Surging duty rates and shifting trade relations are driving tariff issues into tax workflows. A skyrocketing effective duty rate is evidence of that. The trade-weighted average tariff — 1.65% in 2016 — has skyrocketed to 20.2%, the highest it’s been since 1911.
“Customs duties are a tax, but it was really an issue left in the hands of specialists within the company. Now, tax [accountants] are feeling like they’re having to get involved because these duties are starting to eat up so much of the budget,” explained Dan Swartz, Principal at Crowe LLLP.
Tariffs can increase a business’s costs, disrupt supply chains, and potentially stall overall growth; business leaders are taking a proactive approach and rethinking how they can weather the current trade climate. Tax practitioners and accountants who support importers, manufacturers, or multinational businesses must now factor these tariffs into their clients’ tax positions and strategic plans. Effective responses and resiliency are especially difficult to attain when the tariff and trade environment is so frequently in flux.
The intersection of trade and tax is complex — business leaders will rely on professionals who understand its intricacies. Whether you're navigating complex tariff-related tax matters or anticipating shifts in IRS procedures, the AICPA® National Tax Conference in November offers expert insights to strengthen your practice and better serve your clients.
“Tax [accountants] are having to start putting on a customs and trade hat,” said Swartz, who will be speaking at the upcoming conference. “There’s a lot of strategic conversations that need to occur internally on pricing, how to classify goods under the tariff, country of origin, and transfer price.”
Driving down customs costs with transfer-pricing tactics
Tariffs can be imposed on any raw materials, intermediate goods, or finished consumer products imported into a country. Countries often apply tariffs to specific goods, sectors, or trading partners instead of passing blanket tariffs that affect all imports. As goods arrive at the port of entry, it’s the responsibility of the importer to pay the tax directly to the importing country’s customs authority.
Not all businesses will be affected equally by tariffs. Understanding how clients map an entire supply chain to identify points of origin for each good or component and modelling different scenarios to predict financial impacts are two ways CPAs can mitigate tariffs’ repercussions. Navigating tariffs: A guide for CPAs is a three-part resource that discusses the nuts and bolts of tariffs, how to deal with business implications, and what tax implications to consider.
Swartz currently sees many accountants looking at transfer pricing and determining what changes can be made. “Companies [engaged] in related-party transactions across international boundaries … are looking at ways to move up the profit contribution so that they can drive down customs value,” he explained.
For example, a manufacturing company may produce car parts in one country; in another country, a subsidiary of that manufacturer purchases and assembles the parts. What the subsidiary pays is a transfer price. It establishes an arms-length relationship between the related foreign seller and importer to demonstrate that “the relationship between the parties did not influence the price,” said Swartz.
“There’s a bit of an inverse relationship between customs value and profit, the relationship between the IRS and U.S. Customs,” explained Swartz. “When you increase the amount of declared value on an imported good, you obviously are going to have a larger tax or duty liability on that product when it’s coming in. The flip side of that is it drives down your tax liability.”
Duty minimization tools: Navigating drawbacks and trade zones
While a company may not be able to remove a tariff, there are strategies for duty minimization or even duty deferral, including duty drawback programs.
“[Duty drawbacks] allow an exporter to obtain a refund from U.S. Customs on import duties and fees when the good is subsequently exported out of the country or is destroyed under Customs supervision,” explained Swartz. The program was established by the Tariff Act of 1789 and is one of the nation’s oldest trade provisions.
Such programs increase competitiveness of goods in international markets by reducing a business’s cost burden of import duties. Types of duty drawbacks include unused merchandise, rejected merchandise, same condition, or manufacturing drawback. Through your counsel, you can help clients navigate the complexity, determine eligibility, maintain meticulous records, and file claims in a timely manner.
“Not all of the tariffs that President Trump is putting in place are eligible for duty drawback, but a number of them are,” said Swartz. “Another area that companies are … investing a lot of time and money in is foreign trade zones.”
A company could establish a building, yard, factory, or some other location as a foreign trade zone and benefit from duty deferral. “[The business is] then effectively designating that space as a foreign trade zone, which allows [them] to bring in goods into that facility without having to file a customs entry and without having to pay any customs duty.”
CPAs can help leverage the benefits of the business’s zone by calculating and managing duty payments, maintaining accurate inventory records, ensuring regulatory compliance, and preparing accurate financial reports.
“But accountants do have to be careful because under law, only licensed customs brokers can transact customs business,” cautioned Swartz. “Accountants may be tantalized by the growing interest in customs and trade … to help clients with classifying or revaluing product. They have to tread a bit lightly because you don’t want to be in a situation where any of the advice or counsel you’re providing to your client can be inferred as transacting customs business.”
From referee to resource: CPAs in trade strategy
Swartz has heard of some creative ideas tossed around in strategy conversations — undervaluing imported goods, changing the country of origin on a product, grouping products together to affect a change in tariff class — and they all ultimately violate customs law.
“A lot of tax [accountants] are novices to the subject, it’s not something they’ve spent a lot of time on,” explained Swartz. What CPAs can do instead is take more of a “referee-type role” — listen to the ideas, offer guidance within their wheelhouse, and suggest taking the idea to a customs broker or other expert.
Given the complexity and potential legal ramifications of international trade strategies, it’s increasingly essential for accountants to pursue ongoing education, specialized training, and expertise from a range of experts — not only to recognize risky proposals or inform decision-making, but to also confidently guide their organizations through economic uncertainty and tariff turbulence. Accountants need to understand tariff-related compliance, risk, and fraud issues.
Practical guidance and advice from experts at the AICPA® National Tax Conference will help you manage tariff-related tax issues, prepare for adjustments at the IRS, understand potential tax-law changes, and ultimately serve your clients better. The two-day conference, hosted at the Washington Hilton in Washington, D.C., with in-person and virtual attendance options, kicks off on Nov. 17. Register today.
For additional tariff-related support, the Tariff Resource Center has resources, guides, and the latest developments to help you navigate this uncertainty.