Long-Term Tariffs Make Transfer Pricing Adjustments a Priority

Although some uncertainty remains, tariffs appear here to stay. Multinationals therefore must plan for long-term tariffs, including by adjusting their transfer pricing policies.

Luckily, we have more information now than we did four months ago. Since early April, importers generally have faced 10% tariffs on imports, with higher rates on imports from certain countries (such as China, Canada, and Mexico) and on certain products (such as automobiles, steel, aluminum, and lumber).

For transfer pricing purposes, the profits of US importers often are benchmarked to the profits earned by a set of comparable companies with similar functional and risk profiles.

Therefore, public companies’ recently released second quarter results give some preliminary insights into the economic effects of tariffs that can help multinationals shape their internal pricing policies for import transactions.

Additional quarterly data released throughout 2025 potentially will offer more material insight into how companies should contemplate the defensibility of their current transfer pricing policies.

We reviewed the latest fiscal quarter data of publicly traded US distributors—those organized under Standard Industrial Classification Division F: Wholesale Trade. These companies often appear in benchmarking sets for US routine distributors that import products from foreign entrepreneurs.

We observed the following trends:

• Of the distributors of durable and non-durable goods analyzed, approximately half showed decreases in gross margin for the latest quarter, relative to the previous three quarters.
• Importers of apparel (SIC code 513) showed the greatest average decrease in gross margins over the comparison period.
• Companies in the lumber industry (SIC codes 5030 and 5031) also showed a marked decrease in gross margins over the same comparison period.

This preliminary data reveals that many distributors are seeing lower gross margins, which will lead to lower operating margins unless these distributors can sufficiently reduce operating costs. There are several possible reasons for this:

• Even if a distributor is able to fully pass tariffs to customers, the distributor’s margin will decrease. The numerator of the gross margin fraction (profits) remains the same, but the denominator (net sales) increases by the amount of the tariff passed on to customers.
• If a distributor bears the risk of tariffs vis-à-vis the companies that it imports goods from and the distributor can’t fully pass the tariffs on to customers, the additional tariff expense will increase the distributor’s variable costs, again reducing its gross margin.

The preliminary data suggests three key takeaways for transfer pricing practitioners.

Monitor the results of companies in your comparable sets. Ideally, this should be done on a quarterly basis.

In most instances, the public Securities and Exchange Commission filings of the analyzed distributors noted that the impact of increased tariffs on their business and financial results has yet to be determined, placing further emphasis on the importance of forthcoming quarterly data.

The SEC filings of some of these entities point to potential tariff mitigation strategies, such as diversification of products and supply chains, that could mute the future impact of tariffs. However, the most recent quarter may not fully reflect the impact of tariffs for two reasons.

First, current and future tariff rates are in many cases higher than the rates applicable last quarter. Second, the preliminary data may include prices for inventory purchased before the tariffs took effect—many companies bought additional advance inventory as a tariff mitigation strategy.

Tariffs likely will have the greatest effect on operating margins, compared with other profit level indicators. If the margins of publicly traded US distributors remain at lower levels due to the tariff-affected environment, use of operating margin as the profit level indicator may help to justify lower margins for related US distributors.

In some cases, however, this may be undesirable or create too much uncertainty. In those cases, consider using an alternative profit level indicator—such as the Berry ratio (markup on operating expenses) or return on assets—and applying asset-intensity adjustments to enhance comparability.

Foreign tax authorities may challenge transfer pricing policies. Policies that pass all or most of the tariff liability to the foreign entrepreneur are most likely to be subject to scrutiny by foreign tax authorities. Bilateral advance pricing agreements are one way to achieve certainty on pricing in both the exporting jurisdiction and the US.

Tariffs may also affect compliance with existing advance pricing agreements, causing taxpayers’ results to fall outside of the agreed upon profitability ranges. Contact the IRS Advance Pricing and Mutual Agreement program and the foreign competent authority with updated financial projections, updated comparable set data, and a proposal for the allocation of tariffs among related parties.

Tariffs are significantly affecting both unrelated-party and related party transactions, and the effects on unrelated-party transactions provide real-world comparable data that can be used to update related-party transfer prices.

We recommend that tax teams work with colleagues to obtain updated financial projections including tariff costs, changes to sales revenue (including any tariff costs passed to customers), and current intercompany allocation policies.

These internal projections can be compared with now-available comparable data from recent public company earnings reports to determine if real-time pricing adjustments are warranted.

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

Lauren Ann Ross is special counsel at Covington & Burling, focusing on tax controversy matters and transfer pricing issues.

Brian Vincent is a principal at Ryan specializing in international transfer pricing, audit and controversy defense, and tax-efficient supply chain planning.

Write for Us: Author Guidelines