Refunds for tariffs paid under the International Emergency Economic Powers Act (IEEPA)—which were invalidated by the Supreme Court—are simple in one regard. U.S. Customs and Border Protection (CBP) refunds duties only to the Importer of Record (IOR), whose name and identification appear on the original import papers. From a legal standpoint, this approach is straightforward. From an economic standpoint, however, it is often incomplete at best and unjust at worst.
At its core, an IEEPA tariff refund is not new income--it is the recovery of a cost that should never have existed. In many supply and value chains, the IOR did not ultimately bear the cost of the IEEPA tariffs. Those costs were commonly embedded in downstream pricing, absorbed by entrepreneurial entities through reduced margins, or by end consumers through higher prices. Shouldn’t the income from refunded duties therefore be allocated in a manner that equitably reverses the actual economic burden of the tariff, rather than simply accruing to the first participant in the payment chain – often a company that did little more than put its name and account number on a piece of paper?
In some contexts, this is happening naturally through market forces such as supplier/purchaser bargaining power. The refund flows to the point of the supply chain with the highest leverage – for example, a large downstream purchaser who represents 75% of an IOR supplier’s sales is well-placed to demand full passthrough reimbursement of tariff costs, even without legal rights to the refunds.
All too often, however, differences in administrative capacity and supply chain leverage lead to a mismatch between the tariff cost and the refund income. Consider a relatively simple scenario in which a U.S. e-commerce platform fulfilled an order for a Chinese-manufactured product through a third-party logistics company which served as IOR. The IOR passed all IEEPA tariffs on to the e-commerce company, which then passed those on entirely to the end customer. Mechanically, only the logistics company may apply for and receive the refund. Depending on its proactiveness and bargaining power, the e-commerce company may or may not receive any of these funds. At the end of the chain, it is almost impossible to imagine an individual customer, the ultimate bearer of the economic tariff cost but with scant resources and bargaining power, receiving any retrospective refunds from the e-commerce firm.
How to solve this tangle of matching passthrough costs with subsequent refund income? In theory, income‑allocation principles drawn from transfer pricing could provide a template. It is very common in multinational groups for one entity to bear external costs (say, a software license) which are actually for the benefit of other group affiliates. The costs are recharged in proportion to the benefit received, so that the economic cost of the license is borne by the benefiting entity.
The tariff refund income should generally follow the same economic pathway in reverse. Refunded duties should be passed back down in the same way that a refunded license fee would not simply sit with the contracting entity in the transfer pricing example, but flow back to the entity who ultimately assumed the charges.
In practice, of course, identifying the ultimate bearer of tariff costs can be fiendishly difficult, especially in cases where tariff expenses were passed through indirectly or partially. A true "arm's length” allocation analysis in these cases could require PhD-level economic modeling and scenario analysis. The refund mechanism itself is imperfect, with phased batches of refunds, as well as fiscal year timing mismatches causing accounting headaches. Nonetheless, it is hard to swallow the haphazard legal flows of the refunds, which will inevitably redirect billions of dollars of income in favor of IORs who claim them and away from downstream firms - and end consumers - who paid the real tariff costs. Furthermore, and somewhat ironically, vertically-integrated supply chains which exist within a multinational enterprise will be required to undertake this exercise under transfer pricing rules.
Regardless of a legal mandate to do so, horizontally-integrated supply chain groups would benefit ethically and economically by spending some time considering the income allocation question with their transfer pricing hats on.
