On April 9, the Trump administration announced a 90-day pause on what it had termed “reciprocal tariffs” for nearly 60 countries plus the European Union, while leaving in place a minimum 10% tariff rate that applies to nearly all imported goods. The reaction to that news has not been of relief, but rather uncertainty and apprehension, as tariffs on China remain at 145%, and a patchwork of exemptions and product-specific tariffs have made the situation even more confusing. Businesses dependent on exported products or components, especially those from China, are facing existential questions of whether they can remain economically viable if steep tariffs remain in place or are reinstated on other nations.
Prior to the pause, the estimated average applied tariff was set to rise to 27.8%, the highest rate since the 1940s. Both U.S. tariffs and retaliatory tariffs enacted by other countries threaten to impact nearly every industry in the U.S., from retail and manufacturing to construction, real estate, healthcare, hospitality, banking and professional services, with a largely pessimistic outlook for all. While considerable uncertainty remains regarding the new import taxes, businesses should be exploring their options for blunting the effect of tariffs to maintain stability.
Adapting to Higher Import Taxes
If your business has been hit by tariffs, or expects to be, here are key areas to examine to mitigate the fallout:
Supply chain adaptations: COVID-era supply chain difficulties highlighted the weaknesses inherent in an overreliance on distant manufacturing and single sources for goods. Current developments are likely to accelerate trends toward nearshoring and diversifying the supply chain, particularly for companies with supply chains in China. Companies can also elect to hold higher inventories of critical products or parts as well as redesigning products to use domestically available materials or components as a hedge against price shocks or shortages.
Intercompany pricing and customs compliance: Multinationals whose overseas affiliates sell goods to its U.S. entity must now include a tariff cost at import, making it necessary to reexamine intercompany pricing and how tariff costs will be allocated. In addition, customs and tax reporting must be aligned and customs compliance strictly adhered to in order to ensure correct country-of-origin determination and classification. Creating a unified strategy will require tax, finance, and trade compliance teams to collaborate closely.
Reassessing global tax strategy: Tariffs add another layer of complexity to tax considerations for multinational companies. Where previous circumstances may have made it more favorable to keep production overseas, for example, new tariffs may make it advantageous to move to a domestic location using tax incentives or credits to offset increased costs. However, companies must ensure that a supply chain shift does not create double taxation, change their effective tax rate, or significantly alter their cash tax positions. Given that Trump has also indicated the U.S. will pull out of the OECD process to implement a global minimum corporate tax rate, with perhaps additional retaliatory actions, companies will face additional uncertainty in determining their optimal global tax structure.
Mergers and acquisitions: In the short term, tariffs may chill the M&A market by prompting buyers to re-evaluate potential acquisition targets according to their exposure to tariffs and their ability to adapt to or withstand them. Deal terms may include specific tariff-related clauses or be structured to incorporate earnouts tied to profitability to protect buyers from undue risk. At the same time, companies might seek out partnerships or acquisitions in tariff-friendly countries to mitigate their existing supply chain exposures, possibly creating new opportunities for cross-border M&A.
Oversight and controls: The volatility of the tariff environment demands that companies tighten oversight to properly reflect tariff impacts in financial statements, ensure compliance with trade laws, and create risk assessments and contingency plans. Legal advisors should review existing contract clauses, with an eye to potentially including or excluding tariffs as force majeure events in future contracts.
International Business and Tax Advisory Legal Guidance
If the on-again, off-again succession of tariff announcements has left your business unsure of its obligations or how best to secure its interests moving forward, the international business law experts at Bridge Law LLP can provide insight and strategic guidance. We stay abreast of the latest developments to provide up-to-the-minute advice tailored to your business’s needs. To schedule your consultation, contact us here today.