Tariff Refunds Would Spell Nightmare for Related-Company Deals

The possibility that many of President Donald Trump’s tariffs could be ruled illegal has companies salivating at the chance to recoup tariffs already paid—sometimes stretching well into the millions.

But it might also mean a misery of refund disputes with suppliers, customers, and tax authorities around the world all looking to make sure they get what they’re owed and scrutinizing exactly where companies allocate that money internally and to outside suppliers and customers.

The Supreme Court is to hear arguments Nov. 5 on the validity of the levies Trump instituted under the International Emergency Economic Powers Act.

If the tariffs are ruled invalid, companies could see up to $108 billion in already-paid tariff amounts refunded, according to a recent PwC analysis.

“For a lot of the companies we deal with, these are tens of millions, if not hundreds of millions of dollars,” PwC principal Chris Desmond said. “That CFO, CEO hears about that, and they’re like, ‘How quickly can we get that? We are going after that. We are going to get that in. I want to market that as a receivable.”

"$108 billion back to the market is huge,” he said.

Just getting the money could be an enormous hassle, a sluggish process involving paper checks to importers of record.

Once—and if—it all finally comes in, questions abound on how to allocate it. For companies that passed tariffs along to customers, should customers get some of that back? What about suppliers that reduced prices or offered rebates? What legal obligations do companies have, explicitly or implicitly, in contracts?

“Companies initially are like, ‘This is great!’ And then it’s like, oh wait a minute, when we get the money everybody’s going to be coming out with open hands—108 billion open hands,” Desmond said.

Once companies figure out what, if anything, to give customers and suppliers, within a single company the challenge will be figuring out how to allocate the refund to any subsidiaries that ultimately bore some tariff costs.

Reallocated Tariff Costs

While the importer of record is the one that paid the tariff, companies were able to reallocate much of the cost throughout their internal supplier chain to lower the tariff cost while staying compliant with transfer pricing rules, which govern the pricing of intracorporate transactions and ultimately determine where taxes are owed. Unwinding all that would be tricky.

As a rule, tax agencies require affiliate transactions to be priced as if they were between nonaffiliates, to prevent companies arbitrarily shifting profits to low-tax jurisdictions.

“It was complicated from a technical transfer pricing perspective how you allocate tariff expense: Should the manufacturer bear it? Should the distributor/importer bear it? Should it be split between group entities?” Chad Martin, Eide Bailly LLP principal, said. “Figuring out how to allocate tariff refund income is going to be even harder.”

Companies would also have to be careful to unwind the changes they made in response to the tariffs, without making it seem like they were done for the sole reason of avoiding the tariffs “and basically admit this whole thing was kind of a tariff mitigation exercise without necessarily business purpose,” he said.

Companies often use data on comparable transactions to show tax authorities that what they are doing is at arm’s length—as if done by unrelated companies—but comparables will take time to come in, so it will be hard for companies to point to what unrelated companies are doing in similar situations.

One rule of thumb, tax pros say: Just allocate the money to who bore the risk—if you can clearly prove it.

Cost Documentation

To do that, companies need extensive documentation to prove exactly how much of the tariff cost each entity bore, EY principal Ana Maria Romero said.

“It’s operationally complex because you have to have really good data to kind of trace back ‘OK, which SKUs does this kind of refund apply to and then which entity can ultimately board the risk?” she said, referring to Stock Keeping Unit codes that business use to track specific products. “Operationally, when you think about the operational transfer pricing, that is the tricky part in this.”

Crowe LLP managing director Dan Moalusi said the goal is to be “symmetrical,” with refunds equal to the cost borne by whatever entities were involved—and that goes for third parties as well as related entities.

“You have to maintain symmetry across the board, so even in a third-party context, when you think about it just economically,” he said. “If I was sharing that same cost with a third party, it follows that if there’s a benefit, we should share the benefit proportionately the way we have shared the cost.”

Whether companies will want to share the winnings with unrelated companies is another question. But reimbursing affiliates and snubbing third-party suppliers might not fit with the arm’s-length principle, which could make disbursements to affiliates harder to justify.

“If you bought from a manufacturer, you paid the tariff and you got a rebate or reduced product price from them, would you then go and voluntarily send your refund back?” Martin said. “Maybe in some cases, if you’re legally bound to do that, but you could easily see if that sort of thing wouldn’t happen in the third-party context.”