Six months after the global turmoil triggered by the US president with respect to customs duties, and following negotiations throughout August, a ceiling rate of 15 % has utlimately been set on the majority of European exports. While the agreement is considered the most favorable ever reached with the Trump administration according to Trade Commissioner Maros Sefcovic, it still represents a significant increase in customs duties, especially for the European defense industries and its US-based clients. Indeed, the imposition of higher tariffs will considerably affect international trade and reshape certain aspects of the tax landscape, forcing multinationals to review and adapt their transfer pricing policies. Customs duties, as an additional cost, can erode profitability, especially for companies unable to pass these costs on to end customers.
This change will prompt multinationals to reassess the allocation of profits between related entities in different jurisdictions, as traditional transfer pricing models may no longer reflect commercial realities. The pressure on local profits caused by increased tariffs creates a risk for intragroup transactions in terms of transfer pricing. Yet, risk allocation is a key element in transfer pricing analysis. Regulations require that risk be allocated according to the economic substance of transactions. This generally means that the entity assuming the risk must have the capacity to manage it, including the necessary functions, assets, and personnel.
Independent distributors would not bear the full impact of the tariff increase. They would likely pressure their supplier to negotiate a lower purchase price. This response depends on factors such as bargaining power, market competition, and demand elasticity. By analogy, in a purely intragroup context, the solution would be to consider that a limited-risk distributor, that is entitled to a positive net margin, would see customs duties deducted from the sale price at which the European exporter sells to its US subsidiary. This results in a reduction of the sale price (the transfer price) to this related company and thus the customs duty base.
The new paradigm created by these tariffs requires multinationals to reassess the allocation of functions and risks, update market and benchmarking studies, revise profit allocation or the determination of arm’s length price ranges, update intragroup agreements, implement changes in information systems, and establish a price review process to adapt to ongoing policy changes and supply chain modifications.
