The Effects of Recent Policy Changes on Supply Chain, Logistics and Operations

Written by Munish Gupta

The current war of tariffs and trade spat between the US and China has alarmed many global businesses. Unfortunately, these tariffs are going to be likely long-lived in nature but there are multiple paths for businesses to address this significant change to their operations, supply chain and logistics costs.

Duty drawback: Exports from the US worked fine in the past because the import duties into the US were minimal. However, considering the potential 25% tariffs, the exports to international countries from the US becomes prohibitive. For example, a company will have to pay 25% import tariff into the US and then on export to say Canada or the EU, pay the import duties into these destinations.

To mitigate this high tariff scenario, there is a solution called duty drawback. Duty drawback is a refund in payments that are initially collected upon importation of foreign-made goods. US customs issues these refunds only when the imported merchandise is exported out of the country. With a 25% import tariff, it becomes worthwhile to reclaim the import duties paid through duty drawback. 

Non resident importer: Instead of importing product into the US and then sending it the EU, Canada etc. it makes more sense to import product directly into countries the EU or Canada. Canada, Australia and the various EU countries allow the concept of foreign or nonresident importer. This is how it works:

A company gets set up as nonresident importer in Canada/Australia or any of the EU countries and gets a tax number. The tax is called goods and services tax (GST) in Canada/Australia and value-added tax (VAT) in the EU. The mechanism for GST and the VAT is essentially the same. As a nonresident importer, the company can import the product into the country, use a local warehouse to store the product and pay the import GST in Canada/Australia or the import VAT in the EU.

GST/VAT is a "pass through" tax to the end consumer so the net tax liability to the company is zero. All the import GST/VAT paid is refunded to the company at the end of the tax filing period.

The beauty of this concept is that is that a company does not have to set up a local tax entity and does not have to pay any income or state taxes in the destination country because of its status as a foreign or nonresident importer. This is the preferred method for all American businesses wanting to go into Canada/Australia or Europe. The cost of getting set up as a nonresident importer is a fraction of the cost of setting up a local tax entity and the company does not have to deal with the with the headache of the compliance paperwork.

In the EU, the two popular destinations are the UK and the Netherlands. With Brexit happening, Netherlands seems to be the top choice for companies wanting to get into Europe. In this scenario, the customer sends product directly from China to the Netherlands, pays the import VAT and stores the product in a Dutch warehouse. From the Dutch warehouse, product can be sold to consumers in the 27 EU countries. In the 27 EU countries, the end consumer is charged the VAT and the quarterly VAT return filed helps recoup the import VAT paid. In the Netherlands, the import VAT can also be deferred.

With this trade war happening, a lot of companies should start thinking of sending product directly to Europe, Canada or Australia directly from China so that they don’t have to deal with the 25% import tariffs into the US.

Shift high-tariff product out of China: A lot of companies are already moving their supply chain out of Southern China into nearby countries such as Vietnam, Malaysia and Taiwan etc. While this does cause a short-term disruption, this can be a viable long-term strategy to counter the unpredictability around tariffs and ever-changing political situation and it seems that this will last for quite some time.

About The Author

Munish Gupta

Munish Gupta

CEO, Supply Chain Advisory Group

Wharton MBA/UCLA Electrical Engineer with global experience in end to end supply chain/operations in electronics technology (semiconductors) and e-commerce retail sector. Experience spanning worldwide manufacturing operations, warehousing/fulfillment operations, global logistics/transportation/taxation and inventory management. Multilingual (English, French, Italian, Hindi & Punjabi) with global work experience (Americas, Europe and Asia) leading cross-functional teams and international experience spanning travel to over 60 countries.

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