Albrecht says: “Another thing we can do is look at tariff classification. Nobody really paid attention to tariff classification before, but it is important to get it right when you have various tariffs on specific goods. You could argue it wasn’t as significant when it was all duty-free, but now you have to be specific because it is the difference between a 25% surcharge or nothing.”
In the long term, the focus needs to widen and serious consideration given to relocating parts of the business. Armando F. Beteta, leader of the EY Global Trade services at the Latin American Business Center, says: “What we have seen recently with the Brexit uncertainty is that a couple of clients are planning to move manufacturing or assembly to another country. For example, if they are currently exporting from the UK to Latin America, they are now considering Mexico as an alternative.”
Leightman adds: “We are involved in helping clients evaluate a wide range of scenarios and looking at whether they have the flexibility to move to manufacturers in other locations where the impact may not be as deep or will be more predictable. We are also helping to evaluate movement in their own global footprint in a way that might mitigate the impact of tariffs, even if there is an incremental cost increase to operations.”
He gives the example of an electronics manufacturer that supplies the US from China and so incurs tariffs. It has a plant in Mexico that supplies the Latin American market but is not yet able to supply the US. It also has a European factory that supplies the European market. A new solution is to shift production so that the European plant supplies the US, and China supplies Europe, while the operation in Mexico is upgraded with the long-term objective of supplying the US.
“It will likely be less efficient and also potentially cost more from an operations perspective but it is cheaper than incurring the US tariffs on the Chinese goods. So there is a lot of scenario-planning, which then starts to overlap into how the company might be set up from an international tax perspective, as well as looking for other opportunities,” Leightman explains.