Tariffs – What are they and why does it matter to Tax?

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A Tax Function of the Future blog

Business leaders around the world are scrambling to assess impact and develop strategies to address the imposition of new tariffs on trade between the United States and other nations. Are you aware of the sweeping consequences of escalating trade volatility and the reasons why Tax needs to be involved?

What is a tariff?

It’s a tax or duty imposed by a country on a particular class of imports. A tariff is an indirect tax—an above the cost premium levied at the time of import—that negatively impacts profit margin unless it can be passed on to the ultimate consumer.

One of the main drivers of a tariff is to protect certain domestic industries and jobs since consumers may prefer to purchase lower priced domestic versus higher priced imported products. An increase in tariffs could cause affected domestic importers to change suppliers or implement process improvements throughout their supply chain to maintain competitive pricing.

What’s causing turmoil now?

Duties and tariffs have been imposed by the US since the 1700’s as the primary source of federal income and they play a key role in foreign trade policy. At one point, tariffs were as high as almost 95% until after 1913 when Federal income tax was implemented.

In recent years, countries focused more on reducing tariffs and other barriers to free trade – until 2018 when the US began to impose punitive tariffs on a broad category of US imports, including many with China origin and steel and aluminum products imported from virtually all countries, including allies such as the European Union, Canada, and Mexico.

The tariffs signaled a shift in trade policy, slated to reduce the US trade deficit, boost US production, and increase manufacturing jobs. However, impacted US trading partners retaliated with tariffs on US exports, resulting in the ‘trade war’.

Why should Tax care?

Your organization’s efforts to mitigate tariff exposure by modifying the supply chain may involve activities that have tax impact – particularly in the areas of international tax and transfer pricing. Supply chain modification may include one or more of the following activities:

  • Supply Chain Planning
  • M&A Deal Planning
  • Strategic Sourcing & Pricing

Contact us

Orla Beggs

Partner, US Leader, Tax People and Organization, PwC US

Shawn Panson

Private Company Services, Leader, PwC US

Kelley McLaughlin

US Tax Marketing Leader, PwC US

Lauren Dettloff

Private Company Services, Sales and Marketing Leader, PwC US

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