The New Tariff Landscape Requires Strategic Transfer Pricing Tools

The recent increase in U.S. tariffs on imports has introduced significant challenges for multinational companies, particularly with transfer pricing. These changes are reshaping the way companies manage intercompany transactions and comply with customs and transfer pricing regulations.

Impact of tariffs on transfer pricing policies

Transfer pricing, which refers to the pricing of goods, services, and intangible assets between related entities within a multinational corporation, can be a powerful tool to mitigate tariff impacts. 

Higher tariffs mean companies must adapt their transfer pricing policies to account for increased costs associated with importing goods. This involves implementing pricing changes to comply with both customs and transfer pricing rules. 

For example, a U.S. distributor importing goods from a foreign affiliate must adjust transfer prices to reflect the increased costs due to tariffs while maintaining compliance with the arm's length principle.

Challenges in supply chain management

Changes to supply chains or customs valuations to mitigate the effect of tariffs can have significant transfer pricing and other tax implications. Companies must evaluate these changes carefully to comply with both sets of rules and limit double taxation or other tax risks. This may involve adjusting the allocation of costs and profits among different entities within multinational groups.

Retroactive adjustments to pricing of intercompany transactions 

If a company's actual results from intercompany transactions during the tax year are not arm's length, they are required to make retroactive adjustments to the transfer prices paid during the year. This helps keep the reported results on the tax return consistent with the arm's length principle. 

Companies can reduce compensating adjustments by forecasting and monitoring actual results and making pricing adjustments, as necessary. Further, updating the transfer pricing planning can impact income tax returns in the United States. 

An amended return with reduced taxable income resulting from such transfer pricing adjustment can’t be done. Hence, it’s imperative the adjustments are made within the given year. 

Effect of tariff increases on intercompany transactions

Tariff increases will likely lead to substantial changes in already complex intercompany accounting processes. Companies must decide whether legal entities in the United States will absorb the costs or update their policies so costs are passed back to the exporter. This may affect the allocation of profit among group entities. 

Planning steps to consider include:

• Exclusion of management, other service fee, royalty, commissions, etc. from pricing of the products
• Advanced pricing agreements with tax authorities to negotiate the price of products and the policy used for the same
• Reconsider the current transfer pricing policy
• Reconsider the comparable companies selected
• Adjusting the price of transaction to be at arm’s length but more favorable in order to manage tariffs

Efficient calculation of customs value

Other tools to manage tariffs include strategic and appropriate declaration of the price of transaction (i.e., excluding non-dutiable charges from the customs value).

When importing goods, it’s essential to understand which charges are considered non-dutiable by customs authorities. These charges can be deducted from the customs value, potentially reducing the overall duty liability. Common non-dutiable charges include:

• Fees paid to distributors for exclusive rights to sell products in a specific region
• Fees paid to agents who assist in purchasing goods
• Foreign inland freight, international freight, and insurance costs can be deducted from the transaction value if certain requirements are met
• Fees related to the origin of the supply chain, such as sourcing and procurement costs
• Costs associated with storing goods in warehouses before they are imported
• Fees for inspecting and testing goods to meet quality standards
• Costs for specific types of packaging that are not part of the dutiable value of the goods can be deducted
• Some taxes not related to the value of the imported goods
• Post importation adjustment such as reasonable transfer pricing adjustment may be entitled to duty refund; this can be done by taking part in the Customs and Border Protection’s reconciliation program

By accurately identifying and deducting non-dutiable charges, companies can manage their duty liability more effectively and achieve substantial savings in their import costs.

How CLA can help you use transfer pricing to counteract tariffs 

Transfer pricing and customs management are effective strategies for multinational companies to uncover tax and tariff savings opportunities while maintaining compliance with regulations.

CLA has the experience and knowledge to help you handle tariffs and implement reasonable and defendable policies. Our approach includes assessing the impact on operations, exploring alternative suppliers, and understanding the potential impact of tariffs on the economy. 

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