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WASHINGTON D.C. – A new wave of 10% tariffs, alongside higher levies on specific countries, is pushing multinational corporations to reexamine their transfer pricing strategies.
The tariffs, which were announced by the White House, are driving companies to find innovative ways to mitigate rising costs. The tariffs could reverse the long-standing incentives for profit-shifting strategies that many corporations had used for years, encouraging them to reconsider pricing arrangements within their supply chains.
Reevaluating Transfer Pricing: A New Tax Dilemma
Transfer pricing—the method by which companies set prices for transactions between related entities—has traditionally allowed businesses to shift profits to low-tax jurisdictions. By using high transfer prices for goods sold from subsidiaries in low-tax countries to U.S. operations, companies could avoid paying higher U.S. taxes.
However, the imposition of tariffs creates an opposite incentive. Increasing transfer prices now increases the value of goods subject to higher tariffs, which could lead to higher tariff payments, thus raising overall costs.
Sonal Majmudar, partner at Mayer Brown, pointed out that while the importer typically bears the brunt of the tariff costs, companies have the ability to “spread the ultimate cost throughout the supply chain by adjusting the price of transfers between related units.”
This shift has prompted corporations to carefully consider their options for mitigating the impact of tariffs through strategic transfer pricing adjustments.
The Conflict: Balancing Tariffs and Tax Exposure
As companies look for ways to reduce tariff costs, they face a significant trade-off. Lowering the price on transfers within the supply chain can reduce the tariff owed on imports, but it can also increase taxable profits in the U.S., potentially resulting in a higher tax bill.
Courtney Breen, senior analyst at Bernstein, explained, “Companies are facing the decision to either absorb the full tariff cost under their current transfer pricing structures or to reorganize and increase tax exposure in an effort to reduce the tariff impact.”
In industries like pharmaceuticals, where tariffs had initially been excluded, there is growing concern that the next round of tariff hikes could affect their operations. The administration is considering a Section 232 investigation into pharma and other sectors, which could introduce new tariffs, further complicating these decisions.
Transfer Pricing Adjustments: Risks and Solutions
Corporations are typically required to value their intercompany transactions at “arm’s length,” meaning as if the transactions were occurring between unrelated parties. However, there is often flexibility in determining transfer prices, with a range of acceptable values. Historically, many companies positioned themselves at the top of that range, but the new tariffs could drive them to the bottom end in an effort to lower tariff exposure.
Breen warned, “Companies should be cautious about making sudden, drastic changes to transfer prices without corresponding operational adjustments. Tax authorities may scrutinize such changes closely, especially if they appear artificial.”
This means that companies will need to carefully consider how to balance their transfer pricing strategies in a way that minimizes tariff costs without running afoul of tax laws.
Advance Pricing Agreements: A Growing Need for Certainty
For multinationals concerned about potential audits, obtaining an Advance Pricing Agreement (APA) from the IRS or other jurisdictions could provide clarity and reduce uncertainty. APAs allow companies to get pre-approval for their transfer pricing methods and can help resolve disputes before they arise.
However, with IRS staffing cuts, particularly in the Advance Pricing and Mutual Agreement (APMA) Program, companies may face delays in obtaining approvals. The addition of tariff-related cases could further strain the program’s resources.
Despite these challenges, Majmudar is optimistic that APMA can handle the increased workload. “I believe the APMA team is experienced and well-resourced, even with potential cuts. They are likely to find ways to manage the higher demand for tariff-related cases.”
Impact on the Pharmaceutical Sector and Other Industries
Pharmaceutical companies, often cited as examples of aggressive transfer pricing, may face heightened scrutiny due to the combination of tariffs and ongoing investigations into profit-shifting practices. In the face of possible new tariffs, many companies are preparing to adjust their strategies.
For sectors outside of pharma, such as technology and consumer goods, the decision on how to adjust transfer prices in light of tariffs remains critical. With supply chains increasingly under pressure, finding the right balance between lowering tariff costs and managing tax exposure will be a defining issue for many global corporations in 2025.
Conclusion: Navigating the New Tariff Landscape
As multinationals navigate the new tariff landscape, their ability to adapt their transfer pricing strategies will be pivotal in mitigating the impact of these tariffs. The increasing complexity of U.S. trade policy is forcing companies to rethink long-established practices, weighing the costs of tariff mitigation against the risk of higher tax exposure.
With the possibility of further tariff increases in specific sectors, businesses must remain agile in their tax planning and operational strategies. Working with tax advisors and utilizing APAs could provide much-needed certainty, but the complexities of balancing tariff costs and tax exposure will require careful thought and planning.
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