Tariffs Underscore the Need to True-Up Transfer Pricing Early

Much of the transfer pricing compliance in the US is performed under an approach referred to as a “lookback test.” Companies set provisional transfer prices throughout the year based on benchmarked results to generate invoices. Before or after year-end, they evaluate the results to see if they need to adjust their transfer pricing to achieve the required arm’s-length result.

It’s generally a best practice to consider adjusting transfer pricing during the year and make “true-up” adjustments before year-end to avoid unnecessary administrative efforts. True-up adjustments made after closing the financial statements for the year will require additional compliance efforts.

The new tariffs threatened and imposed in 2025 create additional uncertainty for transfer pricing compliance. These material new tariffs will affect the profitability of all companies that import affected goods, but companies importing goods from related parties are also required to satisfy transfer pricing rules.

Pricing and Compliance

According to the regulations under Section 482, “the standard to be applied in every case is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer.” This means that all transfer pricing analysis involves “comparables,” in which companies compare the results in transactions between controlled and uncontrolled parties to determine whether the controlled transactions are arm’s length.

Provisional transfer prices can produce results that aren’t arm’s length, and taxpayers are required to report an arm’s-length transfer price in transfer pricing documentation when they file their tax return. The taxpayer should have most of the information about sales price and volume and sales expenses before year-end, with the exception of information about comparables.

Any transfer pricing adjustment made after the closing of the financial statements will create a book-tax difference that must be listed on Schedule M of the tax return. The government also requires an adjustment to conform the taxpayer’s accounts to reflect allocations made under Section 482.

These conforming adjustments may include the treatment of an allocated amount as a dividend, as a capital contribution, or as a repayment of the allocated amount without additional income tax consequences. In many instances, the transfer price also becomes the customs value used for the computation of tariffs under an application of the “transactional” method.

The tariffs borne by a US importer (such as a US distributor) are inventoriable costs that reduce that US importer’s operating income. Due to these interactions, changes in tariffs can make transfer pricing and customs valuation compliance much more difficult and cause procedural issues with Customs and Border Patrol and between the IRS and other tax authorities.

New Tariffs’ Impact

The new tariffs create substantial reliability concerns when applying transfer pricing methods with the US entity as the tested party for transfer pricing and the importer of record for CBP purposes.

As a new, material inventory cost that applies differently based on asset classification and country of origin, the tariffs are likely to be disruptive to transfer pricing analysis.

Provisional transfer prices may not capture all of the impact of tariffs on comparables and the tested party and could require a true-up adjustment to keep tested party results within the arm’s-length range.

An upward transfer pricing income adjustment to raise the US tested party’s results within the arm’s-length range will require a downward customs valuation adjustment. Importers may make a prior disclosure of a violation to CBP to report a previously undeclared value or price adjustment in exchange for greatly reduced customs penalties. The importer also may be entitled to a refund of the tariffs paid.

Under US transfer pricing rules, an upward transfer pricing adjustment to the income of a US related party produces a downward adjustment to the income of the other transacting related party, but the tax authority in the other involved country may not agree to the change.

A US taxpayer can request the IRS’s assistance under a tax treaty to achieve a reduction of income of the related party in a tax treaty country. This treaty mechanism, known as the mutual agreement procedure, allows treaty partners to eliminate double taxation arising from transfer pricing disputes.

Based on informal discussions with some tax authorities, US treaty partners may object to the reduced tax revenue caused by the self-enriching tariffs imposed by the US government.

Shifting the cost of tariffs to other tax jurisdictions through transfer pricing mechanisms will likely lead to some difficult discussions among tax authorities in bilateral negotiations between treaty partners in the MAP or in bilateral advance pricing agreements as taxpayers seek to avoid double taxation.

Looking Ahead

It has long been a best practice to evaluate the transfer pricing results of the tested party throughout the year and make any true-up adjustments before year-end to avoid the additional customs and transfer pricing procedures of post-importation adjustments.

The new tariffs are a material factor that could produce the need for true-up adjustments. Companies should take special care to evaluate tariff impact on transfer pricing results with ample time to make any true-up adjustments before year-end.

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

Steven C. Wrappe is Grant Thornton’s transfer pricing technical leader in its Washington National Tax Office.

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