The proposal is for a "Destination based cash flow tax" (DBCFT) to replace corporation tax (possibly at a rate of 20% for companies and 25% for non-incorporated businesses and other passthroughs).

  • DBCFT would be chargeable on all business income related to U.S. consumption (so companies, non-incorporated business and PE's of foreign business as well as any US income of foreign business without a PE) - so on direct sales - like a VAT - but also on other income.
  • DBCFT is compared by some to a VAT.
  • VAT key similarities:

- tax on receipts (compare output tax)

- deduction for taxable costs (compare input tax)

  • VAT key differences:

- also a deduction for wages

- applies to other types of income such as royalties and interest

  • Export-led companies from the U.S. could have negative tax liability (deductions and no taxable receipts). This would be carried forward to set against any future tax charges, subject to a 90% limitation.
  • Businesses which import into the U.S. will however pay the tax without deduction for non U.S. costs. This would lead to tax on a figure much higher than any real profit.
  • The aim is that WTO should treat the DBCFT like a VAT but the deduction for wages makes this unlikely.
  • The U.S. would however argue that DBCFT was an indirect tax similar to a VAT and that 'border adjustments' were acceptable in the same way as for VAT.
  • In practice for DBCFT the deduction for wages and the application to investment income (except dividends) makes it look more like a corporation tax or business income tax.
  • If the U.S. goes ahead it is likely that other countries will immediately launch a WTO dispute and that the WTO will negotiate with the U.S. to change the proposals or failing that would approve retaliatory measures. Stopping the deductibility of wages might make it sufficiently like a VAT, but would make the tax even more regressive than it is already. Or removing the border adjustment could reintroduce incentives to shift profits outside the U.S. and thereby reduce the tax take significantly - leading to increased U.S. debt.
  • In an interview with the Wall Street Journal on January 17, President-Elect Trump said that DBCFT would be "too complicated" and added "Anytime I hear border adjustment, I don't love it. Because usually it means we're going to get adjusted into a bad deal. That's what happens."
  • Trump's tax plan would retain the traditional corporate income tax, with significant modifications to deductions and credits, and imposing a 15% rate.