BAT vs. VAT: Either way, will that chill consumer spending?

Expect some form of new tax — what is unclear is the format and who will pay it.

That was essentially the conclusion from three members of a panel who spoke on “BAT, tax reform, NAFTA and CAFTA.” The panelists included Ron Sorini, principal of Sorini, Samet & Associates, a strategic advisory firm with a specialty in trade issues and international politics; Carol Lapidus, partner and national consumer products leader at financial advisory firm RSM US LLP, and Rick Helfenbein, chief executive officer and president of AAFA. Allan Ellinger, co-founder and senior managing partner of MMG Advisors Inc., was the moderator of Tuesday’s event, held at the Penn Club of New York.

One key point that the panelists left with the apparel manufacturers in attendance was they should make their voices heard in Washington. Sorini said the perception in D.C. is that “Wal-Mart is seen as the enemy because they drove the manufacturing base out of the U.S.” That translates to a lower level of receptiveness to an opinion from a Wal-Mart executive. In contrast, the administration and its different offices “want to hear more from other manufacturers and retailers,” Sorini said.

Helfenbein added that more of those discussions could be very important in how the BAT or other changes are formulated, noting that there’s a chance for some form of compromise.

The panelists also spoke about the Trump administration’s plan to lower the corporate tax rate, and how that means they now need to raise revenue from somewhere else to make up the lost income. Sorini, the former ambassador and chief textile negotiator for the USTR and who chaired the U.S delegation in the negotiation of NAFTA, said the amount needed is “$1 trillion to pay for the lower corporate tax rate from 35 percent to 25 percent.”

Up for debate is whether the form of revenue raising will be a border-adjustment tax, or BAT, that manufacturers pay on what’s imported, or a value-added tax, or VAT, that consumers pay as a form of sales tax. Sorini said, “We have to move in that direction. If not a BAT, then it will be some form of VAT.”

Either way, it’s still a concern for the retail and apparel sector. In a BAT, there are adjustments to what becomes taxed depending on what is being exported or imported. Generally, for imports, manufacturers will likely pay a tax that would be higher than what they would garner as their profits since they lose the ability to deduct import costs. According to Helfenbein, that would leave companies with just two options — close their doors or raise prices by 20 to 25 percent. For the latter option, the end result would be fewer customers, and that could turn into a “downward spiral,” the ceo said. He also added that if a VAT was slipped in instead of the BAT, it could be a 20 percent across the board tax, which would be on top of the current personal income tax that consumers pay.

Lapidus said that given the uncertainties over what will get passed, this is the perfect time for companies to hunker down and cut expenses, which could include selling or shutting down non-core operations.

Sorini noted that most Fortune 100 companies support the BAT, but that’s because a high portion of their businesses involve exporting goods. He also said the current thinking about the BAT in Washington does not include any deductions for duties on goods coming into the country.

As for NAFTA, Sorini said he expects some tweaking or change to the agreement in the first quarter of 2018, mostly because of the preparation for the mid-term elections for the Senate and House seats. He predicted that if there’s no renegotiation of NAFTA, “there will be a process to terminate” the agreement. He isn’t foreseeing any changes to CAFTA at the moment.

Sorini also said that with the U.S. stepping out of the Trans-Pacific Partnership, or TPP, he expects to see the start of negotiations for bilateral free trade agreements with Vietnam and Japan, as well as with the European Union, which would help footwear and apparel firms such as Columbia and The North Face.

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