(Bloomberg) A news report that the European Union and other U.S. trading partners are preparing to challenge House leaders’ proposal to overhaul U.S. corporate taxes spurred the plan’s leading congressional advocate to declare that it would survive “any challenge that they bring.”

Representative Kevin Brady, the Texas Republican who chairs the tax-writing House Ways and Means Committee, said he fully expects other nations to challenge the proposal for a “border adjusted” tax. That plan, which is also supported by House Speaker Paul Ryan, calls for taxing U.S. companies’ domestic sales and imports, while exempting their exports.

“We expect other countries to challenge this provision because they have a pretty sweet deal right now,” Brady said Monday.

Brady and Ryan say that the U.S. is disadvantaged by its current corporate income tax. Other countries, which levy value-added taxes, can make border adjustments that tax imports while leaving their own exports untaxed.

“As a result, today made-in-America products are at a tax disadvantage here in America and abroad as well,” Brady told reporters.

Border fence with guard
Bloomberg News

The concept that Ryan and Brady propose for a new border-adjusted tax in the U.S. has generated stiff resistance among retailers, oil refiners and other industries that rely on imported goods or materials. It’s unclear whether President Donald Trump, who has promised to release an outline of his own tax proposals within weeks, supports their plan.

Senate Questions

Senator Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, told Bloomberg Television on Monday that he has questions about the border-adjusted proposal.

Meanwhile, the Financial Times reported Monday that the EU and other U.S. trading partners were preparing for a possible legal challenge to the plan, arguing that it would disadvantage their exports. Any such challenge could result in the largest ever case before the World Trade Organization, said Chad Bown, a senior fellow and trade specialist at the Peterson Institute for International Economics.

If the U.S. lost, “all U.S. trading partners could retaliate to the tune of $385 billion, according to prior WTO calculations,” Bown said. “The biggest WTO dispute on record is $4 billion. This case is potentially 100 times bigger.”

A key issue involves WTO rules for border adjustments—they’re permitted for consumption-based taxes, but not income taxes. Ryan and Brady say their plan, which would be the first of its kind globally, moves the U.S. closer to a consumption base.

The House leaders’ proposal would scrap the corporate income tax—which is levied at a 35 percent rate on companies’ global income. They’d replace it with the border-adjusted tax at a 20 percent rate that would apply to domestic sales and imports. The plan would also eliminate some deductions—with an eye toward focusing on companies’ cash-flow instead of income. Critics say that because the plan functionally replaces the U.S. corporate tax and allows U.S. companies to deduct their domestic labor costs, it would violate WTO rules.

“This will be written in a way that’s WTO-consistent and compliant,” Brady said Monday. “And we will prevail in any challenge that they bring.”

- Sahil Kapur and Lynnley Browning