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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 11 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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With the Trump administration preparing to release its tax reform plan in the next several weeks, the Congressional Research Service (CRS) has just released a timely <a href="https://www.thompsonhine.com/uploads/1345/doc/CRS_Report_-__Border-Adjusted_Consumption_Taxes_and_Exchange_Rate_Movements.pdf" target="_blank" rel="noopener">report</a> on the border adjustment tax (BAT). The report offers an analysis of House Speaker Paul Ryan&rsquo;s proposal of a destination-based cash flow tax (DBCFT), a type of national consumption tax, as part of the &ldquo;A Better Way&rdquo; tax reform blueprint. One component of the DBCFT proposal is the implementation of a BAT, which has generated considerable interest since the November presidential election.
The report states that although there are many important issues surrounding a BAT that require careful consideration, the response of exchange rates is one that has received much attention. &ldquo;Standard economic theory predicts that under certain conditions exchange rates would react to a BAT in a way that would leave exports and imports unchanged. That is, exchange rate movements would offset the effects of the tax, leaving the U.S. trade balance unaltered. Some observers, however, have speculated that such a response may not occur in a timely fashion or that exchange rate movements may not completely offset the tax. If either of these two situations were to occur, or if impact across industries was asymmetric, there could be implications for U.S. businesses and consumers, and as a result, the U.S. trade balance.&rdquo; The CRS report provides a basic framework for understanding how and why exchange rates could respond to a BAT.
The report concludes that replacing the current corporate income tax system with a DBCFT with a BAT would be an &ldquo;unprecedented shift in U.S. tax policy.&rdquo; While such a change would bring uncertainty, CRS analysts stated that &ldquo;economists tend to agree that any tax-induced advantage for U.S. exports or tax-induced costs on U.S. imports would be offset by adjustments to the exchange-rate value of the dollar. In other words, if the dollar appreciation occurs as economic theory predicts, there should be no changes in the trade balance resulting from tax.&rdquo;

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Congressional Research Service Issues Report on the Border Adjustment Tax