US Tariffs Mean Transfer Pricing Issues, Risk for Thai Exporters

As Thai exporters face the sharp edge of the Trump administration’s new tariffs, the question of who absorbs the cost—business or consumer—has never been more urgent.

Given that the US is Thailand’s largest export market, with 2024 exports valued at $63.3 billion, the executive order imposing a reciprocal tariff of 19% for imports into the US is cause for concern for Thai businesses. This tariff increases to 40% when the goods are transshipped through Thailand.

While the legality of these reciprocal tariffs is being tested through the US courts, higher tariffs in specific sectors such as aluminum, steel, cars, and parts, aren’t subject to challenge, and the US administration is considering targeting other sectors.

A Thai company selling goods to its related company in the US should assess the financial effect of the higher tariffs on the US and Thai sides. Adjustments may be required to sales pricing to ensure that results are consistent with the expected transfer pricing outcomes.

In the long term, the multinational enterprise may want to consider restructuring the pricing or the supply chain to reduce tariffs.

Eat the Tariffs?

President Donald Trump has suggested that US importers should “eat the tariffs” instead of passing them on to consumers. The allocation of this tariff burden between businesses and consumers is, however, a dynamic one and dependent on economic factors. For example, if consumers can easily substitute goods such as food products, then more of the burden may fall onto the business.

When US importers absorb some or all the tariffs, this forms an additional cost of business and will hurt profits. The US importer will then need to consider whether the foreign supplier would be willing to absorb some part of this additional cost.

In situations where US importers are purchasing from a related party, they need to consider whether the transfer pricing between the entities should be adjusted to ensure pricing remains at arm’s length under the applicable transfer pricing laws in each country.

Transfer pricing laws, including those in the US and Thailand, require that the pricing between related parties be determined as if they are acting independently—at “arm’s length.”

The question then becomes what would independent companies do in similar circumstances? Would a US importer be forced to take the hit or could it pass on the additional costs to the supplier (or another group company) through the transfer price?

Ultimately, this requires consideration of the allocation of functions, risks, and assets between the related parties in the supply chain. The allocation of profits (and losses) should be consistent with the allocation of functions, risks and assets between the parties.

Allocating Risk

An entity that performs a higher level of functions, bears a high risk, and owns valuable assets such as intellectual property, would be expected to have a higher return than a low-risk entity. However, an entity that bears high risk also may incur losses if a risk crystallizes.

Below are two examples illustrating how differences in the relative function and risk profile of entities in the multinational enterprise supply chain may affect the allocation of tariff risk.

A US parent company is purchasing from a related Thai contract manufacturer for resale into the US domestic market. Where a US parent company that is the entrepreneur and owner of the product IP purchases a product from a low-risk contract manufacturer, the US parent company likely will have to bear the financial consequences of the tariff.

The low-risk contract manufacturer would be expected to earn a routine return for its functions typically based on a return on costs. This return normally would be determined with reference to returns that independent comparable companies performing the same or similar activities earn.

In cases where product demand in the US is greatly affected by price increases, and production falls to the extent that revenue doesn’t cover fixed costs, the US parent may need to compensate the Thai contract manufacturer.

A US limited risk distributor is purchasing from a Thai parent company for resale into the US domestic market. In this case, the US limited risk distributor normally would expect to earn a routine return for its functions, given its limited risk profile. Similarly to the contract manufacturer, the returns for the distributor normally would be determined with reference to returns that independent comparable companies performing the same or similar activities earn.

The Thai parent company, acting as entrepreneur and normally benefiting from the residual profits in the supply chain, may need to bear the financial impact of the tariffs through adjustments to the transfer prices of goods sold to the US.

These adjustments may be implemented prospectively through reduced transfer prices or through year-end transfer pricing adjustments. Any price adjustments should be supported by a sales agreement and transfer pricing analysis and documentation while satisfying US customs valuation rules.

Mitigating Impact

While transfer pricing adjustments may be necessary in the short term to ensure compliance, this doesn’t address the overall effect on the multinational’s profitability over the medium to long term. The multinational enterprise may need to consider other options to mitigate the effect of long-term tariffs.

In addition to considering customs planning such as tariff classification, unbundling of non-dutiable components from sales price, the multinational may want to consider dual sourcing or relocating manufacturing bases to take advantage of lower tariff rates.

Restructuring business operations, however, may lead to transfer pricing implications at the time of the restructuring (such as an exit charge) and post-restructuring, which will need to factor into the modeling.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Stuart Simons is managing director with Alvarez & Marsal in Thailand.

Write for Us: Author Guidelines