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The tax-reform plan released by Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady is intended to improve our corporate tax system by, among other things, taxing companies based on where they sell their goods, not where the business is located or where the goods are made. To do so, the ambitious reforms would set up a system in which corporations pay taxes on their U.S. sales revenues, with deductions permitted for the cost of input materials and labor, along with exclusions for the value of export sales.

Although policymakers rarely need to take the World Trade Organization (WTO) or its rules into account when devising tax policy, the proposal outlined in the Republican Blueprint for a cash flow tax does have significant WTO implications. While many proponents have said that plan is fully consistent with our WTO obligations, or at least that the WTO-consistency of the plan is “ambiguous,” that contention rests on a blurring of the distinction between taxes imposed on imports with rebates or exclusions for exports, combining the two under the overall notion of “border adjusted taxes” or BTAs. As this Issue Brief explains, as currently described, the Ryan-Brady taxes on imports are a clear violation of WTO rules while the rebates or exclusion from taxes for exports presents a murkier picture.

The speed with which WTO disciplines can be imposed also vary between imports and exports. Claims that the cash-flow tax’s application to imports violates the WTO would follow the traditional WTO dispute settlement rules, potentially taking two or more years for a decision on whether a violation has occurred, with significant additional time added on for compliance and possible further litigation over whether any changes the US might make in response to an adverse ruling bring about actual compliance. Disputes claiming that the exemption for exports from the sales revenue base violates the WTO rules on subsidies would, on the other hand, potentially be subject to the WTO’s expedited dispute process for claims involving prohibited export subsidies or relatively fast action by our trading partners to impose countervailing duties on US exports that cause injury to their domestic producers. As a result, any U.S. violations would likely generate several opportunities for relatively expeditious reprisals by other WTO member states.

Publication Citation

Jennifer A. Hillman, Why the Ryan-Brady Tax Proposal Will Be Found to Be Inconsistent with WTO Law (Institute of International Economic Law Issue Brief March 2017)