How U.S. Tariffs Affect Your Transfer Pricing Strategy

Last week, President Donald Trump unveiled tariffs affecting more than 180 countries, including all of the country’s major trading partners. Their effects are wide-ranging, making businesses rethink customer pricing, supplier relationships, and more.  

Multinational companies with a U.S. presence will need to revisit their transfer pricing strategies to ensure continued compliance amid a rapidly evolving economic landscape. As in many areas of tax, proactive transfer pricing planning can help leaders make more informed business decisions. 

How Tariffs Affect Transfer Pricing 

Let’s briefly revisit U.S. transfer pricing rules. According to the IRS and U.S. Treasury, transfers of goods, services, and assets between related companies must be at arm’s length. In other words, related parties must transact with each other as if they’re unrelated. U.S. transfer pricing rules seek to prevent related companies from manipulating prices or contract terms to avoid U.S. taxation. 

U.S. regulations provide a variety of methods to determine an arm’s length price for related-party transactions, and companies can choose the most reasonable method based on their own judgment. Multinational companies often engage experts to conduct transfer pricing studies to develop and document an appropriate transfer pricing strategy. 

Transfer pricing strategies need to be reviewed whenever there’s a change in the cost of goods, services, or assets moving across borders. Of course, recently announced tariffs will increase the cost of goods coming into the United States. 

Cost increases are relevant to transfer pricing for many reasons. Most importantly, most U.S. transfer pricing methods base their arm’s length assessment of a U.S. taxpayer’s transfer pricing policies on profits earned—either on a transactional or entity-level basis. Substantial tariffs can significantly affect profitability, which can cause existing transfer pricing strategies to become noncompliant with U.S. transfer pricing regulations. 

Example: Effect of Tariffs on Transfer Pricing 

Let’s say you lead the U.S. subsidiary of a manufacturingcompany based in a foreign country. The U.S. subsidiary imports electrical components from its foreign parent and sells it in the North American market.  

Before the tariff went into effect, the U.S. subsidiary paid its foreign parent $200 per palette of goods. That $200 figure was based on the results of a transfer pricing study that compared the profits of independent companies with similar function and risk profiles to the U.S. subsidiary. 

Let’s further assume a 15% tariff applies to goods imported from the parent company’s country, resulting in an additional $30 of cost for the U.S. subsidiary on every palette received from its foreign parent. The U.S. subsidiary’s resulting profit margins will be depressed, potentially to the extent that the company may no longer be profitable (which will almost certainly cause the U.S. subsidiary to run afoul of U.S. transfer pricing regulations). Further, the foreign parent may not be able to, or wish to, bear a portion of the tariff amount in order to mitigate the impact on the U.S. subsidiary’s results. 

Companies in this position will need to renegotiate transfer prices for goods that have suddenly gone up in price as the result of U.S. tariffs. In addition to deciding how much of the cost to pass onto customers, multinational companies will also need to figure out how, if at all, tariff fees will be shared between U.S. and foreign related entities.  

Any resulting change in pricing policies between related parties will need to be reflected in updated intercompany agreements. 

Tariffs and Transfer Pricing: It Pays To Be Proactive 

We’re unsure how long U.S. tariffs will last and at what rates. As the United States’ medium- to long-term tariff strategy becomes clearer, multinational companies with a U.S. presence should continue to closely monitor the developments and revise their transfer pricing policies appropriately to mitigate the risk of falling out of arm’s length compliance under the U.S. transfer pricing rules. 

On a related note, duties on goods are paid based on their declared value at import to U.S. Customs and Border Protection (CBP) regularly throughout the year. Companies that wait to respond with pricing adjustments to account for the impact of the tariffs imposed run the risk of overpaying U.S. duties for imported goods. The procedures for claiming a duties refund is an involved process and should be avoided whenever possible. 

Companies that revise their transfer pricing arrangements proactively before paying import duties will: 

• Mitigate the risk of overpaying duties, 

• Better position themselves to react to further revisions in the tariffs imposed, and 

• Equip themselves to make more informed business decisions in the currently dynamic economic environment. 

Smith + Howard: Advisors in Transfer Pricing 

While President Trump has paused all reciprocal tariffs for 90 days (as of April 9, 2025), multinational companies with a U.S. presence should proactively review their transfer pricing arrangements to stay nimble in this dynamic economic environment. With so many compliance rules and business considerations, it’s important to work with transfer pricing advisors that you trust. 

Smith + Howard’s Specialty Tax Services team advises clients with cross-border operations on how best to structure transactions to comply with local tax laws and optimize their financial position. Advisors stay on top of legislative, regulatory, and executive changes to help their clients succeed. 

Contact a Smith + Howard Specialty Tax Services advisor to learn more.