Importers and producers of goods from China and Mexico are trying to decide what, if any, response to take to recently announced tariffs. The solution might be right here at home.
Many manufacturing lines are fairly easy to relocate between existing industrial shells.
Since the days of Venetian spice traders, global supply chains have been expensive to operate, difficult to plan and prone to geopolitical, currency and other risks. Smart manufacturers continuously evaluate sourcing and supply chain planning decisions.
For at least the last 15 years, repatriation has been discussed as a way to reduce lead times, stock-outs, and working capital requirements while improving quality. These arguments become more persuasive as manufacturing shifts from labor intensive processes to capital intensive processes relying more on robotics, AI and automation. Against this backdrop, wages in developing economies continue to rise, compressing wage rate arbitrage that forms the heart of offshore manufacturing strategies. Meanwhile, developed economies continue to offer lower capital costs, better ecosystems for automation and stronger legal & property rights. Many state and local jurisdictions offer tax abatement and other incentives as well. If you have been considering repatriation, now may be the time! Three recent developments set the stage for tax efficient repatriation that reduces working capital and improves supply chain performance:
Corporate Tax Reform: The Tax Cuts and Jobs Act (TCJA) removed incentives for US companies to hold earnings offshore. This change eliminates a significant incentive to produce goods (and retain profits) in offshore jurisdictions.
Tariffs: The prospects of tariffs of up to 25% on goods imported from China and Mexico, (America’s largest and third largest trading partners) have a tremendous impact on risk assessments, even if never fully implemented.
Opportunity Zones: In 2019 there are plenty of appreciated assets that could be sold, with the gains subject to capital gains tax. Or not? The TCJA also established opportunity zones (OZs) that allow appreciated assets to be sold and the gains reinvested tax deferred and eliminated for up to 10 years. OZ incentives apply to investments in qualifying industrial real estate and manufacturing equipment.
In combination, these developments allow domestic manufacturers and importers to upgrade supply chains with state of the art manufacturing, move production closer to consumers, and reduce working capital. And do all of that with extremely favorable tax treatment while benefiting disadvantaged communities at home.
This type of tax efficient supply chain transformation is a great opportunity for CFOs and COOs to collaborate and drive value for shareholders and customers alike.
Contact Cunningham CPA today for tax help, fractional CFO services and other practical, tax smart solutions to your company’s most important challenges.
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