ALERT: Changes In Tax Code Could Negatively Effect Toy Companies

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The game could be changing for those who manufacture outside of the U.S. According to an article in the Wall Street Journal, and republished in Morningstar, by Paul Ziobro and Richard Rubin, "Toy Makers Gird for Tax-Code Change": "A proposal to apply a border adjustment to the U.S. corporate tax would strip toy makers of the ability to deduct the cost of imported goods from their profits, potentially forcing major price increases."

Here is how Mr. Ziobro and Mr. Rubin explain the new tax scheme:

If a company imports $1 million of foreign-made toys, spends $500,000 on domestic costs and sells the products for $2 million, it would only be able to deduct the $500,000 in local costs under the proposal. Thus, it would pay taxes — at the proposed lower corporate tax rate of 20% — on $1.5 million. A similarly situated company now would deduct all the costs and pay 35% in taxes on just the $500,000.

Why is this happening? Because Congress is feeling the heat to keep jobs in the U.S. According to the article, the toy industry is particularly vulnerable because it generates the majority of its revenue in the U.S. while making little or none of its products domestically. This is of course not new. The industry has always produced in low cost of labour countries. In the case of China, the massive and interconnected toy industry infrastructure in that country makes it hard to imagine manufacturing anywhere else.

To say the least, that is potentially a big problem for the industry. Minimally we would expect retail prices to increase. As you can imagine, retailers aren't too happy about this as well.

Never-the-less, the article points out that some think it will not hurt importers and may even help. They point out that such an adjustment could cause the dollar to rise in value and make imported products less costly. 

It appears that at this point it is the House Republicans who are pushing the bill while President elect Trump, Senate Republicans and Democrats are not so sure. This is an important issue and I encourage you to follow this story closely. Read the Ziobro and Rubin article in full. It will be worth your while.

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