In a global context of geopolitical tensions and growing economic rivalry among powers, tariffs have returned to prominence as an instrument of trade policy. Recently, the United States announced new tariff hikes on strategic products from China, such as steel, semiconductors, and electric vehicles, with some rates exceeding 100%. These measures aim to strengthen domestic industry, reduce technological dependence, and protect economic security, whereas China is evaluating similar countermeasures. This dynamic intensifies global supply chains and has created an uncertain environment for multinational corporations with cross-border operations.
One of the issues most affected by this new wave of protectionist policies is Transfer Pricing, i.e., the values assigned to transactions among related companies in different jurisdictions. Tariffs directly modify the tax base used to value such transactions, affecting the tax burden, profit margins, and tax planning. In this situation, multinationals must understand the effects of these changes on their operating structures and adopt strategies to ensure regulatory compliance and financial sustainability.
Tariffs and Their Effects on Transfer Pricing
Tariffs are calculated on the transaction value declared when importing goods. For related party transactions, this value corresponds to the transfer price set internally. Therefore, any adjustment to this price directly affects the amount of tariffs payable.
In scenarios of high tariff burden, a strategy considered by some companies is to reduce the transfer price to decrease the tax base of tariffs. Conversely, this practice generates a knock-on effect by reducing the cost of imported goods, the buyer’s (subsidiary’s) profit increases, which raises its income tax burden in the importing country, which poses a fiscal dilemma since the benefit of paying lower tariffs could be canceled out by an increase in corporate tax.
This conflict becomes more evident if we consider tax rates: the U.S., 21%, and China, approximately 25%. A hasty decision to modify transfer prices may then affect the overall tax efficiency of the group and generate risks vis-à-vis tax and customs authorities.
Regulatory Challenges: The Arm’s Length Principle Pressured
The Arm’s Length Principle, adopted by the OECD and most tax jurisdictions, states that related party transactions should reflect conditions similar to those of independent companies. This rule becomes the normative cornerstone for Transfer Pricing audits.
When a multinational reduces transfer prices to pay lower tariffs, it must support this decision-making with solid economic arguments. Otherwise, it could face tax adjustments, penalties, or even avoidance charges. For example, the authorities could argue that the price does not reflect the actual product value if it significantly deviates from market comparables.
Likewise, there is a high risk for customs, which, unlike the tax authorities, focuses on ensuring that the declared import value is not artificially low. In jurisdictions such as the U.S., U.S. Customs and Border Protection (CBP) audits import values to avoid loss of duty import revenue. Companies must, therefore, find a balance between tax and customs compliance, which can be complex due to the difference in objectives between the two authorities.
Effects of Tariff Hikes on NQFs’ Functions, Risks, and Assets
The tariff increase also has structural effects on the Transfer Pricing analysis. This type of analysis is not only limited to the value of transactions but also evaluates the functions performed by each entity, the assets used, and the risks assumed. When tariffs affect the flow of goods or increase operating costs, the distribution of risks and the economic function may change among group entities.
For example:
- A subsidiary that previously acted only as a limited distributor may begin to take on considerable financial and operational risks due to higher tariffs.
- The need to reorganize supply chains may lead to the relocation of key functions, such as manufacturing or logistics, to tax havens.
- Previous passive entities may become decision centers to mitigate tariff effects.
These changes must be reported and reflected in the functional analysis. Otherwise, they could generate inconsistencies, leading to questioning by the authorities.
Strategies to Mitigate Risks in a Volatile Tariff Environment
Given this scenario, multinational companies must adopt a comprehensive and coordinated strategy among their tax, legal, logistics, and compliance departments. Some recommended measures include:
1. Continuous Review and Update of Transfer Pricing Policies
Policies should be adapted to new risk scenarios. Functional analyses and the selection of the valuation method must be reviewed to reflect the recent business realities properly.
2. Strengthening Documentation and Pricing Studies
Transfer Pricing documentation must analyze the effects of tariffs on profitability and support any adjustments implemented, in addition to comparables reflecting similar conditions regarding tariff exposure.
Conclusion: A Multidisciplinary Approach to Global Challenges
The interaction between tariff policies and Transfer Pricing has complicated tax management for multinational corporations. In a global environment where protectionist measures can arise very soon, companies must implement a proactive approach, integrating tax, customs, and strategic analysis tools.
Adjusting transfer prices is no longer a purely tax decision but involves considering customs implications, effects on operating profitability, and possible challenges from multiple authorities. Transparency, thorough documentation, and alignment with the Arm’s Length Principle are the cornerstones for successfully meeting this challenge.