On March 25, 2025, Forvis Mazars presented a webinar featuring Richard Mojica and Julia Herring of Miller & Chevalier (M&C) along with Michael Cornett of Forvis Mazars’ Washington National Tax Office for a deeper discussion on tariffs, building on our previous webinar on tariff fundamentals. We provided updates on the current conversation and actions happening in Washington. This article is intended to accompany the webinar and contains information current as of March 25. A recording of the webinar can be found here.
The U.S. tariff landscape is rapidly evolving. New industry-specific tariffs have been implemented on steel, aluminum, and automobiles. Country-specific tariffs have also been implemented, such as those on Canada, Mexico, and China under the International Emergency Economic Powers Act (IEEPA).1 Based on the pace of these new tariffs, and the rate at which they continue to evolve, businesses should stay informed and identify strategies to help mitigate tariff exposure and increased tariff rates.
How Can Companies Stay Informed on Changes in the Tariff Landscape?
Companies can stay informed in the following ways:
- Visit Whitehouse.gov. Since many of these tariffs are announced in the form of executive orders, the White House’s “Presidential Actions” webpage is often the first website to contain the most detailed information about new tariffs. Federal Register notices are published soon after and often contain additional details on these executive orders.
- Visit U.S. Customs and Border Protection’s (CBP) FAQ pages. FAQ pages on tariffs are updated frequently, such as this FAQ page on Section 232 Steel & Aluminum tariffs.
- Subscribe to CSMS notices. Register for CBP’s Cargo Systems Messaging Service (CSMS), which is CBP’s primary method for communicating trade news with its trade partners.
What Can Companies Do to Mitigate the Effects of Such Tariffs?
Product Classification
Countries can review and explore changes to tariff classification of their products. Every product is classified within the Harmonized Tariff Schedule (HTS) code. Each HTS code has an associated duty rate. As such, some HTS codes have lower tariff rates than others. A company might be interested in reconsidering its classification to see if a lower tariff rate applies.
For example, consider §232 downstream aluminum and steel tariffs. These tariffs only apply to certain products classified under specific HTS codes. Take, for example, a wooden desk with aluminum hinges. If components of this wooden desk are imported separately, then the aluminum hinges for the desk (classified under subheading 8302.10.6060 of the HTS code), will be subject to §232 tariffs. On the other hand, if the desk as a whole is imported as a “wooden desk” under heading 9403 of the HTS code, then the desk, including the aluminum hinges, would not be subject to these tariffs. Classification is thus a means to mitigating tariff exposure.
Classification also matters, for example, for §301 tariffs, because tariff classification will determine a) if the tariff applies to the product (whether or not the product is of China-origin) and b) classification will determine the applicable tariff rate. For example, many apparel products are subject to a 7.5% tariff rate, whereas others, such as China-origin machinery, are subject to a 25% tariff rate (as of the date of this webinar).
Keep in mind that some new tariffs being rolled out are classification-agnostic and simply apply to all products of a certain country of origin. For example, the first round of IEEPA-China tariffs applies to all products of China.
To support a change in classification, a business will need to understand what the product is, of what it is made, and how it operates. Usually, classification reconsiderations are made through technical materials and product brochures, or even physical samples of a product. In the U.S., in addition to reviewing the HTS, one may also consider a body of rulings made available by Customs to inform classification of similar products.
Country of Origin
Certain tariffs and tariff rates are country-specific, meaning that a tariff may only apply to products of a particular country, or tariff rates might differ depending on the country of origin. At a high level, the test to determine the country of origin is the substantial transformation test, which considers where a product undergoes a change in name, character, or use. Under this test, the country in which that change last took place determines the country of origin.
As part of its substantial transformation analysis, CBP might also consider components of a product and apply the “essence test.” This test focuses the evaluation on the component part that gives the product its essence. CBP asks where the “very essence” of the imported product originated. For example, CBP once determined that the origin of certain fiber optic cables was France—not China—because a certain part of the fiber optic cable, called the fiber optic cable “preform,” was the essential component of the cable and was not further transformed in later production steps that took place in China.
Questions of country of origin are particularly important as we look at tariffs recently implemented under the IEEPA. These tariffs are applied on a country-by-country basis. In the current trade space, for example, a question commonly asked is if a product is of China-origin. Companies are considering supply chain diversification, or adjustments to their supply chains so that products will no longer be of China-origin, either because a) certain components are no longer of China-origin, or b) they are shifting assembly or manufacturing outside of China.
As such, companies may consider whether any portion of their manufacturing process might substantially transform their products such that the country of origin of the product changes, reducing tariff exposure.
Customs Valuation
Tariffs are based on the value of imported goods, also known as “customs valuation.” A change in value will directly impact tariff rates. For example, if a 10% tariff applies to a product valued at $20, but a revised valuation finds that the product’s value is $15, then the tariffs required to be paid on that product will decrease from $2.00 to $1.50.
Import duties are most often based on a transaction value, or the “price actually paid or payable” for a good. Costs up to delivery are included in value, but certain costs are excluded. These costs, known as “not-dutiable costs,” include international freight costs, certain costs incident to international shipping, and post importation transportation. Packing costs, commissions, assists, certain proceeds, and licensing fees are, however, included in value. Conducting a review of existing costs and identifying the “non-dutiable” costs excluded from a product’s valuation can lower a company’s tariff exposure.
Sometimes, products are imported in a multi-tiered transaction, such as a sale by a foreign manufacturer to a foreign intermediary that, in turn, sells to a U.S. importer. The First Sale Rule allows importers to base a product’s valuation on the first (or earlier) sale within a transaction sequence. Considering the earlier sale typically has a lower value, the First Sale Rule could reduce tariffs. To be eligible to use the First Sale Rule, the sales must be 1) bona fide, 2) conducted at arm’s length, and 3) involve products clearly destined for the United States.
What is meant by the term “tariff engineering”?
Tariff engineering is a legal way that businesses can change their tariff liability but must be done with great care and caution. One example of tariff engineering is importing unfinished or modified forms of products to take advantage of classifications with lower or zero duty tariff rates. Another is slightly modifying a product to receive a lower tariff rate. Take a pair of shoes with rubber soles, for example. Adding a small layer of felt to the soles of these shoes may change the classification of these shoes from a “sneakers” classification of the HTS to the “slippers” category of the HTS, which has a lower tariff rate.
Other Tariff Considerations
Tariff Exclusions
When considering new tariffs, companies should ask what tariff exclusions or exemptions might exist. Note, additional exceptions could be announced in future executive orders. A few exclusions and exemptions in the current tariff environment are:
- Chapter 98 exemptions. Exemptions exist for goods under Chapter 98 of the HTS. Chapter 98 includes exemptions for products imported into the U.S., re-exported for repairs, and then re-imported into the United States. Products that would typically be subject to IEEPA tariffs, for example, may still use certain Chapter 98 exemptions to lower their tariff exposure. It is important to note, though, that not all tariffs provide exemptions for goods classified under Chapter 98.
- USMCA exemptions. Businesses should consider trade agreements that may permit exemptions. As of March 7, 2025, at 12:01 a.m., for example, products that qualify for United States-Mexico-Canada Agreement (USMCA) preferential treatment are exempt from the Canada and Mexico IEEPA tariffs. It is unclear if this exemption will extend beyond its current deadline of April 2, 2025. To qualify for preferential treatment under the USMCA, products must meet one of four origin-specific criteria. At a very high level, these criteria are: (1) wholly obtained or produced in North America; (2) produced exclusively from originating materials from North America; (3) meet certain product-specific rules of origin; or (4) be disassembled goods, meeting a regional value content threshold.
Bonded Warehouses and Free Trade Zones
Free trade zones (FTZs) are secured areas where importers can store, manufacture, assemble, and process merchandise. Merchandise held in an FTZ is not subject to duties or fees until it is transferred from the FTZ for consumption. If not entered for consumption, merchandise can be exported from the zone free of duties. Merchandise can remain in an FTZ indefinitely.
Bonded warehouses are secured areas where imported merchandise can be stored without payment of duties or tariffs. Products can be stored in bonded warehouses for up to five years after the date of importation. The duty is paid when the merchandise is withdrawn for consumption into the U.S., with the advantage being a deferral of the duties. Alternatively, a party can choose to export a product instead of withdrawing the product for consumption, thereby eliminating duty obligations.
Unlike FTZs, products in bonded warehouses cannot receive privileged foreign (PF) status. Under PF status, products are appraised for duties at the time status is elected, such as when entering the FTZ. In other words, the tariff rate when entering the FTZ is “locked in” even if the rate increases upon import for consumption. Products in bonded warehouses do not have the option to “lock in” duty rates. Bonded warehouses also differ from FTZs because FTZs do not require a formal customs entry and products in an FTZ have not yet been imported into the U.S. at that time. Products in an FTZ can also undergo manufacturing.
Duty Drawbacks
Duty drawbacks are refunds of certain taxes, fees, and duties that were collected when products were imported into the U.S. but are refunded when products are destroyed or exported. Drawbacks typically fall into one of three categories: 1) manufacturing drawbacks, 2) unused merchandise drawbacks, or 3) rejected merchandise drawbacks.
Products subject to §201, §301, and reciprocal IEEPA tariffs are eligible for drawbacks, but products subject to §232 duties (such as the steel and aluminum tariffs) are not eligible for drawbacks. Products subject to the recent IEEPA tariffs (Canada, Mexico, and China) are also not eligible for drawbacks.
Related Party Transactions & Transfer Prices
Transfer pricing commonly refers to the pricing of cross-border intercompany transactions between related parties. Per Internal Revenue Code (IRC) §482, and consistent with other country transfer pricing rules and guidance, controlled transactions must be priced at arm’s length. A controlled transaction is judged to be arm’s length if the results of the transaction are proven to be consistent with the results that would have been realized between third parties engaging in a comparable transaction(s). Such a result can help taxpayers clearly reflect income and expense in the appropriate tax jurisdiction and prevent the avoidance of taxes with respect to such transactions. IRC §1059A can limit recovery of costs for tax purposes to those taken into account in customs value. Accordingly, there is clear interplay between the two standards. First and foremost, businesses need to make sure they have a clear understanding of their transfer pricing and how such pricing may be impacting the tariffs and duties they are paying on the cross-border flow of goods and services within their supply chains.
With that understanding, and in consideration of IRC §482, IRC §1059A, and other relevant rules and guidance, the adjustment of transfer prices may be evaluated as a tariff mitigation strategy. By unbundling or adjusting transfer prices, the customs value may subsequently also need to be adjusted, which may reduce the value at which tariffs and similar duties are levied. The impact of increasing tariff rates should be modeled, and such modeling can be used to determine if a supportable transfer pricing adjustment is advantageous. In evaluating whether transfer pricing adjustments are appropriate, businesses should also consider how any additional costs related to tariffs impact their overall transfer pricing policy and who should bear these costs if they cannot be passed onto the end customer.
Conclusion
We hope that these insights can help companies identify high-level tariff mitigation strategies in light of the shifting tariff landscape. These strategies, when applied correctly, may help reduce a company’s tariff exposure. Staying apprised of new developments is critical during this time. If you have any questions, please reach out to Forvis Mazars or Miller & Chevalier to learn more.
- 1Following this webinar, reciprocal tariffs were announced, effective April 2. For more details, see our FORsights™ article, “President Trump Declares Sweeping Tariffs.”