Managing tax implications amid turmoil, to read the other chapters in this publication, click here.
Planning responses to, and preparations for, trade developments must involve representatives from all functions involved in the supply chain, from procurement to product design and manufacturing to sales and marketing, and be led by executives who understand both the business and the intricacies of trade rules so that they can identify and assess risk.
Tariff schedules are often based on a product's makeup and its condition as imported. As such, there are a number of steps companies can take to minimize tariff costs. These include:
- Making minor changes to certain materials in an imported product. This may change its classification such that it is subject to a lower tariff, or, in some cases, no tariff at all.
- Changing the origin of an imported product. Country of origin is often determined based on where the item was last substantially transformed. It may be possible to change the country of origin --and avoid tariffs associated with that country --by strategically sourcing essential inputs from other jurisdictions. This may be faster and cheaper than completely moving foreign manufacturing operations.
- Reducing the value of imported items. This value is the basis for assessing ad-valorem (percentage-based) tariffs. Companies may be able to reduce the value of an imported item by unbundling items that are otherwise not subject to duties, or by evaluating and adjusting the transfer pricing methodology used to value imported products between related parties.
- Making use of customs-bonded areas. Tariff payments often can be deferred when goods are entered into customs-bonded areas, such as bonded warehouses, free trade zones and foreign trade zones. These duty deferral programs have evolved significantly over the years to provide importers with enhanced flexibility and operational benefits. And they continue to evolve. In Latin America, for example, Columbia recently enacted legislation that may make free trade zones more efficient and attractive than they were in the past.1
Beyond seeking to minimize tariff costs directly, other measures companies can take to better manage trade risks include:
- Seeking trade management expertise. Ensuring that imported goods are properly classified, and local legal obligations met, is critical in an era of new and higher tariffs. Until now, many companies have not needed these capabilities in-house. Where they cannot do so quickly enough to handle the work on their own, they may wish to turn to third-party advisors who can quickly fill the void.
- Educating suppliers. Suppliers, especially smaller suppliers, often will not have the internal expertise to keep fully abreast of changes on the tariff front. In the UK especially, it behooves manufacturers to begin reviewing their contracts with suppliers and working to make sure each party understands who will be paying for any potential changes likely in a post-Brexit world.
- Taking advantage of new trade agreements. Not all changes on the trade front result in added costs. In March 2019, for example, Australia and Indonesia signed an economic partnership agreement that, once ratified, will eliminate all Australian tariffs on imports from Indonesia, and gradually remove 94 percent of Indonesian tariffs on imports from Australia. The deal is expected to boost trade and investment between the two countries in a variety of areas, including cattle, wheat, education, cars, footwear and textiles.
- Taking advantage of new and reformed tax incentives that many countries are offering to attract and support foreign-based companies, especially those embracing i4.0 --the Fourth Industrial Revolution. These may be able to offset tariff costs. Examples: Singapore is offering RUD tax deduction at 2.5 times the expenditure, as well as a 200 percent tax allowance on qualifying IP registration and in-licensing costs, accelerated tax depreciation on computers and machinery that meet automation and clean-manufacturing standards, and concessionary tax rate incentives ranging from 0 to 10 percent on qualifying income for i4.0 and advanced manufacturing investment in Singapore; Italy is offering `Super Depreciation' and `Hyper Depreciation' capital allowance programs for qualifying i4.0 assets; and The Netherlands is offering reduced income tax rates on profits from certain self-developed intangible assets.
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