US tariffs and transfer pricing
Six months after the global disruption triggered by the US president’s stance on customs duties, and following intense negotiations throughout August, a ceiling rate of 15% has ultimately been set on the majority of European exports. While Trade Commissioner Maroš Šefčovič described the agreement as the most favorable ever reached with the Trump administration, it still marks a significant increase in customs duties, particularly impacting the European defense industry and its US-based clients. The imposition of higher tariffs will substantially affect international trade and reshape key aspects of the tax landscape, compelling multinationals to reassess and adapt their transfer pricing policies. Customs duties, as an added cost, can erode profitability, especially for companies unable to pass these costs on to end customers.
This shift will prompt multinationals to reevaluate how profits are allocated between related entities across jurisdictions, as traditional transfer pricing models may no longer reflect commercial realities. The pressure on local profits caused by increased tariffs introduces risk to intragroup transactions from a transfer pricing perspective. Yet, risk allocation remains a cornerstone of transfer pricing analysis. Regulations require that risk be allocated based on 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. Instead, they would likely pressure suppliers to negotiate lower purchase prices. 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, 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 (i.e., the transfer price) to the related company, and thus lowers 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 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.
