With the recent announcement of tariffs* for goods coming into the US from Canada, Mexico, and China, it’s crucial for company leaders to understand how tariffs could impact their business, as well as what strategies are available to potentially mitigate these taxes.
What Are Tariffs?
Tariffs, also known as import duties, are a US tax on goods imported into the US. Tariffs are different than other US taxes; they’re collected by US Customs and Border Protection (CBP) rather than the IRS. Tariffs may vary by the kind of goods or country of origin of the goods. The most recent tariffs announced, which are now on a 30-day pause, are blanket tariffs on all goods that originate in Canada or Mexico. Cross-border services are usually not subject to tariffs, as tariffs are generally only a tax on tangible goods.
The tariffs on Canadian and Mexican products are blanket tariffs so all classifications of goods are subject to these tariffs, which could have an outsized impact on supply chains that rely on component parts from Canada or Mexico and on final products that may be sold back into Canada or Mexico. When identifying the country of origin, it is not the location of shipment or sale but the place where the item was “substantially transformed,” so US manufacturers that rely on products built in Canada and Mexico will see the largest cost increase.
Logistics: Who Pays, How Much is Paid, and When It’s Paid
Tariffs are paid by the legal importer of record and are reflected in the cost of the final product when it’s resold. Tariff costs are usually negotiated and included in the shipping contract, and they can be allocated to either party in the transaction.
When goods enter a US port of entry, the importer “declares” the goods, the quantity, and the value of the goods. CBP evaluates the declaration and inspects and audits the goods as necessary. CPB collects the tariffs and import fees at that point, based on the value of the imported goods.
Tariffs: Related vs. Unrelated Parties
Tariffs can have differing impacts on a company depending on whether the transaction is between related parties (e.g., a business and an owner, common control, employer and employee, etc.) or between unrelated parties that operate independently of each other (e.g., a US company buying from an unrelated foreign supplier).
Retaliatory Tariffs
Countries targeted by the US for tariffs have announced retaliatory tariffs** of their own, which will impact US companies exporting goods into those nations. Exporters should keep the following in mind:
- There may be a rise in shipping prices when exporting goods from the US. This will be visible with an increase in shipping fees; however, companies won’t directly remit money to the country it’s shipping into, the importer of record will pay this cost.
- Tariffs are a different kind of tax than income tax, so companies won’t receive a credit to offset tariff costs as they would a withholding tax or a foreign income tax.
Potential Tariff Mitigation Strategies
Tariffs can potentially be minimized or avoided through a change in sales strategy and review of a company’s international tax strategy. Some options include:
- Customs goods valuation methods. Different methods may be used to lower the value of the goods.
- Inventory hoarding. If a business can buy more inventory and store it in the US, it may mitigate tariff effects. If a company is debt funding the inventory, analyze whether the interest rate may be lower than the tariff rate.
- Country of origin analysis. A more in-depth analysis may make it possible to shift the legal country of origin of the goods to a country without tariffs.
- License of IP to local country manufacturers for distribution of products.
- Sales of services to local country manufacturers and distributors.
- Use of export incentives to lower the US tax rate on exported goods to mitigate tariff effects.
Understanding Your Options
Aldrich’s international tax specialists provide services that align with your specific needs, including international tax, transfer pricing documentation, and global transfer pricing structuring. We bring together our network of US and foreign specialists from different fields—tax, legal, economics, and other services—to deliver insights to you. Contact us today to get started.
* The White House announced a 30-day pause on tariffs impacting goods from Canada and Mexico on February 3, 2024.
** China has announced a 15% tariff on coal and liquefied natural gas products coming from the US, along with a 10% tariff on crude oil, agricultural machinery, and large-engine cars imported from the US.
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