KPMG: Companies Should Deploy Multiple Strategies to Cope With Shifting Trade Landscape

According to Tim Sarson, KPMG's U.K. head of tax policy, companies should take a number of steps. First, they need to understand how they're exposed to changing U.S. tariff and trade policies, so that they can make judgments on what mitigation approaches to use. Understanding that exposure may involve using modeling and analytics tools.

Second, they should perform some scenario planning around the various impacts of differing policy developments, Sarson continued.

"What we're finding a lot of our clients then doing is, before they're ready to move straight into structural tariff mitigations, they're doing some short-term tactical planning, particularly to save costs and manage margins," Sarson said during an April 23 global KPMG webinar on adapting to widespread tariff increases.

"One of the early questions is, who bears the pain of this? If you're a multinational -- you've got a distributor in the U.S. [and] manufacturing elsewhere, there's an additional cost in the U.S. You're [in] a position where either you're putting your local distributor into the loss and they're bearing the pain, or you're making them good but the pain is hitting elsewhere in the supply chain," Sarson said.

"So actually, some of the early decisions to be made on transfer pricing in the chain [are] really important, but also [are] ways of cutting costs that aren't tariff-related costs."

Companies should be "focusing more on the numbers than the politics," modeling supply chains that alternate between tactical and strategic approaches, and doing what's best for the company, Sarson said. This involves using data, including publicly available data, to model impacts and create analyses on risk exposure on not just tariffs but also other tax impacts such as corporate taxes, he continued.

However, companies should consider taking some sort of action because "the twin dangers can either be that you just decide to wait and see. You don't do anything. But this might not settle down, and things might keep changing over the next four years, by which point you've potentially lost quite a lot of business or margin. Or you react to every tweet, every announcement, and keep changing direction," Sarson said. "How do you cut through the complexity here, and work out a strategy to take yourself from where we are now to a sustainable business model in a few years?"

Irina Vaysfeld, a principal with KPMG's trade and customs practice, laid out multiple strategies that companies could potentially pursue.

They include modeling the impacts of all the tariffs on one's company using data from customs brokers, purchasing, sourcing and forecasting sources; conducting scenario modeling and exploring duty mitigation strategies, including confirming the origin of goods and ensuring that the classification of goods is correct; seeing if goods from Canada and Mexico can qualify for duty-free treatment under the USMCA to qualify for duty exemptions; determining if there is any U.S. content so that only the non-U.S. portion of the good pays a duty; taking advantage of duty drawback, foreign-trade zones and bonded warehouses when available or appropriate; understanding when to use first sale if there is a three-tier structure in companies' transactions; and doing analyses to determine if a good's origin qualifies under any free trade agreement.

"One thing that's coming up in some of these meetings that we're having with our clients is they haven't maybe looked at the value of their goods in many, many years because their products maybe were duty free [and] qualified for a free trade agreement," Vaysfeld said. "So it's really important to look at your bill of materials -- what's included in those costs -- and strip out any non-dutiable charges. It could be some administrative expenses. It could be marketing expenses" or foreign taxes or interest charges.

But besides focusing on specific tariff actions, companies should also watch for changes in U.S. trade sentiment so as to get a sense of direction, according to Sarson.

"This whole debate, or this trade war, is about much more than just tariffs on goods. I think one of the questions [that] has come through we can address a bit later, is why are there no tariffs on services. ... But the U.S. administration is not just looking at trading goods and customs duties. It's also pretty unhappy about aspects of the international tax framework, [the] so- called Pillar Two [which is] the global minimum tax. They're looking at retaliatory measures against that," Sarson said. "And then the EU, for a number of years, has been particularly focused on regulatory measures and what we would call non-tariff barriers as ways of protecting its own businesses and regulating or acting as a bit of a regulatory superpower."

He continued, "So I think it's going to be really important, particularly when you come to model the impact of these trade shifts and these policies, not just to focus on the tariff announcements themselves, particularly as they seem to change on a weekly basis, but also the underlying additional tensions that have been put into international value chains and any sort of transfers of money, payments, etc., across borders."