Navigating tariffs: mitigating risks in a volatile trade environment

The global trade landscape

At Vistra, we believe a new model of globalisation is emerging: one defined by greater regionalisation and increased regulation. In this rapidly changing and uncertain environment, many companies are adopting a ‘wait-and-see’ approach.  However, we see the potential for companies to get ahead of the challenges posed by tariffs through thoughtful and considered scenario analysis.

To thrive, this is a time for companies to re-evaluate fundamental aspects of their daily operations from pricing to supply chain management, and to optimise their investment and trade strategies with a methodical, strategic, and innovative approach. 

Tom Lickess, Vistra’s Global Director for Tax & Statutory Accounting Solutions, offers insight into how multinational companies can effectively mitigate cross-border trade risks associated with tariffs and ensure business continuity.
 

Key risks

As global organisations come to terms with the potential implications of tariffs,  Vistra has identified three key risks to companies engaged in cross-border trade.

• Increased costs of goods: Tariffs lead to higher prices for the cross-border supply of goods, directly affecting margins and consumer pricing.
• Supply chain disruption: trade uncertainty and tariffs highlight the need for supply chain diversification. Reliance on a limited number of intra-group or third-party suppliers, particularly those in countries affected by tariffs, can expose organisations  to significant risks. While taking time and incurring costs, diversifying supply chains may aid in mitigating these vulnerabilities.
• Financial uncertainty & losses: Without proactive measures, organisations may face substantial financial setbacks due to increased costs and supply chain interruptions. Intra-group and third-party cross-border transactions that have had known margins ‘priced-in’ may likely no longer generate the returns forecast, resulting in potential losses, or need to revisit pricing. Given the potential quantum of the tariffs, and the fact that most transactions are not price-elastic, the potential loss of sales should organisations try to pass on additional costs will likely further erode revenue and margins.

Six steps to mitigate risk

It’s clear that the current global trade environment is extremely challenging. To navigate tariffs effectively and minimise shocks, companies should consider the following measures:

1. Scenario testing and ‘tax-overlay’ analysis
Conduct actual and alternative scenario testing on all relevant intra-group and third-party cross-border supply chain that may be impacted, overlaying the various tariff impacts, plus wider corporate and indirect tax impacts (including new intra-group transfer pricing considerations). This may involve analysing different country, entity, operational, and transaction-type supply chain and pricing scenarios to understand the potential financial implications. 

By anticipating and stress testing various outcomes, businesses can better prepare for the future and make ‘tax-informed’ decisions. With tax being a major cost of doing business, factoring in the likely ‘after-tax’ returns is key.

2. Review of contractual agreements
Examine existing contracts for protective clauses that can mitigate financial risks associated with tariffs. Key areas to focus on include:
Terms of trade clauses: Clarify who is responsible for duties and taxes to ensure transparency in cost-sharing.

• Change of law and price adjustment clauses: Identify opportunities for price adjustments in response to new tariffs.
• Contract renegotiation: Prepare to exercise rights for renegotiating pricing agreements and cost-sharing arrangements with suppliers.

3. Supply chain assessment
Evaluate the current supply chain for any potential vulnerabilities linked to tariffs. Explore alternative sourcing options, diversify supplier relationships, or consider domestic production to alleviate potential cost increases. Vistra understands that such organisational and country changes are not straightforward and is actively working with clients to consider the impacts and help with implementation where necessary.

4. Transparent communication with stakeholders
Maintain open lines of communication with investors, customers, and suppliers to manage expectations effectively. Engaging with policymakers and industry associations can also provide insights into potential policy shifts.

5. Ensure trade compliance
Review trade compliance practices to minimise duties payable. Verify the origin and value of imported goods and ensure accurate customs valuation and product classification to avoid penalties and disruptions. Given this new and additional compliance obligation, the costs of compliance should also be factored into your scenario analysis and new pricing/costing models.

6. Transfer pricing adjustments
For multinational companies, revisiting transfer pricing policies is crucial to ensure compliance with the new tariff structures. Transfer pricing adjustments may be necessary to align with the evolving economic landscape – to both lessen the potential impact of the tariffs and align with the new macro and microeconomics that would mean that prior transfer pricing assessment and documentation is no longer compliant.

How can we help?

At Vistra, we understand the complexities of the international trade environment. Our global teams are equipped to best assist you throughout the entire lifecycle of these market-moving events, providing scenario analysis and testing, expert advice, and implementation strategies tailored to your needs.

Are you ready to get ahead of the current crisis? Reach out to us for advice today and ensure your organisation is well-positioned to navigate the challenges of cross-border trade effectively.

To discuss these developments further, please contact Vistra's International Tax Advisory team. Our subject matter experts are here to provide the insights and guidance you need to mitigate risk in uncertain times.

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