The United States-Mexico-Canada (USMCA) trade agreement may have alleviated some uncertainty around North American trade relations, but significant questions and concerns remain for the Canadian manufacturing industry.
Tariffs are affecting many manufacturers in Canada, with some paying hundreds of thousands of dollars in duties. While avenues exist to recoup tariff costs, the administrative procedures can be complex and lengthy.
To stay competitive, companies need tactics that can help them rethink their business model. These four strategies, when implemented carefully, can help manufacturers mitigate the impact of tariffs.
1. Conduct a risk assessment
Identify any long and short-term risks related to tax, tariffs, and general business operations. With recent economic and legislative changes, your business model may not be as efficient as it could be — or worse, you could be at risk for costly penalties and time-consuming audits.
Product tariff misclassifications could result in a major hit to your company's profits. Similarly, setting up an international production facility could have tax consequences for a Canadian-owned business. Aligning your tax and tariff structure with your corporate strategy will help manufacturers to make more informed business decisions.
2. Evaluate your supply chain
Examining product sources and vendor relationships could uncover efficiencies such as lower-cost countries or channels that reduce your tariff expenses. There are, however, pros and cons to using new sources. By exceeding import quotas or failing to account for any additional import costs, manufacturers could incur fees and penalties that outweigh any initial savings.
3. Consider tariff engineering
It is sometimes possible to make minor modifications to a product to ease the tariff tax burden. Tariff engineering requires careful consideration of your product and its tariff classification, including any associated safety and security risks or permit requirements. Other important factors to consider are the cost of materials, cost of manufacturing, and marketability.
Manufacturers should consult third-party professionals to understand how specific product changes will relate to tariffs, and for help with receiving a formal ruling in advance from the appropriate customs agency.
4. Consider expanding your operations
Expanding outside of Canada is contingent on multiple factors and often more complex than it first appears. New tax incentives in the U.S., resulting from its recent tax reforms, may offer opportunities for expansion, but manufacturers should ensure they understand both the benefits and the consequences.
Consider these items in particular:
- Business structure. Tax rates, income thresholds, legislative policies, and other elements can have a long-term impact on your business structure. Companies should prepare and be flexible for change, as it takes time and resources to adapt to new rules and regulations.
- Company size. Tax rates can be preferential depending on the size of your business — but companies may or may not qualify for the same types of exemptions across borders. While larger organizations often have advisors to help optimize and manage varying tax rules, those that are smaller in scale may lack the resources to ensure compliance.
- Future income projections. Understanding the timeline for profitability, particularly when a company operates in multiple countries, helps a company to plan for both losses and growth curves.
- Intellectual property. Intellectual property can include both manufacturing processes and technical knowledge. When expanding to another country, this could mean eligibility for R&D tax credits and/or being subject to additional rules. Companies should ensure they understand what makes them unique.
- Duty implications. Customs legislation differs from country to country, in both requirements and application of fines. Before making a move, manufacturers should review and understand all regulations, particularly if stricter penalties could significantly affect income.
These four considerations are not “one size fits all” strategies. Manufacturers must assess their current operations, including customs procedures, to make advantageous business decisions and determine the path to future growth.
The manufacturing industry team at BDO can provide unified solutions for manufacturers to help mitigate tariff risks, including assistance with tariff classification and formal rulings, domestic and international tax services, and business strategy advisory. To start the conversation, contact us or get in touch with:
Senior Manager, Certified Customs Specialist (CCS)
Partner, U.S. Corporate Tax Practice Leader
Partner, International Tax