If your multinational organization has entities in both the U.S. and China, how will the escalating tariffs affect your transfer pricing? Many articles and opinions have focused on the effects of the new Chinese tariffs from the perspective of consumers, governments, and national economies. However, most analysts have not addressed the specifics of how this might affect those who are most directly involved: multinational firms with inter-entity transfers.
According to a recent Bloomberg article, “INSIGHT: New Tariffs Affect Transfer Pricing Results”:
“Significant new tariffs enacted by the United States and any retaliatory tariffs enacted by other countries threaten to have an immediate, material impact on the transfer pricing results of multinational companies. Because of a lack of recent experience with intense and escalating trade disputes involving significantly high tariffs, few companies are prepared to deal effectively with the transfer pricing implications, which could be substantial.”
Is your company prepared to adjust transfer pricing in order to maintain your profit margin while complying with regulations? Here is our quick summary of major implications for your business.
Each multinational business will encounter a unique situation, but there are some general problems your organization should expect. Your company might encounter the following:
• It may be difficult to quantify necessary changes to arms-length transfer pricing, because detailed, up-to-date information on comparables’ pricing is not available.
• Other countries may protest increased revenues for the U.S. government by adjusting their own trade agreements with the U.S., which will add additional complexity for transfer pricing. This will be especially relevant if your multinational company has transactions or entities in countries other than the U.S. and China.
• Each affected transaction between your related entities will need to be individually examined and adjusted. Then, each adjustment will require a recalibration of other transactions and valuations.
• Without a pre-existing Advance Pricing Agreement (APA) between your related entities, the tariff cost might be absorbed by the importer and cause a reduction in their profits, rather than the price changes being passed on to the customer. For those transfers which already have an APA, Bloomberg’s article recommends “each individual case should be reviewed for the impact of tariffs and appropriate treatment under the specific language of that APA and transfer pricing analysis revised to address the issues created by tariffs.”
Besides direct adjustments to transfer pricing, your company might be able to make the most of the situation by considering other changes, such as:
• Increased use of alternative suppliers
• Passing tariff costs to customers if possible
• Making alternative export arrangements in order to minimize tariff impacts for the related-party exporter
• Seeking tariff refunds if imported goods decrease in value
• Moving transaction changes to earlier in the supply chain in order to avoid arms-length issues
Each transfer will need to be examined to determine how your entities should react and adjust. Each situation will be complex and unique. Be sure your company properly documents transfer pricing adjustments in order to maintain eligibility for potential tariff refunds while complying with U.S. Customs and Border Protection rules as well as IRS regulations.
GreerWalker is a trusted partner for multinational companies for more than two decades. Our interdisciplinary global team of professionals focuses on the needs of privately owned U.S. based companies as well as foreign-owned U.S. subsidiaries with operations in the Carolinas and around the world. Learn more about our Global Business Services, or contact David Jones with any questions you have.