Border Adjustment Tax

DEFINITION of 'Border Adjustment Tax '

Also called a border-adjusted tax, border tax adjustment or destination tax, this is a tax levied on goods based on where they are sold. Goods that are exported are exempt from tax; goods that are imported and sold in the U.S. are subject to tax.



BREAKING DOWN 'Border Adjustment Tax '

A border adjustment tax (BAT) is a tax based on where a product ends up instead of where it’s produced. For example, if a corporation ships tires to Mexico where they will be used to make cars, the profit the tire company makes on the tires it exports isn’t taxed. However, if an American car company purchases tires from Mexico for use on cars made in America, the money it makes on the cars (including the tires) sold in the U.S. is taxed. In addition, the company cannot deduct the cost of the imported tires as a business expense

This tax setup is designed to incentivize corporations to produce and export more, and import less.

Proponents of the tax say that it will spark U.S. job growth while opponents say that it will drive costs higher, cut profits for some businesses (retail, autos and refining are mentioned), and could prompt retaliation from other countries.