Tariffs Test MNEs’ Transfer Pricing Global Operating Models

As governments deploy tariffs to advance their positions in ongoing trade disputes, multinational entities are confronting a new layer of tax complexity. The United States’ 2025 reciprocal tariff regime has forced companies to revisit not just supply chains but also how they set transfer prices across borders. This article examines the collision of tariffs and transfer pricing, modeling real-world scenarios and exploring strategies to mitigate risks while staying tax compliant.

For tax professionals and corporate leaders alike, the core issue is deceptively simple: Who ultimately bears the burden of these tariffs: the importer, the non-US exporter, or both? The answer has direct consequences for tax compliance, profitability, and investor expectations. Tariffs no longer represent just an external cost; they are catalysts that can reshape transfer pricing structures, create double-taxation risks, and demand new strategies for value allocation within multinational groups.

When Tariffs Collide With Transfer Pricing

Transfer pricing governs how MNEs allocate profits and costs among affiliates. Under international tax rules, these prices must follow the arm’s-length principle, the price that unrelated parties would charge under comparable conditions.

But tariffs disrupt this balance. Suddenly, an importer’s cost of goods sold spikes. Customs authorities demand tariffs be paid based on declared import prices while tax authorities expect transfer prices to remain at arm’s length. If the two interpretations diverge, companies can find themselves trapped between conflicting rules.

For tangible goods, companies rely on established methods such as the comparable uncontrolled price (CUP), cost plus method, resale price method, profit split method, or comparable profits method , which correspond to the Organization for Economic Cooperation and Development’s transactional net margin method (TNMM), to determine the intercompany price paid by the importer (assuming that the intercompany price is the import price).

For instance, if a 25% duty suddenly is added to the import price of related-party goods, critical questions emerge:

• Should the importer absorb the duty as a local cost or renegotiate the intercompany price with its affiliate?
• Will customs authorities and tax authorities agree on how to treat tariff-inclusive prices?
• How can MNEs avoid double taxation if profits increase in one jurisdiction but transfer prices are not adjusted in another?

The stakes are not theoretical. Misalignment can trigger audits, erode margins, and complicate compliance across borders.

Modeling the Impact: A Case Study

To illustrate, consider a German manufacturer (ParentCo) exporting medical devices to its US distribution affiliate (USSub). Assume that USSub imports 100,000 units from ParentCo. Suppose that ParentCo’s manufacturing cost is $60 per unit and it charges USSub is $100 per unit. Additionally, assume that the German corporate tax rate is 25% and the US corporate tax rate is 21%, and there are 10 million shares outstanding overall for the group. Initially, the transaction is tariff-free. But when the US imposes a 25% tariff on imports, both parties must decide how to allocate the additional cost.

In this scenario, the group earns $9 million in gross profit [($40 + $50) times 100,000 units], with a healthy $6.5 million operating profit. Transfer pricing is aligned with the arm’s-length principle, and no tariffs apply. As illustrated in Table 1, both entities enjoy healthy margins, and their pricing aligns with international norms. Introduce a 25% US tariff, however, and margins collapse as can be seen in scenarios 1-3.

Scenario 1 – US Subsidiary Bears the Tariff
When the tariff is imposed on imports priced at $100, USSub pays a tariff of $25 per unit, or $2.5 million ($25 times 100,000 units) total. The intercompany price remains unchanged. Table 2 presents the results of this scenario for ParentCo and USSub.

If USSub pays the full 25% duty on top of the agreed transfer price, its profitability erodes dramatically. USSub’s operating margin plunges from 23.3% to 6.7%. Margins that once looked sustainable plunge, and investors see a sharp hit to EPS, which falls nearly 40%. The group gross profit falls to $6.5 million [($40+$25) times 100,000 units] and operating profit falls to $4 million. This approach risks scrutiny from US tax authorities that might argue the subsidiary is not being adequately compensated for its functions and risks, raising transfer pricing exposure.

Scenario 2 – ParentCo Absorbs the Tariff
In this scenario, assume that to preserve USSub margins, ParentCo lowers the transfer price to $80, absorbing the tariff cost. Table 3 shows the impact on ParentCo’s and USSub’s margins.

When ParentCo lowers the intercompany price to offset the tariff, this cushions the US affiliate’s margins and maintains compliance in the US. However, ParentCo’s profitability drops substantially, by approximately 67%. Shareholders might view this as shifting the cost to ParentCo, and tax authorities in Germany could question why ParentCo is giving up so much income. ParentCo’s profits fall dramatically, but USSub maintains its margins. The total group gross profit declines to $7 million [($20+$50) times 100,000 units], while the group operating profit falls to $4.5 million. This approach might align better with economic substance if ParentCo is deemed to create greater value or is the entrepreneur for this intercompany transaction.

Scenario 3 – Shared Tariff Burden
A compromise approach splits the tariff 50/50, reducing the transfer price to $87.50 while USSub bears half the duty. This is a hybrid approach that might provide a balanced allocation of margins. Table 4 provides an illustration of the impact to margins for ParentCo and USSub.

In this hybrid approach, both sides absorb part of the tariff through a combination of price reductions and direct cost sharing. The total group gross profit falls to $6.5 million [($27.50+$37.50) times 100,000 units] and operating profit falls to $4 million. While group profits still fall, margins are distributed more evenly, and the strategy can be easier to defend from a regulatory standpoint.

Across all scenarios, tariffs depress margins and EPS significantly, underscoring the high-stakes nature of tariff-adjusted transfer pricing.

Beyond the Numbers: Regulatory Tensions

Tariffs don’t exist in a vacuum; they can create friction between customs and tax authorities. Customs officials care about the import value declared at the border, which determines tariff payments. Tax authorities, meanwhile, require that related-party prices be justified as arm’s length. When companies adjust prices for tariff purposes but not for tax purposes, or vice versa, they increase the risk of audits and double taxation.

Advance pricing agreements, which many companies rely on for certainty, are not always designed to accommodate sudden tariff regimes. Some jurisdictions permit tariff-related clauses in APAs, but others do not. The 2022 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations acknowledge that government-imposed costs like tariffs affect profitability, but stress that companies must document adjustments consistently.

In practice, this means that companies must defend not only their pricing policies but also their rationale for how tariff costs are allocated.

Strategic Options for Multinationals

Multinationals cannot treat tariffs as a passing nuisance. They require proactive planning. Options include:

• Transfer price adjustments, backed by robust documentation;
• Duty relief mechanisms such as drawback programs, where available;
• Supply chain restructuring to source goods from jurisdictions outside the tariff regime; and
• Hybrid models that spread the tariff cost, balancing both economic reality and compliance.

These strategies have trade-offs in terms of complexity, cost, and defensibility. Each option requires weighing compliance risk, operational feasibility, and investor optics.

Looking Ahead: Implications for Stakeholders

For investors and analysts, tariffs are more than a policy issue, they can be an earnings shock. Companies with rigid transfer pricing policies risk margin erosion, while those that adapt quickly can soften the blow. The difference is visible in earnings per share: Across all scenarios modeled here, group profits decline sharply, with EPS reductions ranging from 30% to nearly 40%. That kind of volatility can influence not only short-term stock performance but also long-term perceptions of management’s ability to navigate policy uncertainty.

Tariffs no longer are an occasional headwind; they are part of the operating landscape. For multinationals, the question is not whether tariffs will affect transfer pricing, but how. Companies that proactively adjust pricing structures, renegotiate APAs, and document their approaches will be better positioned to withstand both regulatory challenges and market scrutiny. Ultimately, tariffs test more than tax compliance. They test the resilience of a company’s global operating model.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Dan Moalusi, Ph.D. is the Managing Director at Crowe LLP.

Write for us: Author Guidelines