- The House Republican tax bill includes a proposed new excise tax on US companies’ foreign sales.
- The tax would help raise a significant amount of revenue to help the bill qualify under Senate rules.
- It also faces pushback from conservative business groups.
The massive 429-page Republican tax bill includes proposed changes to nearly every corner of the tax code, but one provision tucked in the bill could face significant resistance from some of the largest companies in the world.
Under the legislation, the corporate tax rate would be cut to 20% from the current 35%, an enticing carrot for corporations. But multinational companies may not be as happy about a new proposed tax on foreign earnings.
The legislation would force companies to pay a 20% excise tax on movement of profits and goods to foreign entities — unless those entities are changed to fall under the jurisdiction of the IRS. Many companies use overseas entities to reduce their tax bills by funneling products into the US through overseas entities or shifting profits to foreign entities.
For example, if a multinational company builds a widget at an overseas subsidiary and sells that part out of its US subsidiary, it would not pay US taxes, since the overseas entity is profiting despite the good being sold in the US.
The new tax would be designed to keep large multinational corporations from moving operations overseas to avoid paying federal corporate taxes, since the tax appears to apply to US-domiciled companies and foreign domiciled companies selling to a US subsidiary.
It would, however, only apply to sales within the same company. So, if a US retailer bought a good from an overseas subsidiary of multinational sportswear company, for instance, it would not be subjected to the tax.
Analysts say the tax is akin to the border adjustment tax (BAT) that House Speaker Paul Ryan and Rep. Kevin Brady favored before President Donald Trump opposed the idea and it was shelved.
While the BAT would have been more broad reaching, said Chris Kreuger, an analyst at the Cowen Washington Research Group, the excise tax would zero in on certain companies.
“Unlike the BAT, the 20% Excise Tax is not on all imports — only imports within a multinational corporation,” Kreuger wrote in a note to clients Monday. “Unlike the BAT that was pretty uniformly negative for entire sectors of the economy, the 20% Excise Tax is probably more company-specific in terms of negativity.”
It’s fairly clear why the House GOP leaders added the excise tax in the plan. It would raise just under $155 billion in new tax revenue over 10 years, which would helps the plan fit into the window in the Republican budget resolution. The resolution allows the tax legislation to add $1.5 trillion in debt over the next decade.
But some groups, including many GOP friendly interests, have attacked the proposed excise tax. The conservative group Americans for Prosperity came out against the provision in a letter to Brady, the chair of the House Ways and Means Committee.
“Because this new 20 percent tax would apply to cost of goods sold, this could have a serious impact on global supply chains and ultimately increase prices for consumers—akin to the unpopular Border Adjustment Tax debated earlier this year,” read the letter from Brent Gardner, chief government affairs officer at Americans for Prosperity.
“This provision, as written, violates the promise that the Big Six delivered earlier this year that they would not include such a consumer tax in their tax package,” he said.