The introduction of new tariffs by the US Federal administration is expected to significantly affect transfer pricing strategies for multinational corporations. While these tariffs were initially primarily focused on countries like China, Mexico, and Canada, their implications are now extending worldwide. Multinational corporations must now consider how these tariffs will impact their intercompany transactions, customs compliance, and overall financial strategies.
Global trade is shifting, and multinational corporations are at a crossroads. With potential US tariffs poised to reshape cross-border trade, the implications for transfer pricing policies and intercompany transactions are becoming increasingly significant. How will businesses adapt to this evolving landscape?
Understanding Transfer Pricing and Tariffs
Transfer Pricing
Transfer pricing refers to the prices at which goods, services, and intangible assets are transferred between related entities within a multinational corporation. These prices are essential for determining the allocation of taxable income between jurisdictions. Typically, transfer prices are set based on the arm's-length principle, meaning they should reflect the price that would be charged in a transaction between unrelated parties.
Tariffs 
Tariffs, on the other hand, are charges imposed on imports, which directly affect the cost of goods sold (COGS), potentially the sales price between entities and to the consumer and, consequently, the profitability of companies that import goods from foreign subsidiaries. For multinational companies, tariffs can significantly distort existing transfer pricing models, as the tariffs must be factored into the intercompany price to ensure compliance with tax regulations and profits split between jurisdictions.
Example: The Impact of a 10% Tariff (U.S. Entity Perspective)
A simple example helps illustrate the impact of a new tariff on intercompany transactions. Suppose a distributor in the U.S. imports goods from its related Canadian subsidiary. Without a tariff, the distributor might generate a profit margin of 15 per cent. However, if a 10 per cent tariff is imposed and not passed through to customers, the distributor's cost increases, pushing its profit margin from a positive 15 per cent to a 9 per cent. The Canadian exporter would not suffer a reduced profit on the single transaction if pricing remains at pre tariff levels (this ignores possible sales volume impacts). This situation/scenario not only reduces profitability of the US entity, but also complicates the transfer pricing analysis.
Possible Mitigation StrategiesÂ
In response to tariffs, companies attempt to use operational and pricing strategies to mitigate their impact, though these may be ineffective against the tariffs:
- Reduce pricing to US subsidiary to justifiably re-balance profits earned in each jurisdiction. This also has the impact of reducing tariff charges.
- Passing costs to customers: Importers could raise prices to offset tariffs, but competition from untaxed products could limit this strategy.
- Stockpiling inventory or deferring deliveries: Importers purchased goods ahead of tariff implementation or delay order fulfillment hoping tariffs are short-lived, but these are temporary and risky solutions.
- Operational changes: companies who are flexible may change suppliers or move supply chains to avoid tariff impact.
Example: Illustration of Mitigation – Lower intercompany price and lower price to consumer
Navigating Tariffs with Strategic Precision
As tariffs reshape the financial landscape for multinational corporations, companies must reassess their transfer pricing strategies to remain compliant with both tax and customs regulations. By factoring tariffs into transfer pricing models, businesses can mitigate potential costs and group profit impact while ensuring that their intercompany transactions reflect market realities.
Navigating the complexities of tariffs and transfer pricing requires expert guidance. Crowe Soberman can help your business stay compliant, optimize costs, and protect profitability. Contact us today to refine your strategy and secure your financial future.
This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.
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Adrianne Markell
Partner,
Valuations | Forensics | Litigation
Adrianne Markell Professional Corporation