Implications of and potential mitigation strategies for U.S. and Global Tariff Changes from tax and transfer pricing perspectives

Overview of Tax/Transfer Pricing Challenges

The recently proposed increases in US tariffs on imports from Canada, Mexico (albeit currently paused) China and the EU, among others, introduced by the Trump administration, and the anticipated response from those jurisdictions impacted by the proposed US tariffs will have several transfer pricing implications which multinational enterprises (MNEs) should consider. These tariffs can lead to increased costs, potential double taxation issues, and challenges in maintaining compliance with the arm’s length principle when goods are transferred across the border between related enterprises.

 A key question to bear in mind is: Which entity carries the increased cost due to tariffs?

The basic idea is that the increased cost is passed on to the end customer in the form of an increase of the customer price of the affected goods. However, this is not possible in all cases. In such cases, the question is which entity within the supply chain should carry the increased cost, while ensuring that the increased cost is still tax deductible and the treatment of the increased cost is in line with the arm’s length principle and the group’s established transfer pricing policy.
There are some ways for MNEs to mitigate the impact of the of the use of tariffs by:

  • Restructuring the supply chain through e.g., relocating manufacturing operations. These types of business restructurings typically have various tax, regulatory and employment implications, so if a supply chain restructuring is considered to mitigate the impact of tariffs, tax, regulatory and employment issues should be addressed as part of the planning; and
  • Seeking to reduce the dutiable base for customs purposes for intercompany transactions by e.g., excluding non-dutiable elements from the transfer price or, where possible, diverging from the use of transfer pricing for customs purposes and using alternative customs valuation methods.
Key impacts, potential mitigation strategies and considerations

The following summary table provides an overview of some the key impacts, potential risk mitigation strategies and considerations.

The Baker McKenzie transfer pricing professionals can assist you in evaluating your existing transfer pricing policies in light of the increased risk of additional tariffs. We can also provide support in quantifying the impact of any increase in applicable tariff rate on your effective tax rate and customs costs. We are experienced with engaging with tax and customs authorities in relation to APA and ATR support, as well as providing general advice on potential risk mitigation strategies.

The post Trump Tariffs: Customs Valuation and TP Impacts and Mitigation Strategies appeared first on Import and Trade Remedies Blog.