PwC has released a brief on the impacts of a possible tax reform on U.S. manufacturers that looks at how the House Republican Blueprint and its controversial border tax adjustment feature could affect companies.
The report indicates that a reduction in the tax rate from 35 percent to 20 percent would clearly benefit business. The average corporate tax rate for countries in the Organisation for Economic Co-operation and Development (OECD) is at a relatively low 24 percent rate, so this proposal will help U.S. manufacturers compete around the world.
Additionally, many manufactures would be helped by a territorial tax system. Currently, U.S. companies pay a tax on their foreign earnings in the country where they do business. They also must pay an additional incremental U.S. tax when repatriating earnings back to the United States. Most foreign competitors operate under territorial tax systems that allow them to repatriate foreign business earnings with little or no residual home-country tax.
Two other provisions of the Blueprint — an immediate write-off for business investment in plant and equipment and the elimination of the deductibility of any interest expense that exceeds interest income — could be favorable or unfavorable when netted together.
A fifth proposal in the Blueprint has implications for the supply chain—the so-called border adjustment provision. This would have domestic companies wondering if relocating their supply sources and manufacturing to the U.S. and then exporting to foreign markets might be a better plan.
In the brief, PwC advises that companies:
- Don’t expect simple answers. The complexity of the supply chains of most US industrial manufacturers means it is unlikely there will be one obvious solution — that is, a set of decisions that maximizes the business benefit with no risk. Almost anything you decide to do could affect your costs, your ability to execute, or your competitive position later on. This is essential to keep in mind.
- Model the scenarios. The starting point of understanding how much of your materials base is foreign-sourced is only that — a starting point. (And it may not be such an easy piece of information to get, because companies don’t always have clean data on this.) Industrial manufacturers also have to consider other factors, like how changes in the structure of the exported “good” (knock-down versus fully built units, for example) might affect tariffs in destination countries.
- Wait for clearer indications of the likely law before changing your footprint. There’s uncertainty today about a number of issues: whether and how border adjustment would be included in any enacted legislation (and what transition rules might be provided); the likelihood that exchange rates will adjust; and the possible competitive responses that other countries might undertake to offset a perceived U.S. tax advantage. As such, businesses need to consider a deliberative and informed approach. This is one of those instances where it’s probably smart to monitor developments closely and wait before acting. If you have an effective supply chain, leave it alone for now.
- If you can’t wait, analyze your footprint options exhaustively. For those U.S. companies that need to make footprint changes in the coming months, the possible tax changes should be factored in, especially in deciding where to locate new manufacturing capacity. There may still be reasons to locate a plant outside the U.S. But because current tax disincentives for U.S. production could be substantially lowered under tax reform, it probably makes sense, for near-term decisions regarding plant formation and expansion, to at least consider making those investments in America first. Just understand that down the road, the conversation may be different.
Check out the full brief here.