kpmg global trade update and mitigating the impact of tariffs...— additional 15% tariffs on...

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KPMG Global Trade Update and Mitigating the Impact of Tariffs

September 2019


• Current Trade Environment• Tariff Mitigation: How are companies responding?• Exclusions• Heightened Enforcement• Wrap-up

Contents


Current Trade Environment


Trade Developments Operational Impact

232/301 TariffsRetaliatory Tariffs

S. Border IssuesUSMCA

Trade Enforcement

Drawback ChangesBrexit

New Sanctions New RulingsGlobal Manufacturing

Company FinancialsExpansion

Logistics

Corporate Initiatives

Inventory Planning

Trade Compliance

Automation

Customers

Customs Clearance


US-China: 301 tariffs to continue— Additional 15% tariffs on “List 4a” effective September 1st, 2019 and

“List 4b” effective December 15th, 2019 — USTR is proposing to increase “List 1-3” tariffs to 30% effective

October 15th, 2019 and comments are due by September 20th, 2019— Dispute is about more than just tariffs: it’s mostly about technology— Even as negotiations progress, China may have to show

concessions before 301 goes away

Steel, aluminum, and autos (section 232 tariffs)— A truce with the EU, but it may not hold due to National

Security Risks

USMCA— US, Mexico and Canada agree on NAFTA 2.0, but challenges

remain (timing, ratification)

Global trade tensions will remain elevated— Not everything threatened will happen, but U.S. is

becoming more protectionist

Current News


Tariff Mitigation: How are companies responding?


Tariff Policy Background

Steel/Aluminum, Automobiles

Steel/Aluminum: Implemented May/June 2019 tariffs of 25% on Steel and 10% on Aluminum.

AUTOS: Delayed On May 17, 2019, the Trump Administration delayed a decision to impose auto tariffs until December 2019.

National security threat

Section 232

$34B in products

Implemented July 6, 2018 at 25%*; Response to China for unfair trade practices; potential IP theft, tech transfer, & innovation

List 1

Section 301

List 2 List 3

$16B in products

Implemented August 23, 2018 at 25*%

$200B in products

Implemented September 24, 2018 at 10%;

Increased to 25% on June 1, 2019*

Solar panels and washing machines

Solar: Implemented February, 2018. The Trump administration implemented 30% global tariffs on imported solar cells and modules.

Washing Machines: Implemented January 2018 at 20%.

U.S. RATIONALE

TARGET

Harming U.S. industries

Section 201

1) See USTR fact sheet, “Section 201 Cases: Imported Large Residential Washing Machines and Imported Solar Cells and Modules.” 2) See Federal Register Vol. 83, No. 119, pg. 28710. 3) See Federal Register Vol. 83, No. 119, pg. 28710. 4) See Federal Register Vol. 83, No. 137, pg. 33608. 5) See April 27, 2017 White House memorandum to Commerce Dept., titled “Aluminum Imports and Threats to National Security.” 6) See Presidential Proclamations 9704 and 9705 on March 8, 2018. 7) See Presidential Proclamations from March through May 2018. 8) See May 23, 2018 White House memorandum to Commerce Dept. regarding Section 232 investigation related to automobiles.

List 4A

$120B in products

To be Implemented December 15, 2019 at 15%

List 4B

$160B in products

To be Implemented September 1, 2019 at 15%*

*Note that Section 301 Lists 1-3 duty rates are proposed to increase from 25% to 30% effective October 15th, 2019 and comments are due by September 20th 2019


The Basics: Developing Your Tariff Mitigation StrategyThe fallout cost from tariffs creates pressure across the enterprise –how to protect EBITDA?

Deep Data Driven Analysis

Risk, Controls and Change Management

MitigatingRemedialExposure

Trade and Customs

Supply Chain

Cost Optimization

Revenue/Pricing Impact Analysis


Leveraging Tariff Mitigation to Gain an Edge

“Businesses have come to realize that with geopolitical uncertainty comes either paralysis or opportunity. Most are now choosing opportunity. And those that can read the interconnected, proverbial tea leaves and are willing to take unflinching action are coming out ahead.” Douglas Zuvich, Partner and Global Practice Leader Trade and Customs, KPMG LLP

Companies scramble to ease impact of China Tariffs, CFO.com, June 19, 2019


Common 301 Mitigation Levers

*KPMG LLP’s 2019 Tariff Impact Survey

*

― HTS Review― Country of Origin Adjustment― Duty Drawback― Product Exclusions ― Bonded Warehouse

― Foreign Trade Zones― Section 321 De-Minimis― Chapter 98 Provisions― Temporary Import Bond― Valuation

― Strategic Sourcing ― Tariff Engineering― First Sale for Export― Procurement

Changes


Examples of Possible Supply Chain Tactics to Minimize Impact

— Local sourcing appeals to consumers, improves supply chain velocity and cuts costs

— Provides for better quality control and supplier communication and collaboration

— Helps eliminate waste and excess inventory

— Locating manufacturing (either direct or indirect via 3rd party mfg.) close to key markets can also reduce costs: - Eliminate currency fluctuations- Import/Export duties and taxes- Lower transportation & distribution costs

— Improves speed-to-market and improves response times to changing customer demands

— Move sourcing to suppliers in countries that have more favorable trade policies with the United States to mitigate higher tariffs costs

— Renegotiate contracts with supplier to reduce input costs

— Helps to ensure availability of key raw materials and/or component parts particular in a competitive market place where there is limited supply of materials (i.e. shortages)

— As shared in the earlier section, where possible, convert your existing plant or assembly warehouse into an FTZ or bonded warehouse to take advantage of trade laws that allow for re-exportation of duty free goods

1

4

2

3

Increase local sourcing of supplies

(where possible)

Diversify your supplier base to reduce cost and minimize interruption to

the supply chain

Make where you sell (if possible)

Utilize FTZ and bonded warehouses strategies to

leverage trade agreements and mitigate

import/export costs


… Leveraging Key Data through the ProcessCost Factors Other Key Factors

Business Costs— Facilities: industrial, office— Labor: wages, salaries, benefits— Transportation and distribution— Utilities— Financing— Federal, regional, local taxes— State and local support

Cost of Living— Personal taxes— Cost of housing— Cost of consumer products and services— Healthcare costs— Education costs

Quality of Life— Healthcare facilities— Schools and universities— Crime rates— Climate— Culture and recreation— Cultural openness

Business Environment— Labor availability and quality— Education— Access to markets, customers, suppliers— Road, rail, port, airport infrastructure— Utility reliability— Regulatory environment— Labor Union/Right-to-work— Airport connectivity to/from China

Bus

ines

s Pe

rson

al


Exclusions


Section 301 Exclusions

Exclusion Statistics―List 1

- 10,800 exclusions submitted, - 2,900 granted (~27% success rate so far)- 6,500 denied and 1,400 still in evaluation stage

―List 2- 3,000 exclusions submitted- 300 granted (10% success rate so far)- ~1,500 denied, and 1,200 still in evaluation stage

―List 3-13,000 submitted as of Sept 8th (deadline is Sept. 30th) -The vast majority are in public comment or evaluation stage-10 granted; 46 denied


Exclusion Overview

• Timeline: ~90 days to submit an exclusion request• Who can submit:

• Interested persons• Trade Associations

• Exclusions are granted for past 301 duties paid (refunds) to date of implementation of the tariffs; plus 1 year from date of publication of the granted exclusion

• Exclusions are product specific, not company specific. i.e. any importer can use the exclusion (ball bearings)

• Most granted exclusions are based on narrowly defined product descriptions, not HTS code


What You Need to Submit

• Analyze your data. Whether import data or purchasing forecast data, and identify which products are most impacted

• 3 Criteria:• Whether the tariffs cause severe economic harm to your firm or

other US interests• Whether the particular product is only available from China;

noting whether there are US or third party sources• Whether the product is part of the “Made in China 2025”

industrial policy

• Select products for exclusions: If you feel you have a strong argument in all three categories, and financial impact is high, the product is a good candidate for an exclusion


Arguments That Are Successful

—Describe impact on profitability- Product is a crucial component that makes up XX% of the value of

most important product. Additional duties on the product would lead to a significant loss of market share, revenue, etc. (in the amount of $XX).

—Describe indirect impact on U.S. jobs - Additional duties will result in significant layoffs. Ninety percent of

Firm’s revenue is generated by sales to U.S. companies, both OEM and aftermarket customers. Firm employs over 500 people in a city with a total population of less than 30,000.

—Describe impact on investment plans- The Firm will be unable to move forward with current investment

plans while shifting focus on finding sourcing outside of China. Currently, the Firm has plans to increase employment and/or expand our US factory (or R&D Center), however the additional tariffs have put a hold on those plans.


Arguments That Are Successful (continued)

—Describe economic impact on downstream industries- We anticipate further harm in already vulnerable industries (e.g.

trucking, other transport) due to decreased sales. Or, this product is critical for the healthcare industry and the increased prices may increase healthcare costs nationwide.

—Describe challenges associated with moving sourcing outside of China- The market for product is competitive. No suppliers (in U.S. or

outside of China) can competitively manufacture the volume of the product and meet quality standards, while maintaining low labor, material, and tooling costs. Relocation requires approval of standards body.

—Describe plans for, and attempts at, sourcing outside of China- Firm has already begun talks with a factory outside of China and

product quality testing will begin in July.


Constructing Your Argument – Don’ts

—Don’t make general statements without supporting evidence:- This tariff will have significant financial harm.- The additional tariffs will cause us to delay investment.

—Don’t vaguely describe your product, or describe it mostly due its function.

—Don’t provide a short or general answer to any of the criteria questions, including whether the product is part of the Made in China 2025 industrial policy.

—Don’t submit inaccurate financial data.


Heightened Enforcement


CBP Scrutiny is expectedDetecting unlawful circumvention is a top priority for CBP

― The Wall Street Journal and other news outlets have reported an increase in unlawful activities to circumvent the 301 tariffs, including:

(1) “transshipment” of products through third countries(2) conducting minor processing of goods in a third country(3) shipping components into the United States for minor assembly in so-called

“screwdriver” operations

― US Customs and Border Protection is aware of these practices and is leveraging advanced data analytics to target importers it believes may be avoiding 301 tariffs, legitimately or otherwise

― Customs enforcement mechanisms include using CF28 requests for information, investigations, audits, and even sending overseas jump teams to validate importer claims

CBP Enforcement Scrutiny


The CBP Enforcement Swing

Informed Compliance –“Mod Act”

Due to the TFTEA, CBP enforcement is now Enforced compliance.

Enforced Compliance –“TFTEA”

Coordinated enforcement by CEEs and Regulatory Audit to aggressively pursue penalties for non-compliance.


False Claims Act

Centers of Excellence

Enforcement

e-Allegations

CBP/ICEInvestigations

Single Issue Audit

Focused Assessment

Informed Compliance Letters

CF28s/CF 29s

Whistleblowers

Common Enforcement tools

The CBP Enforcement Swing (cont’d)

C B P

Trade Priority Risk

Data Analytics

Industry Issue Targeting

CBP to increase regulatory auditors by 30%


Changing Mindset – From Zero (duty) to Enforcement

Companies may face CBP enforcement actions in the following compliance areas.

A change in mindset and enhanced controls are now warranted.

Inaccurate tariff classifications

Country of origin determinations Transshipment

Dutiable royalties, tooling, molds, assists

(And other dutiable costs)

FTA validation (NAFTA)FTZ –

product must be “privileged foreign”

Imported kits containing

impacted itemsSubstantial

transformation De minimis shipments


Trade is now Linked to Huawei and Technology

Non-tariff barriers are putting tech firms on noticeKey areas: 5G, semiconductors, AI

US pushback on China spans legislative and executive actions, including:

― Global campaign against Huawei

― Tightened investment restrictions (CFIUS) and export controls

― Indictments/sanctions for IP theft, visa restrictions, 5G ban

China may increasingly use regulatory actions against US firms:

― Anti-trust actions (Qualcomm, Micron); Cybersecurity Law


Latest Export Developments

U.S. government recently two significant actions against Huawei, the largest global telecom company:

1) May 15, 2019: Executive Order from President Trump— Requires U.S. government agencies to formulate regulations,

within 150 days, to prohibit U.S. persons from acquiring and importing telecom technology or services from a “foreign adversary”

— Believed to be targeted at Huawei

2) May 16, 2019: U.S. Places Huawei on the “Entity List”— Huawei and 68 global affiliates placed on Entity List

— Prohibits exports, re-exports or transfers of items “subject to the Export Administration Regulations (EAR)” to the listed Entity

— Includes a ban on hardware, software, technical information

— U.S. subsequently issued a Temporary General License


Key Points

• The Entity List action is the single largest sanction in U.S. history

• Huawei’s size and breadth

• The number of impacted global suppliers

• The amount of dealings that suppliers have with Huawei (some over $100 million)

• Given the size of business suppliers have with Huawei, ceasing business is difficult and not simply a matter of stopping shipments

• Tech transfers

• Software downloads

• Employee technical discussions (meeting, emails, calls)

• Does not prohibit purely financial dealings (billing and collection) unless related to an unlawful export to Huawei

• Only applies to items “subject to the EAR”


Non-Compliance can be Costly

Failure to comply with export control and sanctions laws and regulations may lead to significant consequences.

— Civil and criminal penalties

- Civil penalties include a fine of up to $500,000 per violation, depending on the government agency and severity of the violation

- Criminal penalties of up to $1M per violation and/or 20 years imprisonment.

— Reputational and operational harm

— Legal and investigative costs

— Denial of export privileges, which can cause substantial harm to a company’s business

— Debarment from U.S. government contracts

— Imposition of requirements to build out compliance programs as part of a settlement

— In extreme cases, prison terms


In Closing

Companies will need to develop insights into their ability to pivot around new tariffs, protectionist stances or whatever the next wave will be while considering their current contingency plans and risk diversification opportunities.

In doing so, it’s important to assemble a cross-functional team with deep subject matter experience to provide insights and recommendations regarding the potential impacts to a company’s— Supply chain footprint strategy— Operating model— Brand strategy — Capital structure— Trade and tax positions

Companies should be prepared to answer questions such as:

How might we be affected?

What are our options?

What should we do now?


The content presented in this presentation is for discussion purposes only and is not intended to be "written advice concerning one or more Federal tax matters" within the scope of the requirements of section 10.37(a)(2) of Treasury Department Circular 230. To the extent that you decide to act, or not to act, based on any information contained in this presentation you acknowledge that the information was prepared based on facts, representations, assumptions, and other information you provided to us, the completeness and accuracy of which we have relied on you to determine. In addition, the information contained herein is based on tax authorities that are subject to change, retroactively and/or prospectively, and any such changes could affect the observations made or any conclusions reached that are contained herein. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The advice or other information in this document was prepared for the sole benefit of KPMG’s client and may not be relied upon by any other person or organization. KPMG accepts no responsibility or liability in respect of this document to any person or organization other than KPMG’s client.

KPMG Precautionary Language


Thank you!Contact:

Irina Vaysfeld Principal, New York 212-872-2973 [email protected]

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