Navigating tariff uncertainty: Refunds, enforcement, and accounting

0:00Thought Leadership from PwC's National Office. Welcome to PwC's accounting podcast. I'm Heather Horn. Thanks for joining us today for an episode on the latest developments in accounting and reporting. For this episode, I'm pleased to welcome our guest host, Pat Durbin, a regular on the podcast and one of PwC's deputy chief accountants in the national office. I'll turn it over to Pat now to introduce the episode and start the conversation. Hi, I'm Pat Durbin, a Deputy Chief Accountant in PwC's National Office and host for today's episode. Today, we're covering the rapidly evolving U.S. tariff landscape, what's changed, what it means for finance and accounting teams, and the key considerations companies should have on their radar.

0:56These last three months may be the busiest stretch of tariff change we've ever seen. And it's landed on finance and accounting teams, not just supply chain and logistics. To help me break it all down, I'm joined by Sharon Martin from our Customs and International Trade Practice. Sharon works closely with companies on trade compliance and strategic planning. Together, we'll walk through what's changed, what it can mean for the numbers, and what companies should be thinking about now. Sharon, welcome. Thanks, Pat. It's great to be here today. There's a lot to get through, so let's dive in. Let's start big picture.

1:34You know, customs used to be something that really just the customs and trade team or the trade compliance team handled sort of maybe more back office in nature. Why is it suddenly such a hot topic in the finance, accounting, and frankly, even boardrooms? Sure. So in simple terms, the dollars have grown large and the reality has increased. For years, duties have been small, predictable, lying buried in land cost. However, now rates are high enough and changing often enough that they move the cost of goods sold. They're moving margins. They're showing up in places they're never used to. Customs audits, internal audits, and financial statements themselves.

2:12The government publicly reported recovering over a billion dollars in enforcement. So this is real money now. The other reason is that it cuts across every industry. It's easy to think of tariffs and picture steel or clothing or footwear, but now this touches other industries, pharmaceuticals, consumer electronics, autos, food and beverage, medical devices, and solar. Almost anybody who imports anything has been impacted. There are three very important concepts that drive the tariff conversation. Classification. What is the product I'm importing? Valuation. How is that product being valued? And origin.

2:48Where is that product substantially manufactured? So those three levels determine every duty a company pays. And with rates this high, getting these key data elements wrong is a very expensive proposition in a way that simply wasn't a couple of years ago. So I think the message then for the finance function is that this is no longer just a compliance consideration. It is having a meaningful impact on companies' cash flows, P &L, and it's contributing in some cases to significant year-over-year fluctuations in margins. Exactly, Pat. It's not a one-time event. It's a moving target. Part of what I'd like to talk about today is how to build processes that keep us up with this dynamic landscape in a proactive manner rather than being in a reaction mode to each executive order or news article that comes out.

3:35Yeah, I think that's great, and obviously it's tough with all the press, news articles, tweets, whatever you want to talk about. There's always something, it seems, happening here. And I do think as we get into the conversation, sprinkling in some of those practical tips could be really helpful. Maybe before we dive into some of the more recent developments so we don't get accused of burying the lead, let's go to the biggest headline of the year. The Supreme Court decision striking down the IEPA tariffs back in February and the ensuing refund saga. That's where we've been spending the most time talking about things.

4:10Where do things stand now? Yes, it's still ongoing. But yes, the AIPA tariffs were invalidated and there's roughly$166 billion pool of duties to refund, some of which have already been refunded. CBP is returning the refunds through a process called CAPE, the Consolidated Administration and Process of Entries in Phases. It's up to the importers of record to organize their transactions, identify the transactions eligible for phase CAPE process, and request refunds. Phase 1 of CAPE opened in April for entries that had not been finalized or what we call in customs terms liquidated. Phase 2 opened at the end of June for entries that had some additional complexity such as being flagged for reconciliation.

4:51As of early August, on the order of$100 billion had already been queued or certified towards payment. That's real progress, but well short of the full amount. The piece that's working itself out is the older entries, those that are anticipated to be phase ones, those entries that have not already been finalized or liquidated in customs terms. The reason for this is that the government is contesting whether companies that did not file their own claim get refunded on those, meaning whether they have not filed a lawsuit. And this piece is not settled. So that bucket is part of the process that has not yet come on.

5:25There's discussion that it might come on in September, although we're still waiting to hear. So there's work to do. So phase three is still very much in the balance. There's no definitive outcome there. And the appeal of the refund process, that DOJ appeal, has there been any progress on that from a legal perspective even? We haven't heard anything recently. We had last heard that we would get more information on companies that had filed lawsuits and whether phase three would be open for them in September. But no news to date. It's been quite quiet on this front, so something to monitor. And that amount of the$100 million out of the$166 billion, does that roughly correlate to what we think is phase one and two, or there's probably still a fair amount of phase two money to come?

6:07Do we have a sense? It's really hard to say just because of importers' positions and how comfortable they are in having filed the refund requests at this point. I think it's a rough estimate, but it's really hard to say exactly how it all levels out against the different phases. Yeah, I guess those phases may be more dependent upon a company's circumstances than something that you could sort of look at in macro. Exactly. So maybe just a quick little digression here into the accounting because we've talked a lot about that. We've talked about sort of the refund process and the different models companies could use.

6:40I think it was helpful to kind of talk through it in those phases because we've analyzed it under an accounting lens of there's not really any specific guidance. there were three approaches that sort of evolved or emerged in practice. You could sort of just do a pure what do I think my rights are under the law. We kind of call it the legal framework model. There was an analogy to like a loss recovery model, thinking like sort of more like an insurance recovery. So when it's probable that you're going to get your refund. And then even for accountants who would appreciate a gain contingency model, that's a much later recognition point, maybe not until you actually have the cash or at least you have confirmation from CBP that they're planning to send you a check.

7:26So you could have different points of recognition depending on your policy. You could also have different points of recognition depending on which phase of the refund process we're talking about. The other reminder, just again, a little bit of a grounding level set, is once you determine that you are entitled to a refund, you obviously recognized the receivable, that benefit then that presumably already went through a cost somewhere, either an expense and cost of sales, or maybe it's hung up in the cost of an asset on the balance sheet, we basically view it as going back to wherever it originally got charged, wherever that tariff really got charged.

8:02So if it was inventory on hand, it would go back to inventory. If it was already sold through in cost of sales, it would reduce cost of sales. If it's hung up in an asset that's on your balance sheet, PP &E, it would reduce the cost basis of that asset. Only the direct refund you get from the government. I think the more interesting part, which we're maybe starting to see a little bit more discussion about, is what other counterparties do I have commercially that may have an interest in any of those tariff refunds that I got? Yeah, that's the question that everybody's been watching and kind of debating.

8:38So if, for example, you raise prices to cover the tariff and now you're getting the money back, is that refund really yours? And does it belong to at least partly to your customer? Or does it belong to partly or to your customer is the question. It's not a hypothetical. A number of high-profile consumer goods companies are already facing customer class action suits arguing that they shouldn't pocket a refund at a cost. They already passed through in higher prices. In addition to evaluating when to record the tariff refund from customs, companies are also needing to look at who is really entitled to the money, as you were talking about.

9:11They need to go back to their contract terms. They need to look at tariffs or charges, side letters. How were the tariffs ultimately passed on if they were passed on to the customers? But there's also a supplier side. If the supplier was the importer record, does the company have a right to recover that from the supplier? And for related parties, we know that over 50 percent of the importation transactions into the U.S. are from related parties. there may be tax and transfer pricing effects. So once we have the refund, there's a lot more consideration to do from a tax accounting perspective than I think what easily meets the eye.

9:43So the practical takeaway is to reconcile the refund claim back to the contracts, invoices, pricing with a real cross-functional review. Don't treat it just as found money. I mean, it's great to get the refund back. We're entitled to it. But what are the other company considerations that need to be. Now, I think that's a really important point because as you, you know, just listening to that, there are a lot of potential complexities, some that, you know, may have other consequences, particularly when you start talking about transfer pricing arrangements in the tax space. I do think, you know, that other point of just stressing again, it's really important to view this as this is a separate evaluation from the evaluation of your entitlement to a refund under CBP, and we also have different accounting analyses and potentially different points of recognition because, like, if we take just the example of, like, a customer arrangement, and let's say I feel like I have an obligation to deliver some of that tariff refund back to a customer that I may have charged for the cost of the tariff, we would look at that through the lens of ASC 606 as a change to the contract consideration.

10:57We'd think of it in technical terms like variable consideration. And the general framework is if I either am contractually obligated to or it's probable that I'm going to have to give that back to the customer, I would recognize that reduction of revenue at that point. Even if, for example, I hadn't yet received a refund and maybe because I'm using like a gain contingency model, I'm not in a position to recognize it until it's basically realized or realizable. That's presumably a much later point than when I would realistically have the obligation to recognize that reduction in revenue. Now, nobody's going to like that answer, but it's just important then to really understand what are the terms of your customer contracts, juxtaposing that with the model you're using to recognize tariff refunds, and just, I would say, make sure everybody's aware of some of those potential implications.

11:50And I guess just maybe one other point on the accounting, coming back to the refunds. We talked a little bit about the different phases, the different accounting models. A couple of important points. The accounting policy you choose, whether it's that legal framework, the loss recovery, or the gain contingency, you have to apply that consistently to all of your tariff refund claims. However, depending on which type of entry you're claiming a refund for, you might not have the same point of recognition. I think we had a fair amount of certainty maybe with phase one. Phase two, we're pretty far down the path.

12:28Phase three, a little bit more up in the air. So you may need to think about bucketing your claims and doing a separate evaluation depending on what stage of evolution they're in. Agreed. And that's where some of the customs operational challenges really come in. Customs, as we've talked about, is very transactional. So from a customs data perspective, we can go back and track the entries and track the liquidation status or the finalization status. That's really helpful. But what we need to really do is when the refunds come in is exactly what you're talking about. We need to go back and connect with our accounting teams, understand how they're tracking the potential refunds, and then what pool we're subjecting the refund to.

13:06And that's almost like a metadata on accounting entries that we don't usually think about, right? We're thinking about it more in terms of general ledger accounts. There are some of these attributes of the tariff entries that are important for how you go about getting a refund or perhaps judging your entitlement to a refund that we might not have visibility into in an accounting perspective. So we need to build sort of a bridge there. And, you know, there could be friction in this process, right? If we don't have good data, we may get some rejections from CBP on submissions, which, you know, I think is not necessarily fatal, but it just points to you need to really be thoughtful, need to make sure you have a good handle on the data as you're making those submissions and in turn making those accounting judgments.

13:55For sure. And there are mechanisms within the CAPE system where an importer can go in and check whether something has been rejected, what the status is. It's not super detailed, but at least it gives you an indication in terms of where your refund is kind of sitting in the system and whether it's being processed. So just the ultimate timing of the actual receipt of the funds is not very well defined. So maybe sort of on the, call it the little bit of the downslope of the IEPA saga, not completely done yet, but just wanted to cover off that before we got into some of the more recent developments.

14:30But, you know, let's move to that now. And honestly, it's become quite a paint the numbers, paint by numbers exercise, I guess. You know, we've got, I think, a bunch of different sections out there, and I'm going to rely on you to tell me what these all mean. We've got Section 232, Section 301, Section 201, Section 122, Section 338. I mean, first, how do we keep all this straight? What do they all mean? Are there more? That is the question. So the easiest way to think about it, I think, is how durable the tariffs are. These different tariff provisions, it's not one size fits all. It's not just one bucket of tariffs.

15:08Each tariff provision is from a different authority. It might apply to different products, different countries, and certainly have different rates. And in some of the provisions, there are multiple types of tariffs. So maybe we'll just break down a couple as examples. So Section 232, which refers to those tariffs that try to, the provision is to protect national security interests. Section 301 is to address unfair trade practices. These are really what we've seen as long-term tools. Section 301s have been in place for certain Chinese origin goods since the first Trump administration. Probably here to stay, that's why we refer to them as durable.

15:44They have not been challenged in court, so more likely than not we're going to see continued use of 301. Same thing with Section 232. These have been a little bit more industry specific, so we'll talk a little bit more about some of the more recent 232s. We believe that these are more likely than not to be durable. Section 201 is an older safeguard tool for import surges. A little bit, they're also durable, a little bit less commonly used. The 232 and the 301 is what the administration has certainly been turning to more recently. But then we have more limited tariffs. The Section 122 came in at 10 percent, lasted only 150 days and expired in late July.

16:21That has ended, that had a time frame associated with it and a rate cap. That was sort of the original replacement to the AEPA tariffs. Exactly. So AEPAs went away in February. 122s came in. Section 122s expired in July, and here we have, as of July, the same date or the day after the Section 122s, we had a Section 301. We'll talk a little bit more about that to replace essentially the 122s. Section 338 is a really new tool used. This has been just kind of introduced over the last month or two in terms of tariffs that were assessed over Canadian origin goods. We'll talk a little bit more about that because there's a lot going on with trade with Canada recently.

16:59And, of course, there's the IEPA, which we all are familiar with, but that also is a tool that is not durable, obviously determined to be illegal. Arguably an overreach of the IEPA authority, right? Fair to say. So that may be a good segue because we have all of these out there. I think we've heard of some beyond IEPA legal challenges of terror. So which ones of these are still sort of in dispute at law versus, you know, which of these we might have to really assume are going to stick around? I think you alluded to a little bit of that, but maybe just to be clear where we stand. For sure. So Section 232 and 301, in our view, are on solid footing.

17:39They appear to be more likely to stick around for the foreseeable future. And we will talk a little bit more about some of the tariffs that are already in play. And then there are some pending investigations as well. Talk about those. The Section 122s, like we said, those are the ones that had a time limitation. They ended in July, but they're also held up with a court challenge right now. The outcome to that is still uncertain. And the 122s, we'll wait to see what's happening, but it's current litigation. I think the main thing on the 122s is we don't know the outcome of that court proceeding.

18:10So a lot of companies are hoping for a refund opportunity there, but that has not been determined yet. So let's just maybe get concrete on Section 232 because that one seems to be sort of the widest reaching, has this notion of national security, which seems to be sort of broadly interpreted. So just what's happening in that space specifically? Yes, the Section 232s have been really active in the last year. Things like steel and aluminum and copper, they originally started at 25 percent. Now they're at 50 percent. There are some derivative products that are now at 25%. So those have been very impactful tariffs with a lot of confusion in terms of the implementation, but those have been in effect and still are in effect.

18:55Auto and RL parts also at 25%, semiconductors at 25%, lumber at 10%. One of the more notable in Section 232 is the pharmaceuticals. That was something that was kind of a very impactful investigation, and we'll talk a little bit more about that one, but that was 100%, which will be starting on certain products at the end of September. So very impactful. Those are very product-specific with far-reaching consequences in terms of the countries that are impacted. So there's a lot. Maybe I talk a little bit about the Section 232 tariffs as well, because if I take for an example an aluminum can that's subject to the 232, one of the things that I think that the importers don't understand is that the tariffs can stack.

19:38So just because you're importing an aluminum can doesn't mean you're only subject to the 232 tariff. What you are more likely than not subject to is the base rate, something called a most favored nation rate. That is the tariff that has always been in place. That is the tariff that was prior to all of this at an average of about two to three percent for most products imported into the U.S. Those rates still remain. So we have to start with our base rate. Then we have our 232 rate. Then for certain, in this example, the aluminum can, we also have Section 301 duties. We might also have something called anti-dumping duties.

20:11That is also an action that has been in place for many years. And we might also have additional fees on top of it. So I think it's really important to note is that when we're looking at these different tariffs, many of them stack. This is what we call stacking. So one tariff on top of another. In some cases, they don't in there are certain exceptions, but in this case, the aluminum can is a very good example where you have multiple tariffs. This isn't only complexity from trying to calculate what the liability of the tariff liability is, but also from a reporting perspective, making sure that we have the information correct provided to our third party if we're using a third party customs broker, and then on the actual filing with customs.

20:49So it increases the complexity when we're analyzing data. Yeah, no, that's a lot. And obviously, with some of those percentages you talked about, that stacking concept could really, you know, add up in a hurry. Exactly. I think that's definitely a good insight. Coming back to the pharma side, and this is particularly interesting to me, especially when I think about, at least in the U.S., the government through, you know, Medicare and Medicaid ends up paying for a lot of the prescription drugs that are ultimately consumed here in the U.S. You know, we're sort of increasing the landed cost of it.

21:25seems like it's a little bit of a perverse outcome. But I'm also curious about the link to national security and how do we, I mean, obviously, I think this administration maybe is interpreted it broadly, but what's our sense of how they're interpreting or linking something like that to national security? Yes, it's interesting. And I think that's one of the things that could be up for debate on the Section 232s, although we haven't seen that kind of challenge yet. But I do think the idea is that not having access to pharmaceutical or medical products or not having the ability to produce them in the U.S.

21:57does create a national security risk. So it's sort of creating an incentive or opportunity for U.S. manufacturers to produce at a more competitive price point. Exactly. And so having production within the U.S. enables the U.S. to not have to rely on foreign manufacturing. And so I think that's one of the interesting things with regards to the way that this agreement came out is that there were a lot of companies, individual companies. Normally, we talk about tariffs at kind of a product, a country of origin, so the country from which it's sourced or substantially manufactured in customs language terms.

22:27But here with the pharmaceuticals, although they were widespread on a variety of pharmaceutical products, namely in the beginning patent products, and there's conversation whether generic products will also be brought into the fold. But what the government did or what companies went in and did is they actually made negotiations with the administration. So it's all very public information. It's in the annexes of the agreements. But certain companies went in and said, we will agree to certain MFN pricing, to your earlier point, as well as doing onshoring, producing in the U.S. and thereby were able to negotiate lower rates or no rate, you know, kind of an exemption from the rates for a period of time.

23:04So very interesting kind of the way that Section 232 is developed. I think what's very notable is that the rate will be a 100 percent for patented products. So companies that have not gone in and have not made these in negotiations, have not made these commitments, their products that they import will be subject to 100%, which from the pharmaceutical space, previously there were zero tariffs. So the MFN level for pharmaceutical was zero. So this is a very notable progression. Yeah, so definitely for anyone in that space, really very, very company-specific, product-specific. And I think we've got a bunch of different publications sort of tracking some of these tariff developments.

23:43You can get it through sort of our Tax Insights publication series, which is available on pwc.com. Just search around for tariffs, and we'll include some of those in the show notes as well. Let's move on to Section 301, and this is the one dealing with the unfair trade practices and other presumably very judgmental. concept. And I think one unfair trade practice that's been identified as forced labor. So that's been around for a long time. But I guess, how should we think about that currently? How do we think the current administration's thinking about it? And where do those tariffs stand? Yeah, interesting question.

24:23We'll talk a little bit more about enforcement with regards to forced labor. But forced labor is a very significant attention, or it's bringing significant attention of the administration currently, and it has been in the past. But essentially what happened was when the Section 122 tariffs expired in July, there had been an ongoing investigation for the Section 301 tariffs. In effect, essentially the same day or the day after the 122s expired, the Section 301 tariffs replaced them. This is the forced labor tariff under the Section 301 provision. It's important to note that this tariff impacts 60 economies, So it's very far-reaching.

25:01Not all of our trading partners, but far-reaching. And the tariff rates are between 10 % and 12.5%, depending on the country of origin. There are some meaningful exceptions. So this is one where certain goods may not stack, but you have to go into the content of the executive order and the corresponding messages to see exactly what may be exempted. But again, this was largely to replace the IEPA, the 122s, and now we have the Section 301s. And I think there were some investigations that sort of occurred that precipitated these. I think there are some other Section 301 investigations ongoing as well.

25:38Yeah, so one of the additional Section 301 investigations that we are watching really closely is the excess capacity investigation. And this essentially names 16 economies in a wide range of manufacturing sectors. As an example, the pharmaceutical sector is called out, and it calls out the pharmaceutical sector specifically in four different countries, Ireland, Switzerland, Singapore, and Germany. That's an example, but there are other manufacturing sectors that are also called out as part of the 301 investigation. So it's varied by country and varied by industry and varied by product. Now, this investigation began last year.

26:14We still don't have the results, although there were rumors that they may be coming out soon. However, it's been a little bit quiet on that front, but this is something that companies are closely watching as well. So, and I guess if all of that wasn't enough, we have the events of the past few weeks involving Canada. I guess that we call it a trade dispute, which I think surprised a lot of people, given that we have quite a bit of cross-border flows with Canada. And so our northern neighbor generally have a pretty collaborative relationship. So just level set us on what's going on with Canada.

26:46Yeah. So essentially, this is a big deal. It's evolving every day. And it's brand new use of this Section 338. We have not seen this provision being used before. So another new number to add to the mix. But it essentially provides the president with the authority for retaliation that authorizes tariffs up to 50 percent on a country believed to be treating U.S. commerce unfairly. What essentially happened was the U.S. and Canada were negotiating back in the summer. The negotiations failed for whatever reason. There's lots of reasons on both sides of potentially why that did not occur. But what the U.S.

27:21did is ultimately use a Section 338 tool to implement up to 50 % tariffs on a wide variety of products from Canada. There's a lot of different products that are involved. I mean, you'll see it in the news, and it's very much in the news these days. But dairy, alcohol, autos, a lot of those products get a lot of attention because they're traded in high volumes across the border. So one of the things that I think is really important to note here is that unlike some of the other tariffs that we have assessed against Canada, USMCA, so that US-Mexico-Canada trade agreement, oftentimes for some of the previous tariffs, if the products were USMCA qualifying, meaning they met the requirements of the agreement, they were not subject to the duties.

28:04Here, there is no exemption. So this is a really impactful tariff, 50 percent, very impactful. So it's really creating a lot of angst and a lot of companies to take a look and see how am I being impacted and is there anything I can do to to mediate it. And I guess maybe not unsurprisingly, but also somewhat ironically, since Section 338 is our retaliatory basis for imposing tariffs, Canada is retaliating against our retaliation. Exactly. That actually just happened this week. So earlier this week on September 8th, between 15 % to 50 % tariffs were imposed by Canada on U.S. origin goods. And since then, there has been a little bit more kind of conversation in the media in terms of additional import restrictions or import bans.

28:52None of that has come to fruition yet, but I think there are some in the works. So I think that's something else we'll have to continue to monitor. But this one's a really interesting one to me because just, you know, knowing how a lot of companies have organized their supply chain, you know, they have flows back and forth between the U.S. and Canada for the same product just to get it to their end market. So how how are companies navigating this kind of new world order or maybe new North American order, I guess? Exactly. And a lot of the products that we were trading with Canada were subject to USMCA.

29:22So they didn't have that base. Right. And then they were exempted from some of the previous tariff provisions. So it's really impactful. The one good thing about this is that both in the U.S. and in Canada, importers can access their import transactional data. In the U.S., we've talked about this. It's called ACE, the automated commercial environment. We can actually, importers can go in, they can sign up, they can actually access their transactional data. Canada has a similar concept. So the good news is that importers can actually easily get both historical data as well as current data and really do modeling and understand what products are being hit and what is the value associated to try to project out what they think the impact will be.

30:03The other thing that's also really important is you can use it as a risk tool. So you can also use the tool and the data, couple it with your invoices, couple it with your ERP data, and really see, hmm, should I take another look? Have I assigned appropriate classifications or harmonized tariff codes that really are important because the tariffs are being only applied to certain products? So that's important. And then also, is the value that I'm declaring appropriate because these tariffs are being applied on the value? And same thing with origin. Have I looked if I'm declaring something as Canadian origin?

30:33Is that really, in fact, accurate and vice versa on the U.S. side? So the good thing is we have some tools to be able to assess impact. But, you know, the bad news is that we're going to have to plan and monitor. Yeah. Yeah. So I think we've certainly established that tariffs go way beyond just a compliance exercise and certainly in some ways with all of these developments, all of these different tariff provisions, all the different flavors of it, maybe not just a compliance exercise, but sort of a compliance nightmare on top of having real monetary cash flow implications. But I know one thing we have talked about, and there's been a lot of rhetoric from the administration as well around heightened enforcement.

31:16So you think about just the challenge of compliance, but then the amount of money at stake creates probably both an incentive for companies perhaps to look for ways to mitigate that exposure, but also opportunity for the government, CBP, to say, well, there's a lot of money here. We've got to make sure we're getting the part we want. So beyond just the rhetoric and maybe those macro factors, what are we actually seeing in the enforcement environment? Yeah, this administration is very focused on enforcement. And like we started at the beginning, tariffs are material now. And the government knows that.

31:50The government knows that companies are sometimes taking risky positions or sometimes taking positions that they haven't thoroughly vetted. So the enforcement posture has changed. Companies are feeling it. In July, the Department of Justice said its Trade Force Task Force surpassed a billion dollars in civil and criminal recoveries, penalties, forfeitures, and charged losses in less than a year. Similarly, Customs also announced that it had identified a billion dollars in additional duties owed under the Enforce and Protect Act, or EPA, which provides Customs with the Enforcement Authority. So this is a very significant amount of money that Customs and DOJ are going after.

32:27In June, early June, an executive order named the Strengthening Customs Enforcement Order came out that allowed both DHS, so the Department of Homeland Security and Customs, to really focus on a couple enforcement activities, raising import bonding, looking at heightened disclosures rules, looking at foreign export documentation and strengthening overall customs penalties, to name a few things that were called out in the order. In addition, just last week, a notice of proposed rulemaking came out that seeks public comment in terms of how customs will be implementing and addressing some of the items that were relevant in the executive order.

33:04So obviously enforcement is on the administration's mind. They're taking it seriously, and they're taking a number of actions to make sure that they have the tools and mechanisms in place to be able to support the enforcement actions they'd like to take. So definitely not a kinder, gentler enforcement environment. Absolutely not. One of the key points, I think, in compliance and particularly then in turn enforcement, and you've alluded to it a number of times, is country of origin. And I know I've also heard you talk about one of the techniques that companies may use and I guess perhaps inappropriately use is a concept called transshipment.

33:42So can you just talk a little bit about what that means and then how that plays into the enforcement question? Yeah. First, I'll talk about what transshipment is. Transshipment is a concept that means when a company physically routes goods through a third location. So imagine you manufacture in China, you stop in Indonesia, and then onward into the U.S. So you transship through Indonesia. However, where the concern comes in from a customs perspective, where there's a potential of fraudulent or intentional transshipment, is where you manufacture the goods in China. They are Chinese country of origin.

34:13The goods stop in Indonesia, they're relabeled. The documentation may be changed from China origin to Indonesian origin and then on to the U.S. The meaning of this is that, first of all, you're incorrectly declaring a country of origin. In order for the origin to change, something has to substantially change or substantially transform, which is what we say in customs term, to the product in Indonesia in order for that relabeling and that change to actually be accurate. So what customs has come, you know, this concept has been around forever, but what we're seeing more of, and customs has specifically called it out in the executive order and the follow-up proposed rulemaking, is that they're very well aware of these types of activities occurring where companies are intentionally changing the origin, And really, the intent is to reduce the tariff burden.

34:59So we are seeing a lot of the activity and focus of customs to be on transshipment and identifying these types of transactions and the types of products that companies are transshipping so as to reduce the duty burden. All right. So we've kind of, you know, done the history lesson on AEPA. We've covered some of all these recent developments. We sort of talked about the enforcement landscape, sort of this recent dust up with Canada. I think one of the other things that's still looming out there, like these tariffs in theory were supposed to be a bit of a negotiating tool for better trade deals with other countries.

35:36Just kind of very high level. Where does that stand? Like are we seeing progress there with other countries, the one-offs? What's happening? Yeah, I guess one trade – we have throughout this whole scenario, there has been some work on trade negotiations and have achieved some trade agreements and kind of reduced tariff rates with the U.K. That is one example. India, there's an ongoing trade agreement and negotiation. I haven't heard too much about it recently, but that's still out there. One of the things that has been notable is the USMCA, so that U.S.-Canada-Mexico agreement. That was subject to a mandatory review after six years.

36:15That was occurring in July 1st, 2026. It was the sixth anniversary of USMCA. The U.S. chose not to renew USMCA in its current form. So what does this mean? This means that essentially we haven't made any changes with USMCA. It will not have an automatic renewal. It will need to be renewed on an ongoing basis. It doesn't necessarily mean that goods that qualify for USMCA can't receive the duty-free or the duty reduction benefit, but something to keep in mind. And I think this is something that will come into play between the US and Canada in this ongoing matter that we have that has created the Section 338 tariffs as well as the retaliatory.

36:56So USM state qualifying status currently remains, but it will be up to us to continue to monitor any developments with the agreement. So let's just land the plane here on what we really think companies need to be focused on now and maybe just starting with kind of the organizational setup. Yeah, I think the biggest thing, and we've talked about this kind of with IEPA, we've talked about it just kind of tangentially. But I think the important thing is that customs really isn't a back office, you know, a back office function anymore. Now more than ever, customs has been brought to the forefront.

37:29But it's not just customs alone. So much of what customs does or the customs team or the customs function does relies on input from tax, supply chain, treasury, finance, internal audit. All of these other functions really contribute to the accuracy and the ability for the customs team to have the right information and the right data and documentation to do their jobs. I think with the enforcement acts, we are going to see a lot more documentation needed at the front end. So from supply chain partners, kind of the shipping and the manufacturers and the suppliers. So I think this only kind of highlights the necessity for customs teams and other functions within the companies that I previously named to really be coordinated, collaborative, and working together.

38:10And I guess maybe I'm a bit biased, but I'd just probably layer on there's probably some needs to think about this in the financial reporting space as well. You know, this doesn't stop once you figure out the amount of duties you owe or the amount you're entitled to recover from a refund. There's a number of places in the financial statements where these tariffs can have an impact, particularly around any asset impairments where we're thinking about future cash flows, right? This can pretty dramatically change your cost to produce, you know, have other impacts to your supply chain. Those need to be factored in to a lot of those accounting estimates that we're already making.

38:44So controllers really need to be dialed into this and thinking about it as part of the normal close process. In addition, if you've got material exposure to tariffs, you need to think about whether there are any other disclosures you need to be making. There are some disclosures about risks and uncertainties. Certainly outside the financial statements, you have management's discussion and analysis, risk factors. There could be impacts to your internal controls, so you may need to talk about changes to internal controls. So I think the takeaway for me is that it's on the financial reporting side the same as on the custom side.

39:19You know, you can't look at this in isolation. This has a lot of impacts across the organization. So maybe we can just wrap it up with first a checklist for any controllers out there, like what should they have on it as they head into the fourth quarter in year end, and then maybe what we should be looking out for headed into the fall here, what's on the horizon. Sure. Or I would say, just if I could name three things that everybody in controllers in particular should be thinking about is data discipline. We need to make sure that those key elements are accurate, that we have controls in place to determine what they are before entry, make sure that it follows through with the transaction, and that we have the supporting documentation to support the decisions.

40:00Second, documentation and controls. As I said, the enforcement executive order that came out, as well as the proposed rulemaking, are very focused on clean, reviewable, traceable documentation for every type of import transaction, starting with the foreign parties, starting with our suppliers, and even prior to that. The third is the cross-functional coordination. I can't stress that enough. We require the input of other functions. It's really important for the customs team to coordinate with the controllers, the accounting folks, the tax folks, transfer pricing, supply chain in order to enable the provision of the appropriate documentation and to be able to enable the customs team to make the right decisions and not in isolation.

40:41It requires all of those functions to really make informed decisions. And any big headline items that we should have on the radar that might be coming up here in the near term? Any new decision points, milestones? I'm just going to call out two. I would call out, I think, really important to follow that excess capacity 301 investigation just because it could be far-reaching. And I think it could touch some industries that might surprise us. The second one, we really need to continue to monitor the Canadian-U.S. trade relations. As you said, there's a lot of trade going on between the two countries.

41:15There's ongoing events each day. We need to really monitor impact and think through what we might do to mitigate the implications. But I think there's definitely more to come on that. All right. Well, as always, stay tuned. Sharon, this is terrific. A lot of great insights, a lot of great perspectives. I guess if I had to sum it up, you know, customs is really more than just a compliance issue. In particular, it's a finance issue. It has real monetary consequences. We've got an aggressive enforcement environment. So we need to be really focused on control, compliance, mitigating that risk. Certainly, there's a lot of planning that should be happening, probably with a focus on some of those more durable tariff mechanisms that you mentioned, the 232s and the 301s.

42:00There's going to be others, but maybe those would be the ones to focus on. And, you know, I think there are companies that are probably going to take a more proactive approach and they're likely going to build a real process around this to try to proactively manage it rather than just simply reacting to the event. So that's probably my takeaway. Really appreciate you being here to take us through it. My pleasure, Pat. Thanks for having me today. That's our show for today. Tune in next week for more fresh episodes. So that you never miss any of our audio content, follow the PwC Accounting Podcast wherever you listen to your podcasts.

42:41And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com. From Thought Leadership at PwC, I'm Heather Horn. Thanks for tuning in.

43:02This podcast is brought to you by PwC, All Rights Reserved. PwC refers to the U.S. member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com slash structure for further details. This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors, including accountants and lawyers.