Potential Tax & Customs Reform | Elixir Business Support Solutions Inc.

While the tax and tariff reforms are yet to be formally proposed by President-elect Trump, potential policies that have been announced include:

60% or higher tariff on China produced goods and increase in tariff by 25% on goods produced in Mexico and Canada. If enacted, retaliatory measures with similar tariffs on U.S. goods from these countries are expected.
10% tariff on goods from other countries.
A 15% flat corporate tax rate targeting domestic manufacturers.
A 20% flat corporate tax rate on US non-manufacturing companies.
Extending the current FDII 13.125% corporate tax on export of goods and services.
Maintaining the current GILTI tax rate of 10.5% on controlled foreign corporations.
Keeping the interest expense limitations under TCJA.

Other areas that might be addressed consist of:

Keeping the amortization of R & D expense under TCJA or change to expensing.
BEAT adjustments: Higher tax rates and altered definitions for applicable taxpayers.

These proposals, if enacted, could transform the tax and business landscape, offering benefits to domestic manufacturers but also presenting challenges to historical cross-border trade including supply chains and value-chains. This necessitates strategic and comprehensive planning to mitigate increased tax liabilities, and to maintain tax and business efficiencies.

Several areas should be addressed and reviewed to understand the tax and financial impact as well as consideration of changes to supply chains and business operations.

Potential Onshoring of Functions and Intangible Property (“IP”)

Lower U.S. tax rates and potential onshoring for tax savings, must be assessed. Given the low US tax rate for manufacturing and the high costs of customs duties , onshoring and other business changes should be considered.
Reshoring and onshoring of critical functions: Bringing production and other significant functions, back to the US or away from countries with higher tax rates.
Revisiting IP profile: IP profile should also be reexamined from a TP perspective, addressing ownership and strategy. Potential onshoring of IP/ significant R&D functions, should be also considered.

Impact on Supply Chains and related IP:

Tax aspects of the supply chain, related IP and location should be reviewed.
Reshoring and onshoring: The possibility of moving production/sourcing away from countries with highest tariffs, should be explored
Delineate IP payments from the cost of goods/equipment imported: Increased tariffs may apply to embedded IP payments or to IP that is linked to the use/sale of imported goods. The IP profile and ownership must be reviewed to mitigate potential customs duty impact.
Use of Free Trade Zones (“FTZs”): Utilization of FTZs could mitigate some tariff impacts.
Accounting systems and processes: Ensuring accurate tracing and compliance is critical and system/ process changes should be part of action plans.
Potential customs refunds, exemptions and their impact should be evaluated.
Change in location of manufacturing and supply should also be considered

Impact on Intercompany Transactions, Agreements and Target Profits:

Address the Impact on transfer pricing benchmarks and year-end transfer pricing adjustments.
Assess and implement potential amendments to intercompany agreements in anticipation of changing business conditions and commercial metrics.
Align shifting supply chains and value-chains with transfer pricing policies and framework.
Identify and evaluate alternative transfer pricing models to maintain/optimize global profits and tax positions.

To navigate the potential implications of the anticipated tax reform, businesses should:

Assess Impact: Understand financial implications and model the impact of increased customs duty and tariffs, changing tax rates and transfer pricing adjustments, target profits, etc.

Prepare Action Plans: Explore alternative strategies to address potential increase in tax liabilities and to maintain/optimize global tax positions. This is core to successful business planning .

Engage in Tax-Efficient Structuring: Evaluate current and alternative entity structures and international operations.

Monitor Legislative Developments: Stay informed on policy changes and prepare to engage with tax advisors proactively.

The landscape is not yet clear but planning and reviewing strategies and tax structuring in light of these changes can be very productive.

For more insights and help in developing a migration of cross-border tax strategy and developing a plan to meet your specific needs, please reach out to us:

Mounika Maddipatla, Principal – Transfer Pricing and Cross-border Tax, Elixir (mounika.m@elixirbiz.com)

David Zaiken, Director of International Tax Consulting, WebsterRogers (dzaiken@websterrogers.com)

Lavonne Rosenberg ( Partner of International and Corporate Tax Consulting , WebsterRogers(lrosenberg@websterrogers.com)

Planning is the key to success for the future

Potential Tax & Customs Reform affecting cross-border trade

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