In recent months, tariffs have become a significant concern for businesses importing goods, particularly in relation to trade agreements between the U.S., Mexico, and Canada, as well as with other countries. The U.S. government has imposed or adjusted tariffs on a range of goods, and there are ongoing discussions about potential increases or new tariffs. This evolving situation means that businesses must be prepared to manage the impact of tariffs, which can significantly affect the cost of imported goods and ultimately their bottom line.
Tariffs are considered a form of “indirect tax” by tax practitioners. They are termed “indirect” because, although the importer is responsible for paying them to the government, the additional cost is ultimately passed on to the final consumer in the form of higher prices. This is similar to a sales tax.
As with other taxes, strategic planning can help mitigate the economic burden of tariffs. Below are several strategies that may help reduce the financial impact from tariffs:
1. Accelerating Taxable Transactions:
When there is a risk of rising tax rates, tax practitioners often recommend accelerating transactions so that they are taxed under the current, lower rate instead of the future, higher rate. In the case of tariffs, accelerating the importation of inventory may help avoid the additional cost of tariffs if they are enacted in the future.
2. Tax Deferral:
By delaying the importation of taxable goods until the time they are close to consumption, businesses can reduce the economic cost of the time gap between when the tax is paid and when it is recovered (either fully or partially) through the sale of the goods at higher prices. One possible strategy is to warehouse inventory offshore until it is needed.
3. Shifting the Tax Base to a Lower Tax Rate:
The value of imported goods includes both the value of the goods themselves and any associated services. A potential strategy is to identify services that can be “stripped” from the value of the goods and paid for separately, as services are typically not subject to tariffs. For example, sorting inventory for quality control purposes could be done offshore, and the importer could pay for this service directly, rather than paying a tariff on inventory that may not be sold due to quality or seasonal issues.
4. Onshoring Some Value Chain Activities:
Conversely, there may be certain value-added steps that can be performed in the U.S. to reduce the product’s value at the time of importation, provided these activities cannot be “stripped” or accounted for separately. For instance, some products may be imported in bulk or unpackaged and then packaged in the U.S. Additionally, the packaging material could be sourced from a country not subject to tariffs.
5. Valuation Discounts:
Companies facing potential tariffs may already see discounted valuations of their shares and assets. This could present an opportunity to implement restructuring plans, estate planning strategies, or other transactions that take advantage of these lower valuations.
