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Trade, Tariffs and Taxes

Trade, Tariffs and Taxes

Since World War II, some companies doing business in certain countries have generally operated in a world where free trade principles ruled, leaving business strategy to be shaped largely by business matters: identifying customer needs, developing solutions, figuring out how to produce and deliver them as efficiently as possible. Value chains became increasingly global as multinational corporations sourced labor and materials wherever it made the most economic sense. Some policymakers proved accommodating, developing multinational governance frameworks, creating new economic trading blocs like the European Union, and embracing multilateral free trade agreements like NAFTA, all of which eased the flow and reduced the cost of global commerce.

Today, none of this seems inevitable or even sustainable. Populism has erupted across the globe causing increasingly protectionist acts by governments. Some governments have wielded trade tariffs as a tool for advancing both economic and political agendas, often drawing retaliatory tariffs from trading partners. Tax codes have not been immune to political pressures. Tax codes are changing too, sometimes in response to perceived competitive threats, as with the lowering of US corporate income tax rates in 2017, and sometimes to reflect the new digital economy in which intangibles like intellectual property hold increasing sway. The UK, for example, will begin imposing in 2020 a new 2 percent sales tax on revenue generated there by global technology companies.

The net result is that geopolitics has forced its way into virtually every C-suite and boardroom in the world, with dramatic implications for corporate business models and value chains. As global businesses seek to navigate this shifting terrain, they must consider tax implications at every step along the way, understanding how taxes in the broadest possible sense --income taxes, tariffs, duties --will impact their costs. And they must understand the regulatory environment in every location where they operate or source goods or services, leveraging tax incentives where available and negotiating tax benefits with local authorities where possible.

Many companies have found themselves ill-prepared for this new reality. In the UK, companies operating largely within the European Union have had little incentive to establish meaningful processes and systems for tracking tariffs or duties on goods imported from other EU countries, because those tariffs and duties do not exist. In the US, companies might have used inventory-tracking software that could identify suppliers, but perhaps not where those suppliers got their materials, which until now hadn't been a material concern for many.1 As KPMG's Chris Young has noted, some companies simply haven't had the need for the expertise required in these areas.

They didn't know their supply chains, they didn't know what fees they were paying, never mind upcoming increases, and they didn't know what products they were importing.

This report shows how the shifting trade landscape is impacting companies around the globe; identifies the key types of tariffs, duties and non-tariff barriers companies must be prepared to manage; outlines strategies companies can use to imbue their value chains with the necessary flexibility to manage through trade developments as they materialize; and highlights tax issues and solutions to be considered as companies reassess their existing business models and value chains.

An ongoing challenge

The only certainty in all this is that much will remain uncertain. Just on the immediate horizon, these were among the many question marks still looming:

  • How will Brexit play out --will the UK negotiate trade terms with the EU before leaving the bloc or do a hard exit?
  • How enduring are the recent cuts in US corporate tax rates? 
  • Will new US rules aimed at influencing where companies put their intellectual property --the Global Intellectual Low-Taxed Income (GILTI) regime, and the foreign-derived intangible income (FDII) regime --remain intact? Right now, they are being challenged before the World Trade Organization.
  • Will Mexico remain an attractive alternate operating location for companies looking to avoid the trade issues between the US and China? Labor costs have been rising in Mexico, the country still lacks much of the infrastructure that has made China attractive to many industries, and, as seen recently, the US has considered imposing steep tariffs on goods imported from Mexico.

In addressing questions like these, companies must consider geopolitics during overall business planning and tax planning. Tax needs to be a partner in conversations around restructuring operations and investing in new operations in new parts of the world, and in any negotiations over site selection, which must include an analysis of the regulatory environment and opportunities to negotiate tax benefits or incentives.

Contributors

Jerry Thompson
Principal, Tax
KPMG in the US

Christopher Young
Principal, Tax
KPMG in the US

Grant Wardell-Johnson
Head of Australian Tax Centre
KPMG in Australia

Alfonso Pallete
Latin America Head of Markets, Americas Tax*
KPMG in the US

Olivier Sorgniard
Director, Trade and Customs
KPMG in the UK

* KPMG Americas Ltd. is not an accounting firm and is not licensed or registered to practice accounting in any jurisdiction.

Footnote

1 “Trade War Stats Changing Manufacturers in Hard-to-Reverse Ways,” by Ben Casselman, The New York Times, May 30, 2019

Disclaimer

Throughout this page “we”, “KPMG”, “us” and “our” refer to the network of independent member firms operating under the KPMG name and affiliated with KPMG International or to one or more of these firms or to KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Episode 18

Transcript (PDF 284.2 KB).

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