Taxand USA discusses how the proposed border adjustments may violate international trade law as well as the Constitution and points out a few of the practical problems that may be associated with border adjustments in a direct tax system (as opposed to an indirect transaction tax system, like most VAT systems).


International Trade Law Concerns


In the fall of 1984, the firm Touche Ross & Co. sponsored a program that was open to the public at the World Trade Center in New York City to explain the then-recently enacted Foreign Sales Corporation (FSC) legislation. The FSC legislation was enacted to replace the Domestic International Sales Corporation (DISC) legislation, which was repealed in response to a determination that it was an illegal export subsidy under the General Agreement on Trade and Tariffs (GATT).

At that 1984 program, the late, great Eli Gerver, a renowned senior tax partner with Touche, opened up the festivities with some introductory remarks, the following of which were particularly notable in hindsight:


I’m here to tell you that two things are as certain as death and taxes:



  1. The foreign sales corporation, like the DISC before it, will eventually be determined to be an illegal export subsidy
  2. When that happens, we at Touche Ross will be right back here with a program to explain the FSC replacement legislation

As history shows, Eli turned out to be correct on both counts.  If Eli were still with us today, we are fairly sure that he would advise us that the export exclusion proposed in the Blueprint would (if enacted) also be determined to be an illegal export subsidy.


Discover more: Republican blueprint may violate international trade law and the constitution

Discover more: FX rate impact may trump tax rate impact

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Taxand's Take

There appears to be a real possibility that the border adjustments proposed in the Blueprint would eventually be determined to violate international trade law, as well as the US Constitution. In addition, there are some obvious (and probably some not so obvious) practical problems associated with border adjustments in a direct tax system. Nonetheless, the recent political climate change could make way for the adoption of border adjustments in the US tax system, regardless of any such risks or challenges.

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Article tags

International Tax | USA

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