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Border Adjustment Tax and Its Impact on Apparel Brands

May 07, 2018 Nikita Kalra
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The Ryan-Brady tax reforms of 2016 saw both agreements and negations. Certain people regarded them as factors likely to strengthen the dollar, others called them nothing but yet another cash-flow menace for the indigenous companies that import manufacturing goods.

President Trump, in this case, resides in the latter category by calling these reforms “too complicated”.

However, no matter how important a person disapproves of them, the fact is that as a result of the reforms the BAT is still applicable on the local apparel firms and it is impacting their existence to greater depths.

Before we could go on stating the impact, we should first remove any confusions regarding the BDT to clearly understand it.

What is Border-Adjustment Tax?
 

Introduced in 1997 by Alan J. Auerbach, an economist, the border adjustment tax is actually applicable on the manufacturing goods that are imported by any indigenous company of one country from a country that offers these goods at a relatively low price. Companies that follow this approach look for their greater benefit by finding a way to reduce their manufacturing costs. In case of the apparel companies, this may be called apparel sourcing.

 

Ironically, as stated above, the tax is levied on the goods that are imported, meaning that companies that are operating in—for example—U.S. would have to experience a reduction in their overall profit since all of their manufactured products’ prices would be tax adjusted.

For example, if an apparel sourcing company sources its goods from Mexico for a cheaper price, it would be liable to pay the BAT. However, if the same company exports its manufacturing goods to any apparel company sourcing it from the U.S, the tax we are talking about would not be applicable at all. Like I said, ironic enough.

The Impact
There has been a wide discussion over the border adjustment tax and as stated above, people for and against it outweigh each other.

Some people like Ira Weiss of the University of Chicago Booth Business School term tax as a way to “broaden the corporate tax base”. According to the professor, “It would be helpful to US companies that do a lot of exporting, but the US companies that do a lot of importing are likely to object to it. Based on what I know at this point, I would be in favor of a border adjustment tax. Right now, many top US corporations have been able to avoid most of their tax liabilities by shifting their profits overseas.” [1]

These comments are reflective of the “dollar strengthening” concept that is associated with the BAT.

However, seeing a greater reduction in their profits, and as stated by Ira Weiss, local companies that do a lot of importing are very much happy about it. “It is corporate tax reforms on the backs of the American consumers. It is basically a hidden tax in the cost of everything from filling up your car to the shirt on your back to the shoes on your feet”, says Thomas Nakios who owns the Nakios Group.

While these were some of the reactions, it is befitting to say that the BAT has repercussions for the local apparel sourcing companies.

  • They would have to face additional expenses combined with the transportation costs. Those expenses would be in the form of BAT, which is currently 35% on $5 profit. For example, if a retailer buys a sweater for $80 from the internal market, and decides to sell it at $100, he’d be only able to earn $5, minus the transportation cost ($15) from the final price.
     
  • The reduction in profits would be considerable. Following the above example from CNBC, if the sweater is sold for $100, the retailer would only be able to earn a $5 profit. The tax applicable to this profit is 35%, which is $1.75 per unit. So, overall there’d be a reduction in the profit.
     
  • They would have to increase the price of their products to adjust their profit deficits. That increase could be from $10 to $15 per product or commodity (in our example of the sweater, almost 10% to 15%), meaning only one thing: the local consumer would buy these products for a greater price.

However, having these negative impacts on the workability and profit generations in the overall cash flow of any apparel company, the BAT is thought to have some positive aspects also. For example:
 

  • It would help encourage the local manufacturing industry.
  • The appreciation in the price of the dollar (almost 20%) does not necessarily mean that the prices would scale. Instead, the overall commodity prices and the foreign exchanges would make the import of goods relatively cheaper.

Border adjustment tax is seen both as a devil and an angel at the same time. However, those who think that the dollar appreciation is something to look for seldom bring into account that, at the present state, the manufacturing apparel market of the U.S have not the capacity to manufacture everything. They’d have to rely on import. Therefore, the current tax reforms might not be as favorable for them as thought.


[1] https://www.businessoffashion.com/articles/intelligence/the-real-dangers-of-the-republican-partys-us-tax-proposal-for-fashion


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Nikita Kalra

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