On April 2, 2025, the U.S. government announced sweeping tariffs ranging from 10% to over 50% on imports from nearly every country. This abrupt shift from a longstanding trend of tariff reduction has caused significant disruptions to global supply chains, pricing strategies, and profitability—particularly for multinational enterprises engaged in intercompany transactions. While some nations responded with retaliatory tariffs, others, such as Vietnam and Israel, opted not to respond in kind. The uncertainty surrounding the duration and scope of these tariffs has further compounded business challenges and raised critical issues for transfer pricing compliance.

In the near term, companies are confronting immediate operational challenges as they evaluate the financial impact of the tariffs. Some businesses have chosen to delay imports, scale back production, or expedite shipments to build inventory ahead of tariff enforcement. These short-term strategies, while aimed at minimizing cost exposure, often come at the expense of higher shipping costs and temporary revenue disruption. Long-term responses—such as shifting manufacturing operations or diversifying sourcing—require substantial investment and time, and may not be feasible while the policy outlook remains unclear.

The tariffs represent a material increase in the cost of doing business. Whether businesses choose to absorb these costs or pass them on to consumers, profitability is directly affected. For related-party transactions, the key transfer pricing question becomes how to allocate the economic burden of tariffs among group entities in a manner consistent with the arm’s length principle. Regardless of the chosen strategy—whether maintaining end-user prices, increasing them, or adjusting transfer pricing—system-wide profits tend to decline, and the elasticity of demand only complicates matters further.

Standard transfer pricing methodologies, such as the Comparable Profits Method (CPM), may no longer yield reliable results under these circumstances. Historical comparables might not reflect similar tariff exposure, and varying customer price sensitivities can distort profit comparisons. Taxpayers must carefully consider whether traditional benchmarks remain appropriate and reassess the assumptions underlying existing pricing policies. Routine distributors in the U.S., for example, may be unable to maintain historical margins if they are expected to bear the brunt of the tariff burden.

These developments significantly increase the likelihood of tax disputes. Foreign tax authorities may push for a greater share of profits to remain with local manufacturers, viewing U.S. tariffs as an issue for U.S. entities to absorb. Meanwhile, the IRS has intensified its scrutiny of inbound distribution arrangements, particularly where U.S. entities report losses or unusually low margins. Conflicting positions between jurisdictions could lead to double taxation, necessitating competent authority intervention under bilateral tax treaties.

In an environment characterized by economic uncertainty and geopolitical instability, taxpayers with related party transactions must act swiftly to evaluate the effect of tariffs on group profitability and intercompany pricing. Proactive documentation, well-reasoned adjustments, and readiness for audit scrutiny will be essential to navigating this new trade and tax landscape.