains are no strangers to outside pressures and disruptive forces that impact margins, revenue and shareholder value. CNBC recently called out that traditional retailers are being "decimated" by tech: "As a group, traditional retail stocks have long faltered against competition from e-retailers like Amazon; the S&P 500 multiline retailing group is nearly 21 percent off its 52-week highs and down nearly 16 percent over the last year, while the S&P 500 Internet & Catalog Retail industry group is up 46 percent in the same time."1

Looking beyond Amazon and e-commerce, the latest major threat is the border adjustment tax (BAT). The potential friction could have a rippling effect across retail, impacting the full supply chain, starting at suppliers and factories, and extending all the way to the end consumer. At the heart of the issue is the challenge of absorbing new added costs.

The Impact of Tariffs and Protectionism
Last Fall, a study of 250 retail executives quantified the fears and challenges posed by tariffs.2 It turns out that 46% saw this coming in September, prior to the U.S. election, stating back then that they expected to be impacted by tariffs and protectionist measures derived from the trade positions of the two major U.S. presidential candidates. Their expected impact?

  • 44% expect higher cost of goods
  • 22% expect higher risk of delays or disruptions
  • 20% expect more red tape
  • 17% expect challenges procuring materials and resources

How would retailers respond?

  • 36% would raise prices
  • 27% would negotiate lower costs with suppliers
  • 14% would cut out production costs
  • 8% would move production to low tariff countries

The "Potential" Impact Becomes Real
Fast forward six months and the perceived threat has crystallized into a more tangible challenge. The border adjustment tax looms over retailers, who rely heavily on imported goods. The Wall Street Journal last month provided an example of the potential impact. Best Buy, it stated, imports two-thirds of its good. Another 20% are foreign made from domestic suppliers. The impact of the tax law? Best Buy's current $600 million tax bill would balloon to $3.8 billion.3

Retail analyst Oliver Chen told CNBC PowerLunch that the law could impact retail earnings per share by 50 percent or more.4 The National Retail Federation (NRF) has suggested that the tax policy would increase consumer costs on food, gas, clothing and prescription medicines.5 The average family could pay as much as $1,700 in the first year.6

Taking Action
Friction from new challenges such as the border tax are to be expected. It's a fact of life in the world of retail supply chain. There is no easy button or silver bullet for handling risks, whether it be shipment delays, labor strikes, or political issues. Retailers can't plan for every risk and challenge that may come up day-to-day. But they can seek out a broader strategy to enable more agile and fluid supply chain movement. They can deploy flexible infrastructure that enables inventory or orders to be shifted or adjusted to steer clear of higher costs or risks of delay. The ability to shift gears and move inventory from different parties and regions can mean the difference in millions of dollars in revenue, by sidestepping a port strike, natural disaster or tariff. For example, if an event occurs knocking a supplier offline or crippling an ocean carrier, the ability to assess inventory at risk and know the available alternative goods, routes or parties in minimal time is a critical advantage. If a retailer can swap out suppliers or factories rapidly and deploy suppliers in other regions – perhaps even domestic vendors to avoid a border tax – then they at least have a fighting chance of minimizing the impact.

But this is no easy task. It requires multi-tier connectivity. It requires a network that can serve as a foundation for communication, collaboration and visibility. When each node in the network can collaborate and share data regarding the true state of business at that moment, then moves can be made in the best interests of the end-consumer. Risks may be avoided. Friction may be minimized. Negative impacts may be mitigated.

[1] http://www.cnbc.com/2017/02/28/retail-stocks-decimated-by-tech-could-fall-even-further.html
[2] http://www.gtnexus.com/resources/blog-posts/2016-us-election-business-outlook-infographic
[3] https://www.wsj.com/articles/two-retailers-one-big-worry-1488225595
[4] http://www.cnbc.com/2017/02/17/border-tax-could-wipe-out-retail-earnings-by-50-or-more-analyst-says.html
[5] http://www.businesswire.com/news/home/20170228005610/en/4006457/National-Retail-Federation-Launches-Campaign-Highlighting-Consumer
[6] http://cts.businesswire.com/ct/CT?id=smartlink&url=https%3A%2F%2Fnrf.com%2Fnews%2Fborder-adjustment-tax-would-cost-american-households-1700-first-year-alone&esheet=51517449&newsitemid=20170228005610&lan=en-US&anchor=%241%2C700&index=1&md5=20ac2e6767cf485519d902f6311b8c50


Bryan Nella is Senior Director of Corporate Communications at GT Nexus, the world's largest cloud-based supply chain network. He has more than 12 years of experience distilling complex solutions into simplified concepts within the enterprise software and extra-enterprise software space. Prior to joining GT Nexus, Bryan held numerous positions in the technology practice at global public relations agency Burson-Marsteller, where he delivered media relations and communications services to clients such as SAP. In previous roles he has worked with clients such as IBM, MasterCard and U.S. Trust. Bryan holds a BA in Mass Communications from Iona College and a MS in Management Communications from Manhattanville College.

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Tags:  Border Adjustment Tax 

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Proposed Border Adjustment Tax, Trans Pacific Partnership Agreement (TPP) & NAFTA in the News

Posted By Administration, Thursday, February 9, 2017
Updated: Tuesday, February 7, 2017


by Melissa Proctor, Polsinelli, P.C.


Several key international trade issues have been taking center stage in the headlines as of late – issues that U.S. importers, exporters, manufacturers and retailers should be tracking and monitoring closely as their operations, cross-border transactions and international supply chains will likely be impacted in the very near future.

1. Border Tax Adjustment
During the 2016 presidential election, Donald Trump mentioned the possible imposition of a border tax and new tariffs on goods from Mexico and China. In the summer of 2016, the House Republicans introduced the concept of a border adjustment tax in the publication "A Better Way" (otherwise known as "the Blueprint"). So, what exactly is a border adjustment tax? Essentially, under a border adjustment tax ("BAT") scenario, corporate income taxes would not be assessed on a U.S. company's export sales or worldwide income. Rather, corporate income taxes would be assessed on a U.S. company's domestic revenues minus its domestic costs, and the costs associated with imported goods or supplies used in sales in the U.S. would no longer be tax-deductible. Thus, a company that sources raw materials, parts and components from foreign suppliers would no longer be able to deduct those costs and would pay the tax on those imports. The BAT would effectively lower the tax rate on exports and increase the tax rate on imports. The BAT would apply to imported goods (e.g., raw materials, parts, components, finished goods), imported services, certain royalties and license fees. A BAT is designed to stimulate U.S. exports, and it would also have the effect of discouraging imports and cross-border manufacturing operations. It is possible that a BAT, if implemented, could be challenged by other WTO member countries as a prohibited subsidy; however, proponents argue that it is a type of indirect tax similar to the Value Added Tax (VAT) currently imposed in many countries (but not in the United States) which has been generally accepted by the WTO. A BAT, if implemented, would clearly benefit U.S. exporters of goods and services as there would be no tax liability for export sales. However, U.S. importers of finished goods, raw materials, parts and components could see significant increases in their tax rates. The BAT could also raise the tax rates on U.S. companies that own intellectual property rights outside the U.S.

It has been reported in the media that House Republicans may try to push ahead with tax reform legislation that could include a BAT even though it is not clear whether there are enough votes to pass the bill. However, in a recent interview with The Wall Street Journal, President Trump stated that he is not a fan of the GOP's border adjustment proposal that would tax imports and exempt exports, and that the lowering of the corporate tax rate and the imposition of a BAT would be redundant and too complicated (e.g., companies would receive credit on certain parts and not on others, companies would have to contend with messy country of origin issues, etc.). Further, just this week in a speech to the U.S. Chamber of Commerce, Senate Finance Committee Chairman Orrin Hatch acknowledged that the BAT raises questions as to whether U.S. consumers and businesses would be harmed, and whether it would pass muster under the WTO rules. He noted that there are a handful of Republican Senators who do have serious reservations about the rollout of a BAT. To date, there has been no formal BAT proposal issued by the Trump Administration or Congress. U.S. exporters, importers and retailers should continue monitoring this issue and fluid situation closely.

2. Power Granted to the President with regard to International Trade Agreements
As was reported last month in the RVCF Link, Congress has historically granted broad authority to the President to negotiate, enter and even withdraw from international agreements, including Free Trade Agreements (FTAs). For example, the President has the unilateral authority to revoke prior Executive Orders that provided preferential tariff treatment under FTAs and to institute higher tariffs on imported goods. No formal approval from Congress is required before the President may take such actions. In such situations, the Trade Act of 1974, as amended, authorizes the President to increase tariffs ranging from between 20% to 50% of the tariff rates that were in effect on January 1, 1975. However, if this were to occur, the existing preferential tariffs established under an FTA would likely remain in effect for a certain period of time after the President's decision to withdraw from the agreement in order to give U.S. importers and exporters time to adjust.

3. Status of the Trans Pacific Partnership Agreement (TPP)
The Trans Pacific Partnership Agreement ("TPP"), which included the United States and 11 other countries in the Asia Pacific region (i.e., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), would have become the largest regional free trade and investment agreement ever negotiated. In February 2016, the United States and the various signatory countries signed the agreement, but each country was required to ratify and implement it into their local laws. During the 2016 presidential campaign, both parties criticized the agreement, and Donald Trump vowed to withdraw from it completely. Consistent with his campaign promises, President Trump issued a Memorandum to the U.S. Trade Representative (USTR) on January 23, 2017, in which he instructed the USTR to notify the parties of the United States' decision to withdraw from the TPP, and to begin bilateral trade negotiations with those countries wherever possible. Thus, the remaining signatory countries may stay in the agreement without the United States, and then begin negotiating bilateral trade agreements separately with the United States.

4. North American Free Trade Agreement (NAFTA)
The NAFTA is, of course, the free trade agreement between the United States, Canada and Mexico which was signed into force by former President Bill Clinton in 1994. The NAFTA eliminated duties on "originating" goods and removed non-tariff barriers on goods and services traded amongst the parties. Section 2205 of the NAFTA provides that the parties may unilaterally withdraw from the NAFTA six months after providing written notice to the other parties, and the agreement would remain in force for the remaining parties. As noted above, the Trade Act of 1974, as amended, authorizes the President to unilaterally withdraw from FTAs such as the NAFTA, and to set higher rates of duties on imported goods without the formal approval of Congress.

During his campaign, President Trump criticized the NAFTA, and vowed to renegotiate the agreement or withdraw from it – it should be noted that President Obama made the very same promise when he was running for President, but never took steps to renegotiate or withdraw from the NAFTA. The NAFTA has been modified by the parties several times since it went into force (e.g., changes in the rules of origin for certain products, modifications made to the dispute resolution processes, liberalized entry rights for certain professional occupations, etc.). It is anticipated that if the United States were to withdraw from the NAFTA and impose higher tariff rates on goods imported from Canada and Mexico, the costs borne by U.S. manufacturers that source Canadian and Mexican raw materials, parts and components would increase – those costs would likely be passed along to U.S. consumers in the prices of the finished goods. In addition, U.S. exporters would likely find that their products would become less competitive in Canadian and Mexican markets given that customers in those countries would be paying higher duties on U.S. goods. Canadian Prime Minister Justin Trudeau recently announced that he is willing to renegotiate the NAFTA, and that trade deals such as the NAFTA should be periodically reviewed to ensure that they continue to provide benefits to the parties. Similarly, Mexico's Foreign Minister, Claudia Ruiz Massieu, recently announced that the Mexican government would also be willing to discuss the NAFTA and how to modernize it, but ruled out renegotiation of the agreement. President Trump is expected to issue an Executive Order on the renegotiation of the NAFTA with Canada and Mexico at any time.

5. Conclusion
As noted above, there has been no formal BAT proposal issued and no Executive Order has been published relating to the commencement of renegotiations of the NAFTA or withdrawal from the NAFTA as of the date of the writing of this article. Even though the United States is formally withdrawing from the TPP, it is likely that new bilateral trade agreement negotiations between the United States and the signatory countries will be initiated in the new future. Therefore, U.S. exporters, importers and retailers should continue monitoring all of these issues and this fluid situation closely.


Melissa Proctor is a Shareholder with Polsinelli, P.C. With significant experience in the customs laws and regulations, export controls, economic sanctions, and international trade, Melissa is committed to understanding companies' operations and providing assistance geared toward helping them reach their specific business and operational goals. She may be reached at (602) 650-2002 or via e-mail at mproctor@polsinelli.com.

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Tags:  Border Adjustment Tax  NAFTA  Trans Pacific Partnership Agreement (TPP) 

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