more than $1 trillion in its first
decade, offsetting more than half of
the tax revenue lost due to lower tax
rates and a territorial tax system. That
is quite significant. Second, a BAT
is intended to encourage domestic
production and job creation while
discouraging outsourcing by making
the cost of imported goods more
expensive via lost tax deductibility.
Winners and Losers
The central problem with a BAT is
that it creates very distinct winners
and losers. The winners—those that
would benefit most from corporate
tax reform as envisaged in the
House blueprint—would be large
U.S. multinationals that primarily
produce domestically but sell their
products globally, such as aerospace
and industrial machinery and
equipment companies. They would
benefit greatly from tax exemption
of their international sales under
a territorial tax regime and tax-
free repatriation of overseas cash
derived from future foreign earnings.
Many of these companies are
advocating vocally and politically
for a BAT to be implemented as
part of any tax reform legislation.
Losers under a BAT provision would
be U.S. multinational corporations
with minimal international sales and
low gross profit margins that import
continued from page 15
FIGURE 1: ILLUSTRATION OF BORDER ADJUSTMENT TAX PER THE HOUSE BLUEPRINT PLAN
ASSUMP TIONS CURRENT TAX S YSTEM PROPOSED TAX SYS TEM WITH BAT
Sales Domestic Sales 90% $90.00 $90.00
International Sales 10% $10.00 $10.00
Total Sales $100.00 $100.00
Domestic
vs. Imported
COGS as a
of Sales
COGS Domestic Sourced 50% 60% $30.00 $30.00
COGS Foreign Sourced 50% 60% $30.00 $30.00
GROSS PROFIT $40.00 $40.00
SG&A and Occupancy Costs 25% $25.00 $25.00
PRE-TAX PROFIT $15.00 $15.00
Territorial Adjustment Exemption for Profits from Int'l Sales $0.00 ($4.00)
1
Border Adjustment Add back foreign-sourced COGS $0.00 $27.00
2
TAXABLE INCOME $15.00 $38.00
Income Tax Taxes without BAT 35% $5.25
3 $3.00
4
BAT BAT-related taxes 20% $0.00 $4.60
5
TOTAL TAX $5.25 $7.60
NET PROFIT $9.75 $7.40
EFFEC TIVE TAX RATE 35% 51%
Tax Expense Delta $2.35
Change in Taxes 45%
Change in Taxes as a of Gross Profit 6%
Required Sales Increase to Offset New Tax Effects $5.88
Footnotes:
1. $10 int'l sales x 40% GP Margin
2. $90 domestic sales x 60% COGS x 50% foreign sourced
3. $15 pre-tax profit x 35%
4. $15 pre-tax profit x 20%
5. 20% x [(Footnote 1) + (Footnote 2)]
