Automakers Could Avoid Excise Tax by Rerouting Foreign Payments

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By Victoria Graham

Multinational auto manufacturers in the U.S. may need to rethink their supply chains to offset a heavier tax burden under the House and Senate tax bills.

Provisions in both the House bill ( H.R. 1) and Senate bill levy hefty taxes on corporations that make payments to foreign businesses for related services and goods. For the auto industry, this presents a significant hurdle, as transactions between U.S. and foreign businesses are commonplace.

“[W]e are concerned that provisions designed to address base erosion create a new burden on payments made to support American jobs and auto production,” John Bozzella, president and CEO of Global Automakers, said in a news release. Global Automakers represents international auto manufacturers such as Honda and Subaru.

Plans Target Foreign Payments

The House and Senate bills both target foreign payments made by U.S. corporations, but the tax rates in the bills differ.

Under the Senate bill, corporations would be subject to a 10 percent minimum tax on base erosion payments, which are defined as deductible related payments to a foreign person. The tax would apply to businesses with annual gross receipts of $500 million and a base erosion percentage of at least 4 percent.

The House tax plan, passed Nov. 16, proposes a 20 percent excise tax on related foreign imports, unless a corporation chooses to treat these payments as connected income, which would then be subject to U.S. taxes. Companies that receive more than $100 million annually in goods and services from foreign companies would be subject to the tax. (For a road map of where to find key provisions and compare the House tax reform bill (H.R. 1) with the Finance Committee version, read Bloomberg Tax’s analysis.)

The bills “would impact any payment that is being made, whether it is a finished product or component parts, to the extent that the payment is otherwise deductible in the United States,” David Sites, an international tax services partner with Grant Thornton LLP’s Washington office, told Bloomberg Tax.

The excise tax in both bills “is a broad-reaching provision and it’s one where we are seeing a lot of clients show tremendous amounts of interest in modeling and understanding how the provision might impact them,” he said.

Payments Subject to Excise Taxes

The foreign payment provisions in the House and Senate measures target specific types of car manufacturers, said Kevin Tynan, Bloomberg Intelligence senior analyst for new vehicles and auto part manufacturing.

“The excise tax would impact the large multi-national automakers that produce parts and vehicles in other countries and ‘sell’ those goods to their US operations,” he said. “They do not pay tax on those sales—so the excise tax would get the US its cut in those instances,” Tynan said in an email to Bloomberg Tax.

Companies with more vertically integrated supply chains that are directly connected to the company would face difficulties under the tax provisions, Sites said.

“U.S. automakers with offshore manufacturing for components of vehicles would be impacted by the new provisions,” he said.

An example of a vertically integrated supply chain is a U.S.-based auto manufacturer with an aluminum wheel production facility abroad. When importing the wheels to a U.S.-based facility, the corporation would be hit with the excise tax.

The base erosion tax “preserves the discriminatory tax treatment in the underlying bill by targeting inbound companies that have integrated supply chains and have invested heavily in the United States, creating 1.29 million American jobs,” Bozzella said in a news release in response to the Senate’s Nov. 14 modifications to the Tax Cuts and Jobs Act.

Royalty payments would also be subject to the excise tax under both bills. Typically, subsidiaries of international auto manufacturers with U.S.-based operations make royalty payments to their automotive parent company, Sites said.

Sites used the example of Company X, based in Japan and manufacturing automobiles in the U.S. The U.S. subsidiary may be using manufacturing processes belonging to the Japanese parent and paying a royalty to the parent. “That royalty would be a deduction to the U.S. company” and the type of standard base erosion payment the tax bill is trying to target, Sites said.

“You are looking at a situation where an auto manufacturer or auto distributor is paying more U.S. tax tomorrow than today,” Sites said. If the excise tax provisions go into effect, “one would have to ask, do you pass the costs to consumers or do these costs fall out somewhere else within the supply chain?”

North American Supply Chains

Within the North American automotive manufacturing industry, supply chains are increasingly interwoven among the U.S., Canada, and Mexico.

“One feature of the auto industry is that there is a huge amount of trade with Canada and increasing trade with Mexico. It’s almost as if there is no border,” Susan Helper, an economics professor at Case Western Reserve University, told Bloomberg Tax. Helper, who was formerly the chief economist at the Department of Commerce, focuses her research on the globalization of supply chains and the revitalization of U.S. manufacturing.

“Mexico exports about 70 to 80 percent of the cars it makes, and almost half of those exports come back to the U.S.,” Helper said.

In October, the Ford Fusion ranked as the fourth-best-selling car in North America, with more than $17 million in sales, according to Bloomberg Intelligence. An analysis of the Fusion’s vehicle origin demonstrates the prevalence of Mexican and Canadian trade. Sixty percent of the Fusion’s content is Mexican-based, while 25 percent is Canada- and U.S.-sourced, according to the National Highway Traffic Safety Administration.

The top-selling midsize car in North America in October was the Toyota Camry, with more than $26 million in North American sales, according to Bloomberg Intelligence. Seventy-five percent of the Camry’s content is U.S.- and Canada-sourced, while 15 percent is from Japan, the NHTSA said.

Related-Party Provisions

Sites said related-party payments are a key element in both tax bills, and may determine which auto manufacturers pay the excise tax and which don’t.

“If you take a domestic company and they source goods or finished products from an unrelated party, that payment is not considered base erosion,” he said.

An example of an unrelated-party payment is an intellectual property licensing payment to an unaffiliated business, Steven Rosenthal, a senior fellow at the Tax Policy Center, told Bloomberg Tax.

In an effort to avoid related-party payment taxes, companies may shift their supply chains abroad to reroute deductible payments through unrelated parties, Rosenthal said. This would potentially render the related-party rules ineffective.

“There are questions around if the related-party rules will work and how effective they will be, because you can always reroute deductible payments abroad through unrelated parties,” he said.

“To the extent that auto companies have lots of related-party payments today, that’s going to be a problem, but if they change their supply chain and start using unrelated parties, it is going to be less of a problem,” Rosenthal said.

As the Senate prepares to vote on its bill, and lawmakers prepare to hammer out a compromise version, Sites recommended that auto manufacturers think through their potential tax liability and examine their supply chain setup.

“Take time to sit down and understand how the proposals are going to impact your current supply chain and think about what changes you can make from a supply chain perspective, " Sites said. “You might get some unexpected results.”

To contact the reporter on this story: Victoria Graham in Washington at

To contact the editor responsible for this story: Meg Shreve at

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