BAT key to VAT. A BAT prevents offshoring and distortion of trade.

Border adjustments are taxes or tax exemptions that apply when payments for goods and services cross international borders. While familiar in the context of value added taxes, border adjustment has arisen in the context of possible U.S. tax reforms. In this regard, five points merit attention:

Border adjustments may be implemented as taxes on imports and rebates on exports, or by excluding overseas sales and purchases from the computation of taxable income;

Unlike tariffs on imports or subsidies for exports, border adjustments are not trade policy. Instead, they are paired and equal adjustments that create a level tax playing field for domestic and overseas competition;

Border adjustments do not distort trade, as exchange rates should react immediately to offset the initial impact of these adjustments. As a corollary, border adjustments do not distort the pattern of domestic sales and purchases;

Border adjustments eliminate the incentive to manipulate transfer prices in order to shift profits to lower-tax jurisdictions; and

Border adjustments eliminate the incentive to shift profitable production activities abroad simply to take advantage of lower foreign tax rates.

These conclusions apply to border adjustments per se; there may be many other impacts when border adjustments are implemented as one part of a larger reform.