The Border Adjustment Tax (BAT), a ‘destination-based cashflow tax’ being proposed by several Republican members of the US House of Representatives, could have major ramifications for US companies that locate overseas.  

Under the BAT, companies would deduct the full value of any investments made in the year they are made, rather than depreciating investment costs over many years, as is currently permitted by US tax and accounting rules.

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Businesses would also no longer be able to deduct from their taxes the interest payments used to finance those investments. In other words, the BAT removes taxes as a factor in business investment decisions.

The ‘destination’ part of the BAT calls on companies that source and import from overseas be taxed only on profits from sales made in the US. US manufacturers and importers of consumer goods claim that the BAT would raise the effective tax rates for many of them to well over 100%.

“It’s very possible that the tax may exceed profits,” said Rick Helfenbein, CEO and president of the American Apparel & Footwear Association (AAFA). He believes this will put US importers under siege.

Companies such as Walmart, Nike, Abercrombie & Fitch, Costco, AutoZone, QVC, Michaels Stores, the Container Store and others that import products, or parts of products, for sale in the US would be taxed on the imported goods. 

The destination tax does not apply to overseas divisions of US companies that sell to customers that are also overseas, as profits from overseas transactions are not subject to US tax as long as profits are left overseas.

The BAT would not count the overseas sales as revenue in the situation where a US company manufactures products in the US and sells them overseas, for example, as Boeing does. The company can still deduct the production costs as a business expense in calculating its taxable profit.