Why Trade & Customs Need to be Higher Priority in Supply Chain Planning

Welcome to the latest issue of Talking Tax, where each month I explore a major trend or topic impacting businesses’ total tax liability. Be sure to subscribe so you’ll receive Talking Tax directly in your inbox.

This month, we look at how U.S. trade policy is evolving amid continued global supply chain disruption and uncertainty, and why companies need to elevate customs in tax and supply chain planning. Insights for this month’s issue were contributed by Damon V. Pike, Leader of Customs and International Trade Services at BDO USA.

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Companies are rethinking their supply chain strategies because of COVID-19-induced lockdowns, volatile commodity prices, shortages of critical materials and a shifting trade policy landscape. However, according to the 2022 BDO Tax Outlook Survey, 45% of tax executives indicated that they are not included in supply chain planning, which could prove costly. Tax executives also expect import and customs duties will be the largest portion of their total tax liability, tied with employment taxes.

The Consequences of Misunderstanding Tariffs

Too often, companies view tariffs as a “sunk cost.” They may not be aware of the options available to mitigate their tariff liability or they may not understand how tariff rules can impact supply chain decisions. Consequently, these businesses may make changes to their network that have unanticipated adverse tariff-related implications. For example, many businesses that source heavily from China have considered diversifying their supplier base. Some companies have tried to move parts of their production process out of China to avoid tariffs. However, if they do not meet the “substantial transformation” standard necessary to change the country of origin from China to a different location, their goods remain subject to Section 301 tariffs.

Additionally, adjustments to U.S. trade policy are changing how companies need to approach customs compliance. This shift began most notably with the “labor value content” calculations imposed on automotive original equipment manufacturers (OEMs) in the United States-Mexico-Canada Agreement (USMCA) – the first time a U.S. trade agreement has mandated hourly wage requirements for all member nations. In addition, the USMCA created a "Rapid Response Mechanism" which allows anyone to report unfair labor practices, such as prevention of workers’ rights to collectively bargain.?If evidence to support the claim is found, a binational panel is assigned to rule on the merits of the claim.?As of this writing, the few claims that have been raised that merited a hearing before a binational panel were privately settled.

This shift towards social responsibility concerns in free trade agreements will only increase as it mirrors the rise in Environmental, Social, and Governance (ESG) policies in corporate boardrooms. New rules such as the labor value content provisions in the USMCA require customs compliance personnel, supply chain professionals and/or tax leaders to work together closely to stay at the forefront of trade policy changes as ESG continues to evolve.

The Uyghur Forced Labor Prevention Act (UFLPA)

The UFLPA is the most significant upcoming change to U.S. trade policy that reflects the shifting nature of customs compliance. Signed into law in December 2021 by President Biden, the UFLPA will essentially ban the importation of products produced in the Xinjiang region of China that were made using forced labor. The federal government will issue guidance on the evidence companies will need to produce to avoid the ban; however, it is unclear whether this guidance will be released before the UFLPA’s effective date of June 21, 2022. Because the burden of proof of “no forced labor” is on the importer, and implementation of the UFLPA is imminent, companies that source from Xinjiang should already be having conversations with suppliers to prepare. Because the new law also covers goods made in part in Xinjiang (raw materials), those conversations should also be taking place with all vendors no matter where the finished good is produced.

The Nature of Customs and Supply Chain Planning Is Changing

Looking ahead, we are likely to see additional treaties or legislation like the USMCA and UFLPA that include stipulations for importers related to labor or sustainability. Such measures will require close cooperation between supply chain professionals and customs professionals and/or tax leaders to collect adequate evidence from suppliers that demonstrates compliance – at a product-level basis. This can be an enormous undertaking for companies with hundreds if not thousands of part numbers. They’ll also need to cooperate on strategies to adjust sourcing if new rules related to labor or environmental impact are implemented that necessitate a network adjustment. ??

The federal government will also continue to take action to protect supply chains critical to the economy and national security, including semiconductors, rare earth metals and medical devices. For example, in February, the U.S. Department of the Interior updated the list of critical minerals it deems necessary to the economic and national security of the U.S. These minerals could be targeted for federal policy action that encourages or mandates onshoring of those supply chains to the U.S. The government is already developing significant monetary incentives to encourage semiconductor manufacturing onshoring. It's possible that these kinds of incentives could be made available to other sectors or coupled with punitive action for companies that fail to move production to the U.S.

These types of policies are representative of the increasingly blurred lines between customs, supply chain and national security that have widespread implications for businesses across industries. The shifting landscape necessitates leaders of those functions within companies working closely together to support ongoing success.

Reach out to [email protected] if you have any questions about UFLPA compliance or want to discuss strategies for mitigating your tariff exposure.