Key Takeaways
- Tariffs directly impact costs and margins: Higher duties increase landed costs, COGS, and can compress profitability, requiring updated costing and forecasting models.
- Align customs and tax rules: Transfer pricing and customs valuations may conflict; businesses need strong documentation and integrated systems to stay compliant.
- Plan for cash flow and VAT effects: Duty drawbacks, VAT on imports, and timing of recoveries can significantly affect liquidity and tax positions.
- Strengthen compliance and audit readiness: Maintain robust records (invoices, customs entries, shipping documents) to support claims and withstand increased audit scrutiny.
- Integrate tariffs into tax and supply chain strategy: Consider tariffs in sourcing decisions, tax planning, and capital allocation to avoid hidden costs and risks.
Tariffs have so many effects across multiple jurisdictions, especially with proposals like reciprocal tariffs, country-specific surcharges and extensions or changes. This means changes to sourcing, investment and pricing decisions across industries. And this, in turn, means that businesses need to be aware of new tax and accounting consequences.
In this blog, we’ll walk you through the impact of tariffs on your business’s tax strategy, to ensure you account for compliance, and save money where possible.
What are Tariffs and How Do They Work?
Tariffs are taxes or duties imposed on imported goods, and occasionally on certain services or digital imports. These are typically levied at the border by customs authorities to protect domestic producers, raise revenue, or as a retaliatory policy.
They come in a few different forms, including:
- Ad valorem: a percentage of the customs value (like 10% of your invoice value).
- Specific: a fixed amount per unit (for example, $5 per item, or $200 or ton).
- Mixed or compound: these feature both ad valorem and specific components.
- Countervailing duties (CVD) or anti-dumping: duties added to offset unfair subsidies or dumping.
- Retaliatory or sectoral or country-specific surcharges: applied in response to other countries’ actions or under national security or reciprocal tariff policies.
And there are several practical implications of tariffs being applied. Firstly, there’s the impact on your landed cost. Duties are usually applied to the customs (transaction) value of your import. This increases the landed cost of goods, and by extension, the unit cost used for your inventory valuation and cost of goods sold (COGS). Naturally, this creates knock-on effects for your accounting and tax strategies.
But it gets even more complicated. Tariff measures can be temporary (like exclusions or quotas) or permanent. Exclusions or extensions and similar administrative changes can shift your liability months after importation, possibly leading to the need for post-entry corrections or refunds.
What Are the Key Tax and Accounting Implications of Tariffs?
First, let’s talk about costing, inventory valuation, and your gross margin. Because tariffs increase your COGS, they can compress your business’ gross margins and alter your profitability metrics. As such, your accounting team must update costing models and consider tax depreciation or amortization effects where duties are capitalized rather than expensed.
And then there’s the impact on transfer pricing and customs valuations. Customs authorities generally look at the transaction value of your imports and apply customs valuation rules. But tax authorities examine your transfer pricing to ensure that your business uses arm’s-length prices. So when tariffs change the price structure of your inventory, or your company re-routes goods between related entities to avoid tariffs, your transfer-pricing policies can conflict with customs valuations.
Let’s also not forget the effect tariffs could have on your cash flow. The US allows recovery of duties (or duty drawbacks) when your business exports imported goods or uses them in exported products. However, this can reduce your net duty cost and the ultimate tax or COGS burden.
Tariffs can also affect VAT or GST. Many countries charge these taxes on imports; so higher tariffs also increase your import VAT liabilities. And because the recoverability of import VAT depends on local rules, your finance team will need to coordinate with customs to ensure the correct VAT base and negotiate any possible refunds.
All of this can affect your financial reporting. Sudden tariff changes can lead to inventory revaluation issues under IFRS or GAAP, especially with regards to risk disclosure.
So, how do you ensure that your finance team is on top of all these possible issues?
Ensuring Tariff Compliance: Controls and Documentation
There are several things your tax and accounting team can do to proactively account for the negative effects of tariff changes. These include:
- Integrating customs and tax data flows. Ensure customs entry data, tariff classifications, and duty payments are linked to your general ledger, inventory subledger and tax provisioning systems. That way, any tariff changes will flow through to your COGS and tax calculations.
- Review transfer-pricing policies and traceability. If your business uses intercompany pricing or routing changes to avoid tariffs, you must document everything and align customs valuation to your transfer pricing documentation.
- Rework your inventory costing. Reassess your standard costs, landed-cost templates, and stock-valuation methods to incorporate tariffs. This is especially important when budgeting and forecasting.
- Strengthen your audit trails. Maintain supplier invoices, customs entry records, bills of lading and export documentation. This will help you to support classification, valuation and drawback claims under customs and tax audit.
It’s also important to ensure that your business can respond strategically, especially if you own a multinational corporation. And this means your finance team will need to consider aspects like:
- Supply chain and sourcing adjustments: consider multi-sourcing and production alternatives after you’ve weighed considerations like corporate tax, payroll taxes, incentives, and customs duty regimes in target jurisdictions. Often, the cheapest landed cost option on paper becomes more expensive once duties, VAT timing and tax incentives are included.
- Advanced customs planning: think about applying for binding tariff classification rulings and origin determinations for any vulnerable product lines. This can help reduce future risk, especially where policy volatility is high.
- Integrate tariff costs into your tax planning: include tariff scenarios in your tax forecasting and capital-allocation. Tax pros like the team at Fusion CPA can help you with this, to ensure your strategy is sound, no matter the changes to tariffs.
Tariff Compliance and Risk Management
As with any changes to international tax law, compliance is essential. But how can your finance team ensure your business stays in the green when the goalposts might change? It requires some proactive planning and strategy, particularly because many governments have increased audits on origin claims, classification and anti-circumvention. So even if your business is above-board with all its dealings, you should expect more post-entry scrutiny and possible retrospective liability.
This is where effective record-keeping and accounting come in. You’ll need to ensure that you have audit-ready evidence, from supplier contracts and commercial invoices, to freight records and export documents.
Of course, if your team isn’t equipped for this, or you want to outsource your day-to-day accounting to limit the stress, we can help. Fusion CPA not only offers expert tax preparation, but our outsourced controllers can step in to ensure that, no matter what your situation, you can rest assured knowing that tariffs are accounted for.
To see how we can help you manage your books or develop a winning tax strategy, schedule a free Discovery Call with our team today.
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This blog does not provide legal, accounting, tax, or other professional advice. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.