Tariffs and Transfer Pricing for Manufacturers

In an era of renewed trade tensions and rising tariffs, global manufacturers are under pressure to reevaluate not just where they source their materials, but also how they price intercompany transactions. For companies with international operations, transfer pricing—the method used to value transactions between related entities—has become an increasingly complex area, especially as tariffs distort traditional cost structures.

Tariffs are, by design, a cost of doing business across borders, but they can also complicate how multinational manufacturers report profits, allocate expenses, and remain compliant with tax regulations in multiple jurisdictions. When left unexamined, the intersection of tariffs and transfer pricing can lead to compliance risks, margin compression, and disputes with tax authorities.

When one affiliate of a company sells goods to another across a national border, the transfer price must reflect an arm’s-length value—what two unrelated parties would pay for the same transaction. But tariffs can inflate the cost of goods entering a country. For example, if a U.S. manufacturer imports components from its own subsidiary in China, and those goods are subject to a 25% tariff, how should the transfer price be adjusted? Should the tariff be built into the transfer price, or treated as a separate cost borne by the importer?

There’s no one-size-fits-all answer. The approach depends on the company’s transfer pricing policy, the functional profile of each affiliate (e.g., limited-risk distributor vs. full-risk entrepreneur), and jurisdictional expectations.

Customs authorities and tax authorities often have conflicting goals. Customs wants to maximize import duties, while tax authorities want to prevent base erosion. A price that seems acceptable to one may raise red flags for the other. Manufacturers should assess whether their transfer pricing documentation aligns with customs declarations—and if not, where adjustments or reconciliations may be necessary.

Rising tariffs can affect operating margins, especially for entities whose profitability is benchmarked using comparables. If tariffs reduce margins in low-tax jurisdictions, the tax authority may question whether the company is shifting profits intentionally. Manufacturers should revisit their profit allocation models to reflect the new economic reality.

Some companies apply year-end true-ups to their transfer pricing. However, if tariffs are causing major cost shifts throughout the year, it may be worth considering real-time adjustments to avoid large reconciliations—or scrutiny—later.

This issue doesn’t just belong to tax or finance. Legal, supply chain, and operations teams should also understand how tariffs impact pricing and profit allocation. A cross-functional approach can help mitigate surprises and ensure consistent policy execution.

Tariffs aren’t just a trade issue—they’re a transfer pricing issue. As global tax authorities grow more sophisticated, manufacturers must ensure their intercompany pricing strategies reflect the economic substance of their operations, even in a volatile trade environment.

Connect with CSH and ensure you have the right strategies in place to maximize your situation. Proactive planning now can help avoid costly audits and penalties later.