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03/21/2025
Understanding transfer pricing and new U.S. tariffs on goods importation
Multinational enterprises must understand the possible impact of proposed tariffs on strategic plans and the related risks on commercial goals.
The new U.S. administration has communicated the U.S. government is adopting a global tariff strategy and imposing additional tariffs on goods imported into the United States from Canada, Mexico, and China. As a result, although tariffs are not yet finalized, multinational enterprises (MNEs) must understand the impact on strategic plans and the related risks on commercial goals. MNEs will need to be ready operationally to make the necessary changes to execute on strategic plans, drive business value, manage compliance risks, and optimize cash flow and effective tax rates.
Illustrative example of tariffs and transfer pricing – foreign headquartered company
This table is a simple example presenting the impact of new tariffs on intercompany arrangements within a MNE group. The example assumes an arm’s length return for U.S. distribution of (five) 5% operating margin.
Column A presents the current state prior to tariffs and the U.S. distributor earns a return of 5%, which is considered an arm’s length return.
Column B presents the revised financial results due to the application of a 25% tariff on the cost of goods purchased from its affiliate.
The impact is that cost of goods increases to $81 from $65 resulting in a decrease to the U.S. distributor’s targeted operating margin to negative 11% (i.e., below an arm’s profit assuming operating expenses remain unchanged).
|
Column A Distributor P&L (pre-tariff) |
Column B Distributor P&L (post-tariff) |
|
| Sales | $100 | $100 |
| Cost of goods | (65) | (65) |
| Tariff 25% | N/A | (16) |
| Gross profit | 35 | 19 |
| Gross margin | 35% | 19% |
| Operating expenses | 30 | 30 |
| Operating profit | 5 | (11) |
| Operating margin | 5% | (11%) |
As a result, MNEs need to consider the following potential business/operational changes:
- Understand the supply chain and values of costs by duty categories and the impact of tariffs;
- Understand if costs can be passed on to customers and impact on profits throughout the supply chain; and
- Understand the impact on volumes of sales in the United States and impact on costs and profits.
Transfer pricing impacts include:
- Transfer pricing adjustments – Consider reducing cost of sales to U.S. distributor to bring them back to routine/policy profit levels shifting the risk of loss to the foreign party and whether it aligns with transfer pricing policies. Ancillary impacts include an important factor of performance evaluation of the entities and management team to keep them motivated to drive the group’s commercial strategies.
- Benchmarking – The implementation of tariffs and impacts on comparable companies may make it difficult in assessing comparability factors for selecting comparable companies in a benchmarking analysis (i.e., assuming a profit-based method to benchmark the arm’s length financial returns of a U.S. distributor). The need to select comparable companies that experience the same conditions related to tariffs may be more difficult to identify, and financial results may need to be adjusted for the impact of tariffs, which will be more challenging or may not be possible to perform.
Transfer pricing call to action
MNEs are modelling out the impact of the tariffs. Those responsible for the transfer pricing function within MNEs need to have a seat at the table during these exercises and discussions because they play an important role in analyzing and modelling the global and regional transactional impacts of the tariffs and therefore provide key strategic advice in decision-making to manage compliance risk and drive business value. Key concerns that MNEs should also think through include:
- Modeling out impacts to transfer pricing and monitor intercompany pricing results.
- Developing supportable positions to defend transfer pricing adjustments.
- Analyzing supply chain costs and identifying areas to strip out costs resulting in lower costs for value for duty purposes.
- Consider converting routine distribution operating models to limited risk distribution models.
- Consider stopping the importation of finished goods and performing assembly within the U.S. thereby reducing the value for duty purposes.
- Consider near/onshoring IP to the U.S. and move to make/sell operating models within the United States.
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.