Creating Tariff Strategies? Get the Tax Department to Weigh In

With the tariff landscape evolving under President Donald Trump, multinational enterprises are weighing strategies to reduce their impact.

These include including tariff engineering, which deals with changing the composition or design of a product; supply chain optimization to increase profitability and customer service; or supply chain diversification to reduce the risk of relying on one vendor, manufacturing location, or country.

But multinationals shouldn’t focus solely on tariffs when discussing how to modify their supply chains. They need to involve their tax departments and advisers to help ensure any benefits from tariff mitigation aren’t offset by unexpected tax consequences.

Multinationals should think about the direct and indirect tax consequences that can arise when making changes to their supply chain, especially when the businesses involved are related.

That means not only considering tax consequences in the country where they may be leaving or shrinking their footprint, but also the tax consequences in the country where they are moving. US-based multinationals also must consider tax consequences in the US.

Leaving or downsizing operations in a country could have numerous implications. For example, a country may impose an “exit tax” when a company is establishing or migrating operations outside its borders. This may require a valuation of the business to determine the exit tax or require rulings from local tax authorities.

An exiting entity also may have to deal with employment laws if reducing or terminating the workforce, which can result in severance payments. These additional costs can be substantial and may require additional funds to be provided by the owners of the exiting entity to make such payments. This could result in a question of who is able to deduct such payments for tax purposes.

When selecting a new country for relocation, multinationals typically consider the rate of income tax on future profits but other factors such as indirect taxes, withholding taxes, treaty networks, and operating and labor costs shouldn’t be overlooked.

Given the uncertainty about tariff rates, multinationals should also consider potential future tariffs that could be imposed if they move operations outside of their current country.

The US’ anti-deferral rules—Subpart F and the global intangible low-income tax—should be analyzed and modeled when moving operations or assets (both tangible and intangible) between countries.

Another item multinationals should consider is the adjustment of transfer prices between related parties. Section 1059A of the US tax code states that customs value needs to align with the income tax value, meaning the transfer price under Section 482. In other words, transaction values should be consistent for transfer pricing and customs purposes.

As a result, businesses need a clear understanding of their transfer pricing and how such pricing may be impacting the tariffs they’re paying on the cross-border flow of goods and services within their supply chains.

By adjusting transfer prices, the customs value may subsequently need to be adjusted as well. That may reduce the value at which tariffs are levied. In general, transfer prices are set with reference to a range of prices determined according to the arm’s-length standard. Adjusting prices within an arm’s-length range may present an opportunity to increase or decrease customs valuations.

Businesses also should consider how any additional costs related to tariffs may affect their overall transfer pricing policy and, therefore, who should bear these costs if they can’t be passed on to the end customer.

Because changes to supply chains take time and changes to tariffs can happen quickly, multinationals should evaluate their supply chain on a regular basis to plan for the unexpected. Further, they should review their contracts to see if they address tariff and tax changes that could impact their business with suppliers and customers.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael Cornett is a managing director with Forvis Mazars in its Washington National Tax Office, focusing on international tax issues.

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