As the disruptive and uncertain trade environment continues its dominance on the corporate boardroom agenda, CPAs at multinational companies are increasingly tasked with assessing its impact on their organizations and developing strategies for mitigating its potential negative effects. Although there are plans for the United States and China to sign the first phase of a trade deal within the next week, uncertainty over tariffs persists.
For many organizations, particularly those in industries that have enjoyed low tariffs and minimal trade regulation in the past, developing an effective response to address the risks of an intensifying global trade war presents a significant challenge. Notwithstanding, many are succeeding, and CPAs should know that there are strategies and tactics they can use to assist their organizations as they turn today’s trade disruption into a competitive opportunity now and in the years ahead.
Tariff basics
Import tariffs, also referred to as “duties,” are essentially taxes levied on certain imported merchandise from select countries or companies (see the sidebar “Common Types of Tariffs Assessed on Goods Imported Into the US”). Tariffs may be used as an instrument of protectionism or as a means to raise government revenues.
For importers, tariffs are another cost of bringing products to market and often ultimately end up booked as part of the cost of goods sold.
The tariff applicable to a product varies depending on the type of product. While some tariffs are assessed as a fixed amount per unit of imported merchandise, the vast majority of tariffs are assessed as a percentage of the declared “customs value” of the goods. The percentage is referred to as the duty rate. Duty rates vary by product and by the country of origin of the item assessed. The customs value that the duty rate is assessed against is most often the price paid or payable for the imported goods when the goods are exported to the United States, plus certain statutory additions. Nevertheless, when there is no sale for export to the United States or when the sale is between parties that U.S. Customs and Border Protection (CBP) regulations consider related, another method of appraisement may be required.
Strategic tariff planning
For decades, U.S. companies have deployed a variety of methods to alleviate the cost pressures of tariffs. Some of these tactics defer the payment of duties. Some reduce or eliminate the duties payable, and others allow companies to reclaim duties previously paid. With the recent onslaught of tariffs into the United States, and worldwide, opportunities for tariff management that once were applicable only to traditionally high-duty-rate importers, such as apparel and footwear, are now an appealing competitive tool for companies across industries.
Companies implementing tariff mitigation strategies anticipated reducing the impact of tariffs by 59%, according to KPMG’s 2019 Tariff Impact Survey.
Below are some of the primary strategies leading companies are using to mitigate the effects of rising global import tariffs.
Country of origin planning
Whether or not a duty is applicable may be based on the item’s “country of origin.” For example, most recently, certain goods from China are subject to punitive tariffs imposed by the Trump administration, namely under Section 301 of the Trade Act of 1974. Accordingly, companies are increasingly evaluating their production processes to potentially alter the finished product’s final country of origin to escape the Section 301 tariff burden.
The effectiveness of this strategy is often contingent on whether CBP will recognize the processing in the second country as a “substantial transformation.” For instance, the assembly of numerous parts to create various intermediate components, and the subsequent assembly of the intermediate components to produce a new finished good, may potentially result in a substantial transformation of the parts. Generally, the country of origin of the finished good will be where that substantial transformation takes place. However, when only simple or noncomplex assembly occurs in a country, CBP has ruled that the processing is not sufficient to constitute a substantial transformation of the imported components in that country. The substantial transformation requirement is complex, fact-specific, and based on the totality of the circumstances, so a CBP ruling or professional advice should be sought when considering whether to adjust supply chain operations to affect origin changes.
Assessing tariff classification
The Harmonized Tariff Schedule of the United States (HTSUS) provides the applicable tariff rates and statistical categories for all merchandise imported into the country. For most tariffs, including normal “most favored nation” (MFN) tariffs, the HTSUS code will be a factor in determining whether tariffs apply and at what rate. It is critical that importers review the existing tariff classifications assigned to each imported product to determine whether the classification is accurate and, if not, whether a different classification, not subject to the tariffs, may be more appropriate. Similar to the country-of-origin determination, determining a product’s classification may be complex, and a single, specific component or functionality could alter a product’s classification significantly.
A simple tariff classification example
U.S. Court of International Trade conclusion: Cellphone cases are distinguishable from other protective cases because, unlike other cases, they allow for the article to be used while contained within the case. So cellphone cases would be classified under Option 2.
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