Higher Tariffs Are on the Way – Can Your Company Manage the Damage?

As U.S. tariffs continue to rise, importers face mounting financial pressure. While these increased duties are designed to promote domestic production, companies with complex global supply chains are experiencing significant cost burdens. With duty rates climbing to 25% or more, many businesses are reassessing their pricing strategies to mitigate the financial impact. This surge in tariffs comes on the heels of recent policy changes and negotiations that could further complicate global trade dynamics.

The situation has grown even more complicated with the U.S. implementing tariffs on China, which had been delayed previously. Initially, there was hope that the tariffs would remain on hold amid ongoing trade negotiations. However, as of this week, the tariffs went into effect, targeting a broad range of goods, including consumer electronics, machinery, and raw materials. In response, China has imposed reciprocal tariffs, further intensifying the cost pressures for businesses engaged in trade with China. The Chinese tariffs are impacting industries such as agriculture, automotive, and technology, creating additional challenges for U.S. companies already facing supply chain disruptions.

In addition to these developments, the U.S. has paused tariffs on Canada and Mexico for 30 days to allow for negotiations, offering a temporary reprieve for businesses that rely on trade with these nations. However, this relief may be short-lived. If negotiations do not lead to a resolution, tariffs on these countries could resume, further escalating costs for businesses. The uncertainty surrounding these tariff negotiations means companies must remain prepared for potential tariff hikes after the 30-day negotiation period ends, and develop contingency plans accordingly.

Customs duties are typically calculated as a percentage of the inventory’s declared transaction value at the border. Historically, with average duty rates of around 2%, many businesses have deprioritized customs costs. However, the recent surge in duty rates has made strategic cost management essential. By reducing the cost of goods sold (COGS) on imported items, companies can achieve substantial savings—for example, a $100 reduction in COGS equates to a $25 savings at a 25% duty rate. Companies must focus on managing their pricing structures more closely and re-evaluating supply chain costs to maintain profitability.

However, businesses must also navigate the conflicting priorities of U.S. Customs and the IRS. Customs authorities scrutinize inventory prices to ensure accurate duty payments, while the IRS often seeks to raise taxable income by increasing intercompany transaction values. This discrepancy can create compliance risks, particularly for companies engaged in transfer pricing adjustments. The recent developments in tariffs only add another layer of complexity, as businesses must now consider the potential future adjustments to the cost of goods, especially with fluctuating duty rates on imports from China, Mexico, and Canada.

To balance these competing regulatory concerns while minimizing costs, businesses can explore strategic reallocation of expenses. Some companies may benefit from shifting a portion of their import costs to non-dutiable service fees and royalties, thereby lowering their customs duty obligations without triggering adverse tax consequences. Proper implementation of these strategies requires adherence to the arm’s length principle under U.S. and global transfer pricing regulations, ensuring compliance with both Customs and IRS requirements.

In addition to reducing duty costs, optimizing customs valuation strategies can improve cash flow, free up capital for reinvestment, and enhance overall operational efficiency. A well-structured approach can help businesses navigate the complexities of rising tariffs while maintaining compliance with tax authorities.

As companies continue to face an unpredictable tariff environment, proactive planning and strategic cost management will be key to navigating these new challenges. For businesses engaged in international trade, staying informed and adjusting strategies as tariffs evolve will be essential to minimizing financial impact.

For a more in-depth look at these tariff mitigation strategies, read the full article here: KBKG | How Companies Can Manage Higher Tariffs That Are on the Way