Hot from the press are the developments surrounding the U.S. import tariffs, dominating the news since last week. And even more than stable import tariffs, businesses despise periods of instability.
It obstructs strategic and operational planning, uncertainty leads to indecisiveness and it takes some cool heads to navigate the crisis. But never waste a good crisis! So CFOrent is happy to share our expertise and insights to entrepreneurs looking for options amid the current turmoil.
Key Takeaways
- Prepare a short- and long-term scenarios for how your business will tackle the U.S. import tariffs.
- Review your catalogue and distinguish goods from services.
- Understand and reassess the dynamic between import tariffs, transfer pricing and income tax. Optimise them by reviewing your current model.
Are the Tariffs Definitive?
Decisions in board rooms will depend on each member’s interpretation of the current situation. That the height and reach of the import tariffs have even surprised Wall Street, should be an indication that many thought this was just another round of bluff and grandstanding. Entrepreneurs now need to choose which scenario they want to believe:
- Scenario 1: This is a short term negotiation tactic to bully some trade partners into better deals for the US (e.g. Tik Tok). When a few first easy wins can be announced, and as inflation starts flaring up, most of these tariffs will be reduced. If you believe this scenario, no harm in riding out the storm and waiting until Q3 to further make up your mind. Historically speaking, this would not be the first time that it happens.
- Scenario 2: It really is a long term policy, driven by a philosophy that industrial reshoring and reduced dependency from countries, like China, is worth the economic pain. This scenario would imply that logistics flows need to be redrawn, also for companies that were just starting to have significant US sales. If and when a certain level of tariffs prove sustainable on the long term, only then your company can realistically assess local investments and reshoring production.
Review Your Catalogue
An import tariff will suddenly make US goods seem more competitively priced than foreign goods. In reality, the American consumer will just pay more for any good, foreign or domestic, and therefore can afford to spend less. The supply-demand curve will find a new equilibrium, and thus, it does not automatically dictate that you will have to drop prices by the amount of the tariff in order to stay competitive.
It is important to note that only goods are impacted, not services. In many cases, a sale includes a pre- or post-sales service (think broad, such as software upgrades, repairs, education, etc). Reassess pricing, and potentially unbundle the services from the goods.
Carefully assess the customs product classification you are importing under, these can be found here. A reclassification, combined with the division of services and goods, can benefit the tax burden for your company.
Large orders of goods are likely to be delayed or reduced. If your company heavily depends on maintaining stock, it is time to update your financial outlook.
Dollar as Reserve Currency
The Federal Reserve System (commonly known as “the Fed”) has three key objectives: maximising employment, stabilising prices and moderating long-term interest rates. In practice, this means the institution battles inflation and stimulates growth.
The expected raise in prices will fuel inflation, but, this might actually be part of a greater plan to weaken the dollar. This will make US production more competitive for domestic companies.
In the search for political gain, let us not underestimate the political pressure to not increase interest rates in exchange for more employment. In turn, it is our prediction, the US dollar will slide even further and managing currency risk becomes more relevant.
Import Tariffs, Transfer Pricing and Income Tax
All three share a dynamic bond, so if one of them is adjusted, so should the others. When you are selling goods to your own US subsidiary, before delivering tem to your end consumer, your business will likely have a Transfer Pricing contract (TP) in place.
Let us assume your business has a typical Transactional Net Margin Method (TNMM) setup, where the U.S. entity earns a routine margin on it’s operating costs.
When import tariffs increase the Cost of Goods Sold (COGS), this margin can be eroded, making it appear less profitable or even loss-making. Now the details on incoterms and contractual division of risk and reward become very relevant.
To-Do:
- Work out at which cost your goods enter the country. Remember that transfer pricing does not automatically serve as the declared transaction value at the border.
- Review the transfer pricing.
- Re-evaluate the tax burden of the import tariffs. Depending on your transfer pricing contract, the import tariffs can reduce the income tax in either the U.S. or Belgium.
A proactive Transfer Pricing review is advised to ensure the U.S. entity’s profitability remains within an acceptable arm’s length range, even with inflated import prices.
CFOrent’s Action Plan
To assist entrepreneurs in these turbulent times, we like to share our call-to-action:
- Scenario Planning: create financial models for both short- and long-term scenarios in which import tariffs impact your business.
- Supply Chain Diversification: explore alternatives elsewhere, preferably in stable regions, and secure new supply chains.
- Service Strategy: focus on unbundling services from goods to shield your revenue from import tariffs.
- Customer Communication: manage expectations surrounding prices, delays and potential unbundling of services from goods
Let Us Take Finance Off Your Mind
With our presence in both Belgium and the U.S., CFOrent is seasoned in knowledge of bilateral agreements between Belgian companies and U.S. subsidiaries. Our experts are ready to navigate these turbulent times together with you, and use this crisis to make a paradigm-shift for you and your business to ensure a stabilised future. Get in touch today!
