How to use transfer pricing to manage tax burdens under the new 2025 tariff pressures?

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The 2025 tariff landscape has put transfer pricing under a new spotlight. With rising tariffs, such as the 25% general rate on imports from Mexico and Canada, companies must reassess how they structure transactions across borders. Transfer pricing isn’t just about tax anymore; it’s now central to managing cross-border duties as well.

At its core, transfer pricing determines the prices that related entities within a multinational enterprise (MNE) charge each other for goods, services, or intellectual property. These internal prices affect both taxable income and customs valuations, two sides of the same coin under today’s tariff pressure.

Here’s the trade-off: a high transfer price inflates the customs value, leading to higher tariffs, but reduces the U.S. taxable income. A lower transfer price has the opposite effect, minimizing tariffs but increasing taxable profit in the U.S. This balancing act means MNEs must weigh the cost of cross-border duties against their income tax exposure and stay within the arm’s length standard required under IRC § 482.

Let’s break it down with a scenario: A U.S. company imports goods from its affiliate in Mexico. If tariffs on those goods have increased, lowering the transfer price could significantly reduce the customs value and, therefore, the tariff cost. The U.S. entity would then report higher taxable income. Depending on tax rates and cash flow priorities, that trade-off might be worth it.

Some companies are also revisiting supply chain models. In a contract manufacturing arrangement, for example, the foreign manufacturer earns a modest markup, which may reduce the dutiable value at import. The importer can have customs value the goods based on the price between the manufacturer and the middle entity rather than the final U.S. importer, provided the documentation clearly states that the exporter intended the goods for the U.S. at the time of sale.

One often overlooked tactic is cost unbundling. Separating service fees or royalty payments from the product invoice, when economically justifiable, can reduce the customs value without altering the total cost to the buyer.

All of this underscores a central point: transfer pricing and customs planning must work in sync. Historically, tax and customs teams have operated in silos. That won’t cut it anymore. The new tariff environment demands alignment, documentation, and regular review of both pricing policies and customs declarations.

Bottom line

Tariffs are unpredictable, but your strategy doesn’t have to be. With careful planning and documentation, transfer pricing can be a powerful lever to optimize both tax outcomes and tariff exposure, if you’re willing to get proactive.

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