Transfer Pricing Agility Offers a Shield Against Trump’s Tariffs

The ability of multinational businesses to manage and mitigate the impact of tariffs on their operations will play a critical role in determining corporate success or failure. Businesses bringing components into the US from related parties under transfer pricing arrangements may struggle to adjust.

In many cases, long-term contracts set the prices between US businesses subject to the new tariffs and their customers. This could make it difficult to recover costs in the short term. Affected businesses should develop and implement strategies to adapt.

Related parties are required to use transfer pricing principles to value products and components moving across international borders during manufacturing and distribution. The costs and related income assigned to each country are based on the activities, assets, and risks that each party brings to the process—and are compared to an “arm’s-length” standard that measures how two unrelated parties would value the same transaction.

To the extent that one entity is engaged in more activity, has more assets, or bears more risk, it may be entitled to more of the profits, creating more taxable income in its tax jurisdiction.

In a low-tariff landscape, multinationals typically benefit from concentrating activities in lower-taxed countries. The imposition of tariffs at the US border could upend that calculation.

Multinationals that transfer components and products to related parties in the US may want to take steps to reduce the import value, or the price at which goods are transferred into the country and the value used to calculate the tariff.

The more a multinational shifts the functions, assets, and risks associated with production into the US, the more it may be able to reduce the import value and the related tariff. The planning process for a tariff response should include:

A supply chain review and potential realignment. Taxpayers and their advisers should ask whether it’s feasible to set up US operations that could perform more of the value-add assembly or even full production in the US. They also should ask if it’s cheaper to find an unrelated US supplier of components or certain inputs rather than rely on the related party whose products are subject to tariff.

An examination of entity roles. Historically, many multinationals have operated the US arms of their businesses as low-risk distributors of their products. If there’s no practical way to realign the supply chain, particularly in the short term, reevaluating the relative risks borne by US and non-US entities could create legitimate grounds to bear additional costs in the US and reduce the import value subject to tariff.

An evaluation of intercompany agreements. Determine whether the business has agreements that accurately reflect the current state of its cross-border transactions. If the business hasn’t updated the agreements to reflect increased assets, activities, or risks taken in the US for supply chain realignment, an update can help support the lower intercompany pricing.

If the business hasn’t formalized its cross-border activities in agreements at all, documenting the factors that determine the intercompany pricing subject to tariffs is crucial.

A review of customer pricing. Review whether the tariff can be passed on to the customer, in whole or in part,or whether it will have to be borne by the US arm of the business or the non-US related entity.

Pricing structures in existing contracts may limit some US manufacturers and distributors from raising prices to pass tariffs on to customers. Ask if this could rise to a “force majeure” event in its customer contracts on the basis that these tariffs constitute an extraordinary event that makes performance impossible.

A court may have to decide the question, so consider it carefully rather than applying as an initial tariff response plan.

More frequent analyses of arms-length transactions. The arm’s-length determination that supports transfer pricing involves an examination of how independent companies are operating in the market. This typically involves reliance on annual reports and annual financial data.

The market has responded so quickly to the mere discussion of tariffs that affected businesses might be better served in the months ahead by more timely updates to their transfer pricing analyses.

Active monitoring of quarterly public filings in the remaining months of 2025 might provide real-time data about the impact of tariffs on arms-length transactions between unrelated companies that could support tariff-reducing transfer pricing adjustments.

Multinational businesses need to monitor not only tariff policies but also the broader spectrum of tax proposals under consideration. The more effort executives put into planning for probable scenarios, the better positioned their businesses will be for fast, effective responses to the inevitable changes.

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

Author Information

Lara Witte is the transfer pricing practice leader at Plante Moran’s Southfield, Mich. office.

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