April 2025 – Historically, customs duties are considered to be the origin of taxation. Today, looking specifically at the current U.S. administration, customs duties—better known as tariffs—are primarily used as tools of trade policy. Rising customs duties are creating uncertainties for multinational companies and supply chains. With the ongoing increases in customs duties, the question arises: How can multinational companies adequately address new tariff regulations from the tax law perspective?
Customs valuation review
Rising customs duties can significantly impact the cost structure of imported/exported goods and, thus, disrupt carefully planned transfer pricing arrangements and related intercompany agreements between affiliated companies. In times like these, it is particularly worthwhile for multinational companies to not only analyse and understand their supply chain in detail, but also to conduct an up-to-date customs valuation review. Such reviews involve analysing the customs classification and customs valuation of goods for customs optimisation purposes. Based on this evaluation, red flags can already be identified and costs mitigated where necessary.
Even though tariffs and transfer pricing are different areas of law, they overlap in practice. While transfer prices are not directly applied to customs duties calculations, they can have an impact on the cost base of a customs duty, and tax authorities often collaborate with customs authorities to evaluate and ensure consistency in the reported value of goods. Engaging in the practice of artificially lowering transfer prices to reduce customs duties will attract the scrutiny of the tax authorities, and tax re-assessments may be the consequence. By conducting a customs valuation review, multinational companies should also conduct a new transfer pricing study to assess whether adjustments to their intercompany pricing strategy are necessary (e.g., changes in terms and conditions of intra-group legal agreements, entering Advance Pricing Arrangements, etc.).
First sale rule
With regard to the U.S., multinational companies may also benefit from the so-called First Sale Rule. This rule allows importers, in certain cases, to determine the customs value in chain transactions based on the price of the first sale in the supply chain, rather than the price paid by the importer for the goods. However, attention must be paid to transfer pricing, as the first sale in the chain must be concluded at arm's length in the case of affiliated companies, meaning that the price needs to be comparable to that charged between unrelated companies.
Unbundling costs
Another option for multinational companies might be to “unbundle” costs. This involves splitting combined service packages (which include products and services such as freight, insurance, etc.) into their individual components and analysing whether they are mandatory. Successful cost unbundling may reveal that certain services have been unnecessarily included in the customs value, allowing them to be excluded, thereby minimising and optimising the customs duty payments.
Duty drawback
Multinational companies should also assess whether a refund of the custom duties paid is possible in the respective jurisdiction. If, for example, goods are exported from Austria to the U.S. and are going to be exported from the U.S. again, a refund of customs duties may be possible.
Restructuring of corporate operations
Another alternative for multinational companies could be to relocate manufacturing or business units or even certain company functions. In most countries, including the U.S., the customs tariff principle applies, meaning that the more the imported goods have already been processed, the higher the customs duties. By relocating certain operations or functions to other countries (e.g., the U.S. or lower tariff jurisdictions), multinational companies could potentially lower or avoid import duties on raw materials. Additionally, there may be positive collateral effects when considering the country of origin of the goods. However, this alternative requires a comprehensive tax law analysis of the pros and cons, as relocating functions or business units from Austria would typically lead to an exit tax on hidden reserves (i.e., fictitious profits). Multinational companies should also document the economic reasons for the restructuring of corporate operations in order to mitigate the risk of any challenges by the tax authorities. Further, well-structured transfer pricing policies can enhance global tax outcomes by ensuring that profits are allocated to the jurisdictions where value is generated. Multinational companies should also assess how higher profitability in the respective jurisdiction might affect the group's overall effective tax rate and explore strategies for managing withholding taxes on intercompany dividends, royalties, and interest payment.
U.S. Foreign-Trade Zones
When exporting goods to the U.S., so-called U.S. Foreign-Trade Zones (“FTZ”) may also be of interest. FTZ are considered areas outside of the U.S. customs territory, so customs duties may be deferred until the foreign goods leave the FTZ for consumption in the US. In certain cases—such as the import of raw materials into a FTZ, the finishing of a product within the FTZ, and the sale of a product in the U.S—customs duties may not be imposed upon delivery into the FTZ.
Key takeaways
As outlined in this article, companies can take specific tax-related measures to mitigate the effects of any new tariff regulations. This is more crucial than ever given that, in light of current developments, it is expected in the near future that the tax authorities will conduct more tax audits regarding compliance with customs and transfer pricing regulations. This highlights the importance of timely and thorough documentation to ensure full compliance by multinational companies in various jurisdictions. Taking a proactive approach towards customs and the tax authorities is generally advisable. For this reason, close coordination with these authorities, for instance by obtaining binding advance tax rulings (for example in Austria), can mitigate the risk of penalties and interest charges during a tax audit of the multinational company.