Editor: Mary Van Leuven, J.D., LL.M.
As the United States settles into a new presidential administration, a focus on trade policy and tariffs remains a critical issue for businesses. President Donald Trump’s emphasis on increasing tariffs (also referred to as customs “duties”) threatens to upend the low-tariff global trade landscape businesses are accustomed to. The administration can leverage several legal mechanisms to implement these tariffs, including the International Emergency Economic Powers Act (IEEPA), P.L. 95-223; Sections 122, 201, and 301 of the Trade Act of 1974, P.L. 93-618; Section 232 of the Trade Expansion Act of 1962, P.L. 87-794; and Section 338 of the Tariff Act of 1930, P.L. 71-361. Each of these tools provides a pathway for imposing tariffs, whether for national security reasons, to counteract unfair trade practices, or to protect domestic industries from surges in imports.
On Feb. 1, 2025, Trump announced a series of executive orders that sought to impose significant new tariffs on Canadian, Mexican, and Chinese goods, invoking the IEEPA as authority. The tariffs on Chinese goods took effect Feb. 4. Those on Canadian and Mexican goods have been subject to various modifications since the initial announcement and may continue to evolve as the Trump administration’s tariff policy remains fluid.
In addition, on Feb. 11, 2025, Trump announced an expansion of the tariffs on steel and aluminum imports that he had previously imposed during his first administration, invoking Section 232 of the Trade Expansion Act of 1962. These executive orders terminated all previously granted country exemptions and product exclusions and set the tariffs on affected steel and aluminum products at 25%, effective March 12, 2025.
The president may potentially impose additional tariffs with respect to other countries. Thus, importers should consider the following strategies that can help mitigate the duty exposure and maintain cash flow.
Duty mitigation/cash flow strategies
Mitigation strategies can include taking advantage of the following principles, programs, and features inherent in international trade systems, to be assessed on a case–by–case basis, depending on the specific applicable tariff:
First–sale–for–export principle: This strategy involves applying a principle whereby duties are assessed on a prior sale in the supply chain rather than the final sale to the U.S. buyer (e.g., the price paid by a foreign middleman to the foreign manufacturer). By ensuring that the prior (or first) sale is a bona fide sale for export to the United States, establishing that the goods are clearly destined for exportation to the United States, and complying with customs arm’s–length requirements, companies can potentially lower the dutiable value of their imports. To effectively implement this strategy, companies must maintain thorough documentation of the transaction chain, including commercial documentation and proof of payment, to demonstrate that the first sale meets all legal requirements. This customs valuation strategy should be strongly considered alongside potential direct tax benefits when implementing or reorganizing international supply chain or tax structures.
Duty drawback: This program allows importers to receive a refund, or “drawback,” of duties paid on imported goods that are subsequently exported or destroyed (whether the goods are unused or further manufactured in the United States). Companies can use duty drawback to recover up to 99% of the duties paid, thereby reducing overall costs. To maximize benefits from duty drawback, businesses should establish robust tracking systems to monitor the movement of goods and ensure compliance with all filing requirements. This includes maintaining accurate records of import and export transactions and understanding the timelines for filing drawback claims.
Cost unbundling: By separating dutiable and nondutiable costs (such as international freight and insurance) in the import transaction, companies can reduce the dutiable value of their goods. This may also require coordination with tax departments, for instance, to potentially remove the costs of intangibles embedded in the cost of imported goods that may not necessarily be dutiable. This may be accomplished in various ways, ranging from separately stating and paying the royalty for intangibles to reallocating ownership or the rights to the intangible. Proper documentation and compliance with customs regulations, and understanding tax implications, are essential to effectively implement this strategy. Businesses should conduct a detailed analysis of their product pricing and supply chain costs and work closely with suppliers to ensure that invoices clearly delineate between dutiable and nondutiable charges.
Foreign trade zones (FTZs): FTZs offer significant cash flow benefits by allowing companies to defer customs duties on imported goods, with the added benefit of saving entry filing fees. Goods can be stored, processed, or assembled in an FTZ without incurring duties until they enter U.S. commerce. This can improve liquidity and reduce carrying costs for inventory. To take full advantage of FTZs, companies should evaluate their supply chain operations to identify opportunities for utilizing these zones and ensure compliance with all FTZ regulations, including physical security and recordkeeping requirements.
Supply chain diversification and country–of–origin–based planning: Tariffs are generally assessed based on a product’s country of origin. To plan for potential cost increases due to tariffs, it is necessary to evaluate an import supply chain, identifying where the goods are produced or “substantially transformed,” where the components and raw materials are sourced, and what level of production occurs in the various countries. This strategy could include renegotiating supplier contracts, adjusting pricing, exploring alternative sourcing options, or partially modifying production operations to confer a new country of origin.
Downward transfer pricing adjustments: Importers in related–party transactions may require compensating adjustments to bring their profits up to a level acceptable to tax authorities. While upward adjustments to the cost of goods sold generally require paying additional duties to U.S. Customs and Border Protection (CBP), a retroactive decrease to the price of previously imported goods may result in a refund of customs duties because the U.S. importer, in theory, initially overpaid customs duties (see Abad and Hok, “Transfer Price Adjustments Don’t Necessarily Increase Import Duty Costs,” 52 The Tax Adviser 356 (June 2021)). To obtain a refund, CBP requires, prior to the importation of the goods, that an “objective formula” be in place. Establishing this formula requires satisfying five factors:
- A written “intercompany transfer pricing determination policy” is in place prior to importation, and the policy is prepared taking Sec. 482 into account;
- The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return;
- The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted;
- The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and
- No other conditions exist that may affect the acceptance of the transfer price by CBP (i.e., the adjusted price must be at arm’s length from a customs perspective; CBP, Customs Bulletin and Decisions, Vol. 46, No. 23 (May 30, 2012), page 13).
Importers should consider their transfer pricing arrangements in advance, based on the totality of the circumstances, in order to obtain a refund of duties based on the adjusted prices of imported goods.
Customs compliance and reasonable care
The Trump administration has signaled that it intends to enhance scrutiny of import transactions and step up enforcement of existing trade and customs laws to avoid tariff circumvention by importers. For instance, with respect to the steel and aluminum tariffs, the presidential proclamation provides that CBP “shall prioritize reviews of the classification” of imported goods, including product alterations, and “assess monetary penalties in the maximum amount permitted by law” for misclassifications resulting in revenue loss (The White House, “Adjusting Imports of Aluminum Into the United States,” Feb. 11, 2025).
Thus, as companies implement these strategies, they should exercise due diligence to ensure they comply with all requirements. In addition to duty savings, importers should also consider whether their declared customs values are accurate and sufficiently documented to avoid customs penalties and to avoid overpaying duties or unnecessarily paying the new origin–based tariffs.
For example, importers should review off–invoice payments and costs related to imported goods and ensure compliance with customs valuation rules by identifying potential additions or deductions to customs value, such as royalties, assists, and selling commissions. This requires a comprehensive review of all import–related financial transactions to ensure accurate reporting and compliance with customs regulations.
As customs duties are typically assessed on an ad valorem basis, the correct customs value of imported goods is crucial in determining duty costs. In transactions between unrelated parties, the customs value is presumed to be at arm’s length. However, related–party transactions require a “circumstances of sales” test to ensure the relationship does not influence the price. Importers should consider documenting their customs valuation method in a “reasonable care” study and confirm annually that transactions are at arm’s length to avoid potentially costly penalties. This involves a detailed analysis of the transaction terms and pricing strategy to ensure compliance with customs regulations.
In situations where post–entry adjustments between related parties may be required, those adjustments may necessitate reporting changes in the customs value of imported goods. Depending on the nature of the adjustment, importers may owe additional duties or be eligible for refunds. Companies should ensure their transfer pricing policy aligns with declared customs values in order to recover potential duty refunds. This requires close collaboration between tax and customs departments to ensure consistent application of pricing policies and accurate reporting to customs authorities.
Competing in the global market
While the tariffs under the Trump administration pose challenges, businesses can employ various strategies to mitigate their impact. By leveraging duty mitigation techniques and ensuring compliance with customs regulations, companies can navigate the complexities of international trade and maintain their competitive edge in the global market. It is critical to start modeling these tariffs’ potential impact on the bottom line, calculate the return on investment of potential tariff mitigation strategies, and implement a game plan.
Editor Notes
Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.
For additional information about these items, contact Van Leuven at mvanleuven@kpmg.com.
Contributors are members of or associated with KPMG LLP.
The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the authors only and do not necessarily represent the views or professional advice of KPMG LLP.