As the ramifications of recent shifts in U.S. tariff policy begin to unfold, businesses are seeking strategies to manage their cost exposure and mitigate uncertainty. Given the substantial increase in potential U.S. tariff exposure, which a PwC analysis suggests could rise from $76 billion to nearly $989 billion annually, companies are increasingly turning to four key tactical approaches: eliminate, refund, delay, and reduce.
The most direct, albeit challenging, method for companies is to eliminate tariff impacts by relocating production or sourcing to nations without tariff constraints or by manufacturing within the United States. While theoretically simple, the implementation is complicated by the inherent uncertainties and costs involved, which often make businesses hesitant to commit without more definitive clarity.
The refund avenue involves utilizing “duty drawback,” enabling companies to recover up to 99% of paid duties under certain conditions. This approach, akin to a tax refund, requires rigorous diligence to navigate its complexities and eligibility criteria, which vary depending on the types of tariffs applied.
Another approach is to delay tariffs through mechanisms such as foreign trade zones (FTZs) or bonded warehouses. These structures allow companies to defer tariff payments on raw materials until they are processed for domestic consumption, or even avoid them altogether if goods are exported. Despite the advantages, the logistics of setting up FTZs, requiring sophisticated inventory systems, may pose challenges.
The last strategy, to reduce tariffs, involves adjusting the dutiable base for imports through transfer pricing evaluations or unbundling non-dutiable items. Companies may also apply the “first sale for export” principle, setting a lower customs value derived from an earlier transaction. These strategies, while generally more accessible than the prior options, necessitate a comprehensive review of a company’s overall exposure, to prevent unintended consequences that could counteract the benefits.
For the full article on these strategies, visit Bloomberg Tax.
As companies navigate this evolving landscape, the focus shifts from a “wait and see” approach to proactive planning and preparation, ensuring that they remain compliant and cost-effective while managing these changes’ impacts on their bottom line.