A reciprocal tariff works differently as the rate is determined based on country of origin.
THERE are countless opinions on the allegedly flawed basis used in arriving at the reciprocal tariff rates. There are serious concerns over the domino effect.
Some hope they are of temporal nature to bring parties to the negotiation table while others fear irreversible damages to globalisation and free trade.
Some Malaysian exporters are more focused on the immediate impact and eager to explore options to avoid or reduce the exposure to the 24% reciprocal tariffs effective today.
Accountants have a pivotal role in guiding businesses to make well-considered decisions and, in particular, avoid making choices that result in far-worse tax exposure.
In this write-up, I focus on the role of accountants in light of the immediate or short-term strategies which has recently gained traction among Malaysian exporters.
Basis of application
Historically, there is a default (universal) duty rate in the domestic legislation on the importing country and importers would produce proof of origin to enjoy preferential rates where there is Free Trade Agreement (FTA). There is no FTA between Malaysia and the United States, but for certain goods non-preferential certificate of origin were required in the past as part of the import documentations.
A reciprocal tariff works differently as the rate is determined based on country of origin.
Where the origin is from Malaysia, a higher tariff rate of the 24% applies instead of the universal baseline rate of 10%.
It is vital to note that tariffs are imposed based on “country of origin”, and not “exporting country”.
As an example, if goods with Malaysia origin is exported to the United States from Singapore, the applicable reciprocal tariff rate would be 24% imposed on Malaysian goods (and not the 10% imposed on Singaporean goods).
The industry should watch this for discrepancy in the origin rules of the United States and that of the exporting country (for example, those published by the Investment, Trade and Industry Ministry in the case of Malaysia) would cause hiccups during clearance of goods or during post-clearance audits conducted by the US Customs.
Strategies to cushion impact
Given a choice, multinationals would want to maintain both the costs and the end-customer price structure so that the top line (revenue) does not suffer due to price sensitivity of demand.
Hence, is it common for boards and chief financial officers to ask if there is way to legitimately avoid or reduce the exposure to the fresh-from-oven US tariffs.
Here are some of the commonly floated strategies.
The first strategy is to onshore the manufacturing within the United States. Obviously, this is one of the desired outcomes by the US policymakers.
While some European Union (EU) multinationals have made pledges to do so, leaders in the EU, including the French Prime Minister, have urged businesses headquartered therein to suspend all planned/recently announced investments into the United States.
Neither Malaysia nor Asean has urged the business community to suspend investments into the United States.
Hence, Malaysian businesses that see merits in onshoring within the United States are free to do so. The cost differential is prohibitive in many cases.
Second, multinationals with plants in Mexico or Canada could consider supplying to the US market from these plants.
The April 2 executive order has reiterated that goods originating under the US-Mexico-Canada agreement are eligible for the preferential terms provided in the agreement.
Tax accountants are well-positioned to analyse and advise if there are pitfalls or risks of failing to meet the origin criteria.
Third, establishing a subsidiary in the United States for distribution activities could be helpful in reducing the tariff exposure.
Of course, the tariff savings must be weighed against the additional operating and compliance costs, the higher corporate income tax in the United States and any dividend withholding THERE are countless opinions on the allegedly flawed basis used in arriving at the reciprocal tariff rates. There are serious concerns over the domino effect.
Some hope they are of temporal nature to bring parties to the negotiation table while others fear irreversible damages to globalisation and free trade.
Some Malaysian exporters are more focused on the immediate impact and eager to explore options to avoid or reduce the exposure to the 24% reciprocal tariffs effective today.
Accountants have a pivotal role in guiding businesses to make well-considered decisions and, in particular, avoid making choices that result in far-worse tax exposure.
In this write-up, I focus on the role of accountants in light of the immediate or short-term strategies which has recently gained traction among Malaysian exporters.
Basis of application
Historically, there is a default (universal) duty rate in the domestic legislation on the importing country and importers would produce proof of origin to enjoy preferential rates where there is Free Trade Agreement (FTA). There is no FTA between Malaysia and the United States, but for certain goods non-preferential certificate of origin were required in the past as part of the import documentations.
A reciprocal tariff works differently as the rate is determined based on country of origin.
Where the origin is from Malaysia, a higher tariff rate of the 24% applies instead of the universal baseline rate of 10%.
It is vital to note that tariffs are imposed based on “country of origin”, and not “exporting country”.
As an example, if goods with Malaysia origin is exported to the United States from Singapore, the applicable reciprocal tariff rate would be 24% imposed on Malaysian goods (and not the 10% imposed on Singaporean goods).
The industry should watch this for discrepancy in the origin rules of the United States and that of the exporting country (for example, those published by the Investment, Trade and Industry Ministry in the case of Malaysia) would cause hiccups during clearance of goods or during post-clearance audits conducted by the US Customs.
Strategies to cushion impact
Given a choice, multinationals would want to maintain both the costs and the end-customer price structure so that the top line (revenue) does not suffer due to price sensitivity of demand.
Hence, is it common for boards and chief financial officers to ask if there is way to legitimately avoid or reduce the exposure to the fresh-from-oven US tariffs.
Here are some of the commonly floated strategies.
The first strategy is to onshore the manufacturing within the United States. Obviously, this is one of the desired outcomes by the US policymakers.
While some European Union (EU) multinationals have made pledges to do so, leaders in the EU, including the French Prime Minister, have urged businesses headquartered therein to suspend all planned/recently announced investments into the United States.
Neither Malaysia nor Asean has urged the business community to suspend investments into the United States.
Hence, Malaysian businesses that see merits in onshoring within the United States are free to do so. The cost differential is prohibitive in many cases.
Second, multinationals with plants in Mexico or Canada could consider supplying to the US market from these plants.
The April 2 executive order has reiterated that goods originating under the US-Mexico-Canada agreement are eligible for the preferential terms provided in the agreement.
Tax accountants are well-positioned to analyse and advise if there are pitfalls or risks of failing to meet the origin criteria.
Third, establishing a subsidiary in the United States for distribution activities could be helpful in reducing the tariff exposure.
Of course, the tariff savings must be weighed against the additional operating and compliance costs, the higher corporate income tax in the United States and any dividend withholding tax on repatriation of profits to the parent entity. Further, it is also important to satisfy the Customs valuations rules as well as transfer pricing requirements for corporate tax purposes.
Fourth, supply chain realignments to meet origin criteria in one of the many jurisdictions subjected to the baseline universal tariff rate of 10%. While this is a valid option for consideration for many businesses, no decision should be made without full consideration on the implications to product cost as well as the ownership and control of intellectual property deployed in such manufacturing functions.
Fifth, to ensure that the transactions are organised in a fashion whereby there is no practical obstacle to benefit from the various exclusions and deductions granted by the US Customs in ascertaining the value on which the tariffs are imposed.
As an example, the ex-factory incoterm could be handy in reducing the US Customs valuation with regards to freight and insurance cost.
Also, elements such as latent defect (repair) allowances and the use of post-importation royalty could – depending on the merits of each case – be effective in reducing the value subject to tariff. These aspects may have been taken for granted in the past due to zero tariff.
Moving forward, it is important to pay attention to these details to attain the goal of a competitive pricing to the end customer without compromising the exporter’s profit margins.
In addition to the existing rules, the April 2 executive order also provides that if the goods being imported into the United States comprise at least 20% value that originates from the United States, the tariff applies only on the value of the non-US content of such goods.
Documentation and tracking are vital for businesses that are eligible for this exclusion.
Sixth, in some cases the use of foreign trade zones in the United States could be beneficial to the importer or the multinational group as a whole.
Pitfalls to avoid
Tax accountants are well-positioned to highlight to the board on the different facets of tax and duty implications of what might otherwise be viewed as a simply tweak to the supply chain.
As an example, if part of the manufacturing activities for a product is “moved” to a different jurisdiction, such action could constitute as “restructuring” for transfer pricing (for the purposes of corporate income tax).
Given there is no change in shareholding or transfer of employees, businesses may not conventionally view such reallocation of function/production line as restructuring, but the Inland Revenue Board has made its position clear in the transfer pricing guidelines published on Dec 24, 2024.
The transfer pricing requirements may compel the Malaysian entity to be paid a one-off an arm’s length indemnification for the alteration of an existing arrangements.
Such indemnification could be either capital in nature (in which case there is no tax implication) or be treated as a compensation for loss of income (in which case such the one-off payment is subject to a 24% corporate income tax).
The actual tax treatment depends on the facts of each case. It is vital to carefully evaluate the exposure and risks before embarking on any decision to relocate part of manufacturing to elsewhere for US tariff benefits.
On a separate note, any proposal to reduce the sale price of Malaysian made goods to a group entity in the United States must be evaluated in the context of the US Customs valuation against past imports of the same/similar goods as well as the Malaysian transfer pricing implications.
The latter is not just a comparison with past transactions with the United States, but also a comparison against contemporary transactions with other markets (where the conditions are comparable).
The pitfalls discussed here are not exhaustive.
Needless to say, there is no “one size fits all” solution. Some solutions may be viable for exporters of consumer products while other solutions may have its merits for intermediate goods for industrial use. There are many factors.
Accountants – particularly tax accountants – are well-positioned as trusted advisers in guiding the board with timely tactical inputs to attain strategic benefits without inadvertently taking on larger tax or financial risks.
Industry champions and finance leaders are also required to be prepared with longer-term strategies and contingency plans beyond the trade strategies discussed this article. In the interest of brevity, I reserve my comments on the longer term and broader economic consequences of reciprocal tariffs.
Thenesh Kannaa is the executive director of TRATAX Sdn Bhd. The views expressed here are the writer’s own.
