The recent surge in new tariffs imposed by the United States is having an adverse impact on transfer pricing.
Over the last two years, the U.S. has enacted new tariffs at an unprecedented rate. These include 25% tariffs on raw steel and 10% tariffs on raw aluminum, 25% tariffs on approximately $250 billion of annual imports of Chinese manufactured goods and recently-proposed 10% tariffs on the remaining $300 billion of Chinese manufactured goods.
A tariff on imported goods is a tax with a rate that varies with the class of goods and country of origin. The “importer of record,” usually a U.S. distributor or manufacturer, bears initial responsibility for payment. Upon sale of the imported good by the importer, tariff costs become part of the cost of goods sold.
Tariff costs have a material impact on all importers with affected goods, but directly affect transfer prices between related parties, creating added complications. Depending on the tested party and transfer pricing methodology, the impact of a tariff could raise both short-term and long-term transfer pricing issues. As of yet, there is no guidance forthcoming from the IRS or other affected tax authorities.
A 25% tariff on imported goods could easily require related party importers to make a transfer pricing adjustment to keep results in the arm’s length range. Further, if the importer determines its customs valuation based upon its transfer price, an upward transfer pricing adjustment will trigger a downward customs valuation adjustment. Finally, an upward transfer pricing adjustment in the U.S. would produce double taxation; although the importer could seek to eliminate the double taxation under the Mutual Agreement Procedure in all U.S. tax treaties, other countries might object to reduced tax revenues created by the tariffs imposed by the U.S.
Multinational companies should stay apprised of the latest developments regarding tariffs and consider the impact it may have on transfer pricing.
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