Surprise, the turf of the tariff playing field has shifted—again! As we wrote on these pages a year ago, Chief Financial Officers (CFOs) are positioned to operate as the organization’s voice of reason (and source of regularly updated forecasts) since President Trump unleashed an initial volley of tariffs. Following the U.S. Supreme Court’s February ruling that U.S. tariffs issued under the International Emergency Economic Powers Act (IEEPA) are unlawful, the demand for finance leaders’ levelheadedness is even higher. One way for finance leaders to flex their judiciousness is by emphasizing to CEOs, C-suite peers and board members that refunds (should those ultimately result) are not a reprieve.
Tariff refunds will trigger substantial work and raise strategic questions about customer and trading partner relationships. Furthermore, tariff-driven forecasts, business plans and models require an update after the Supreme Court’s landmark decision and the subsequent issuance of new tariffs and additional Section 301 investigations. CFO leaders are ideally positioned to orchestrate these efforts. Sensitivity analyses, scenario planning, related next-gen FP&A activities, bill of material (BOM) clarity, and cost accounting remain crucial components of an effective tariff change response, but additional actions are needed for several reasons.
For starters, tariff refund processes and approaches introduce new workstreams, additional uncertainties and, for some organizations, new reputational risks. Although the refund process is still subject to regulatory developments and clarity, it will almost certainly require organizations to submit detailed supporting data and documentation, which will necessitate extensive legal, regulatory and accounting work, expansive internal collaborations and thoughtful communications with external stakeholders. At the same time, new and looming tariffs must be analyzed and addressed as the war in Iran and the energy shock it has sparked continue to unfold and add even more (and different sources of) uncertainty to the forecasting and business modeling landscape.
More investigations, more complexity
In striking down the IEEPA tariffs, the Supreme Court left the process by which companies can recover funds paid for invalidated duties to the U.S. Court of International Trade (CIT). In early March, the CIT ordered U.S. Customs and Border Protection (CBP) to stop collecting IEEPA duties and to immediately refund most of the collected duties (with interest). Two days later, though, the CIT temporarily suspended its refund order after the CBP issued a court filing stating that it needed 45 days to upgrade its technology systems to handle the refund process. In a mid-March progress report to the CIT, the CBP estimated that the four primary components of its new refund system were anywhere from 40% to 70% complete.
Meanwhile, the following duties are currently in effect:
- A flat 10% tariff on nearly all imports enacted under Section 122 of the Trade Act of 1974, which requires these “temporary important surcharges” to expire in 150 days (on July 24) unless the U.S. Congress passes an act to extend them (which is unlikely);
- Sector-specific Section 232 of the Trade Expansion Act of 1962 tariffs that affect the steel, aluminum, copper, automotive and semiconductor industries; and
- Country-specific Section 301 (also of the Trade Act of 1974) tariffs designed to counter unfair trade practices and intellectual property theft. As of mid-March, these tariffs were restricted to Chinese goods.
But wait, there’s more! On March 11, the U.S. Trade Representative (USTR) initiated new investigations of unfair trading practices (“relating to structural excess capacity and production in manufacturing sectors”) on 16 U.S. training partners under Section 301. Besides China, these countries include the European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan and India. A day later, the USTR announced separate Section 301 investigations of 60 economies that relate to potential failures “to impose and effectively enforce a ban on the importation of goods produced with forced labor.” Depending on the outcomes of these investigations, additional Section 301 tariffs are possible.
Refund risk recognition
In addition to recognizing the fluid, complex nature of the current U.S. tariffs structure and the IEEPA refund process, finance leaders should consider the following:
- Refunds pose risks: Some consumer-facing companies that publicly declared their intention to pursue tariff refunds experienced swift backlashes from customers who believe they ultimately deserve the refunds on price increases levied in response to tariffs. Those reactions include a handful of customer lawsuits. Many B2B companies that apply for and receive tariff refunds will have difficulty determining which parties in lengthy supply chains are entitled to refunds (whether legally, or for business and relationship reasons). These intricate determinations could raise thorny questions about who ultimately benefits from refunds, and which parties absorb redistribution costs. Missteps can damage relationships with key trading partners. It is a delicate high-wire act, as it is difficult to retreat from combative interactions back into productive trading relationships.
- The refund application process will likely be cumbersome: Efforts to produce an accurate, defensible application for what the company directly paid in tariffs will be burdensome to many organizations. Multi-tier supply chains are difficult to reconstruct. The data required to apply for refunds, including records of what a company actually paid to the federal government, may need to be located across multiple procurement and accounting systems, reconciled and reviewed for accuracy.
- Refund amounts may not match expectations: Organizations subject to tariffs also invested significant time and money performing sensitivity analyses, running through scenario plans, renegotiating with trading partners, instituting pricing adjustments, scrutinizing advance pricing agreements (APAs) and reconfiguring supply chains. None of those costs are recoverable, yet senior leaders, including some CFOs, may understandably conflate these costs with the actual tariffs the company paid.
CFOs can help CEOs and other senior leaders approach the refund decision with a clear picture of the benefits, risks and costs of the endeavor. A comprehensive perspective will yield more accurate cost-benefit analyses while enabling the organization to proactively mitigate any reputational or relationship risks.
A state of controlled readiness
Finance leaders in companies eligible for tariff refunds or subject to current (and possibly future) duties should consider taking the following actions:
- Expand the room: Cost accountants have been working tirelessly while running sensitivity analyses, churning out scenario plans, updating bills of materials (BOMs) and modeling new pricing strategies. Now their expertise is needed to calculate refunds. If the company opts to pass along some or all of the refunds to customers and supply chain partners, cost accountants will need to assist in allocating those amounts and tallying the related administrative costs. Refund-related work also requires input from treasury groups, tax functions, sales teams, procurement teams and legal counsel. Multinational companies may need their international tax and transfer pricing specialists to determine if new tariffs affect critical assumptions within APAs.
- Establish a state of controlled readiness: In conjunction with their accounting, sales, legal, procurement and tax partners, finance groups can identify the nature and location of data they likely will need to apply for refunds once the submission process is developed. This work will shed light on the magnitude and cost of the refund-submission process. Before deciding whether to apply for a refund, CFOs should assess the costs, benefits and risks of the following scenarios: the refund is received and retained; the refund is received and partially passed through; and the refund is received and fully redistributed. Each option has unique legal, commercial and reputational implications. In some cases, companies may be contractually obligated to share tariff refunds with trading partners. In other cases, companies may elect to pass on refunds to customers (e.g., in the form of price reductions or purchasing credits) to mitigate reputational risks.
- Calculate the total cost of tariffs: Distinguishing between actual tariff expense (i.e., duties paid) and the total cost of paying, analyzing and reacting to the changes in the tariffs landscape can help manage stakeholder expectations regarding expected recoveries. Calculating refundable amounts along with associated but non-recoverable costs will provide the data necessary to strengthen board discussions, improve decision making on whether to apply for a refund, and enhance communications with trading partners and customers, especially when it comes to dealing with the downstream effects of any tariff refunds that are realized.
- Formalize tariff monitoring: Current U.S. tariffs are based on three different statutory authorities (Sections 122, 232 and 301) with unique legal foundations, durations, limitations and exclusion mechanisms. Those stipulations can be modified or stayed by courts at any point in time. A structured tariff-monitoring capability that links directly to FP&A and cost accounting activities can help address the uncertainty of this variability of potential outcomes. To generate valuable insights, tariff-related scenario planning and financial modeling require accurate data inputs on a near-real-time basis. A team charged with monitoring tariffs should be responsible for incorporating changing renewal requirements, exclusion application windows, sunset dates and litigation timelines into forward-looking planning and analysis activities.
Performing these actions will also equip CFOs and their colleagues with the insights they need to hold productive discussions with the board regarding refund decisions and tariffs-related adjustments moving forward. A reasonable way for CFOs to open the board’s next discussion on tariffs is by emphasizing that the Supreme Court’s invalidation of IEEPA-based tariffs in no way signals a return to trade-policy stability. There may be a refund of tariffs paid, but there doesn’t appear to be a reprieve from assessing the impacts of variable trade policies coming any time soon.
This article originally appeared on Forbes CFO Network.
