Liberation Day Tariffs: Navigating U.S. Trade Shifts and Transfer Pricing Challenges

On April 2, 2025, President Donald Trump announced a comprehensive tariff strategy aimed at reshaping US  trade relationships and bolstering domestic industries. This policy introduces a baseline 10% tariff on nearly all imported goods, effective April 5, 2025, with higher “reciprocal tariffs” targeting specific countries based on their trade practices.

Impact on Transfer Pricing and Customs Valuation

Transfer pricing and customs valuation serve distinct purposes but are closely linked. Transfer pricing ensures that intercompany transactions reflect arm’s length conditions for tax purposes, while customs regulations determine the dutiable value of imports. Since transfer prices often serve as the customs value, they directly affect tariff calculations. Any inconsistencies between tax and customs reporting can trigger audits by tax and customs authorities.

While transfer pricing allows for flexible valuation methods, customs rules favor a strict hierarchy, prioritizing transaction value. This difference can create challenges when adjusting prices for tariff considerations.

Tariffs and Intercompany Pricing

The responsibility for paying tariffs generally falls on the importer of record, determined by contractual terms. Companies must assess whether existing contracts allocate tariff-related risks appropriately and whether adjustments are necessary. If prior agreements did not anticipate significant tariff changes, businesses may need to renegotiate terms to reflect economic realities.

For example, if a foreign manufacturer sells goods to its US subsidiary, the US entity bears the tariff cost. While parties may seek to share this burden by adjusting transfer prices, tax and customs authorities may scrutinize such adjustments, particularly if they lower taxable income in the exporting country. Furthermore, post-importation price reductions (e.g., year-end transfer pricing adjustments) may not be accepted by customs authorities unless they comply with relevant guidelines.

Where contracts lack explicit risk-sharing terms, companies must determine a reasonable allocation based on a functional analysis of their supply chain. The ability to pass tariff costs onto buyers depends on market conditions—if demand is high, sellers may transfer costs, but in weaker markets, they may have to absorb them to stay competitive. This allocation is subject to regulatory scrutiny.

Tariff Volatility and Comparables in Transfer Pricing

Tariffs add complexity to transfer pricing benchmarking. Comparability in arm’s length transactions becomes more difficult as tariffs disrupt pricing structures. Companies must reassess whether their existing comparable data remains valid, considering geographic and industry-specific impacts. The financial data from this period may not be reliable for future benchmarking, as tariff costs may lead some companies to absorb the expense while others pass it on, distorting profit margins.

Tariff Mitigation Strategies

To minimize tariff impacts while maintaining compliance with transfer pricing rules, businesses may consider:

• Adjusting intercompany agreements to account for tariff costs appropriately.
• Reallocating tariff burdens between related parties where justifiable under market conditions.
• Unbundling pricing for goods and services to isolate tariff-sensitive transactions.

However, companies must ensure that any pricing changes are defensible under arm’s length principles and not merely short-term responses to tariff changes. Tax authorities will likely scrutinize adjustments, making documentation and consistency between transfer pricing and customs reporting essential.

Conclusion

The volatile trade environment between the U.S. and other countries poses significant challenges for transfer pricing compliance. Companies must carefully assess how tariffs impact intercompany pricing, contractual risk allocation, and benchmarking. Proactive planning and alignment of transfer pricing and customs policies are essential to mitigate risks and avoid potential disputes with tax and customs authorities.