Navigating the Tariff Storm: A Guide to Transfer Pricing Adjustments

In the complex world of international business, multinational enterprises (MNEs) face a new and significant challenge: adapting their transfer pricing strategies to a landscape reshaped by tariffs. Transfer pricing—the rules for setting prices on transactions between related companies in different countries—is built on the "arm's length principle." This means the prices should be as if the companies were independent, unrelated parties.

However, as detailed in a recent analysis from Grant Thornton, the imposition of new and fluctuating tariffs, particularly by the U.S., has thrown a wrench into this system. For companies importing goods from a related foreign entity, these tariffs are not just a business cost; they are a direct threat to compliant transfer pricing.

The Core Problem: Tariffs Squeeze Profitability

Imagine a U.S. distributor that buys goods from its related overseas manufacturer. The U.S. company pays a set transfer price for the goods and then an additional tariff to U.S. Customs. This tariff becomes part of the company's inventory cost. As the substantial tariff can instantly turn a profitable distributor into one reporting a significant loss.

For instance, a 25% tariff on imported goods can slash a 5% operating margin into a -15% loss. A company consistently reporting such losses will raise red flags with tax authorities like the IRS, who expect a distributor to earn a reasonable, arm's length profit for its functions and risks. This discrepancy forces the MNE to make a "true-up" adjustment—a correction to the transfer pricing applied during the year to bring the results back within an acceptable profit range.

The True-Up Dilemma and Its Complications

Making a true-up adjustment sounds straightforward, but it's fraught with complexity. To correct the U.S. distributor's loss, the MNE might need to lower the price the U.S. company pays for the imported goods. While this fixes the U.S. profit for tax purposes, it creates a domino effect:

1. Customs Valuation Conflict: The transfer price is often used as the basis for calculating the customs duty. A downward transfer pricing adjustment means the company should have paid less in tariffs, potentially requiring a voluntary disclosure to Customs and Border Protection (CBP) to avoid penalties.
2. International Tax Disputes: Lowering the price for the U.S. importer means reducing the revenue and profit of the foreign seller. The tax authority in the seller's country will likely object to losing tax revenue, especially if they perceive the adjustment as a way for the U.S. to export the cost of its own tariffs. This can lead to double taxation, where the same profit is taxed in both countries.

Strategies for Mitigation and a Path Forward

MNEs are not completely helpless. They can manage the impact of tariffs in a few ways:

• Pass the Cost to Customers: The U.S. distributor can increase its selling price to customers to cover the tariff cost.
• Share the Burden with the Supplier: The MNE can negotiate a lower import price from the related foreign manufacturer, effectively having the supplier absorb part of the tariff cost.
• A Combination of Both: Often, the most practical solution is a mix of slight price increases and slight price reductions.

While these strategies can soften the blow, true-up adjustments are often still necessary. The article advises companies to be proactive. Even if the full impact of 2025 tariffs is muted—due to stockpiled inventory or partial cost-passing—assessing the situation now is critical. A proactive true-up enhances compliance and lays the groundwork for a more stable pricing strategy in 2026.

An Added Insight: The Need for an Integrated Approach

The fundamental lesson here extends beyond tariffs. It highlights a critical flaw in how many companies manage international taxes: the siloing of different compliance functions. Too often, the transfer pricing team, the customs team, and the corporate tax team operate independently. The tariff crisis exposes how dangerous this can be.

A decision made to please the IRS (lowering the import price) can create a violation with CBP and ignite a dispute with a foreign tax authority. True strategic resilience requires an integrated, holistic approach. MNEs must break down these internal silos and foster communication between all parties responsible for cross-border transactions. The goal should be a coherent intercompany pricing policy that simultaneously satisfies arm's length standards, customs valuation rules, and the commercial reality of the business, all while minimizing the risk of double taxation. In today's volatile trade environment, this integrated approach is no longer a luxury—it is a necessity for survival.