US Reciprocal Tariffs 2025

US trade deficits and surpluses

Transfer Pricing Overhaul: Responding to Tariffs, Risk, and Regulation

1.Transfer Pricing in Transition: Adapting to Global Tariff Pressures

The reintroduction of reciprocal tariffs by the United States—now at 27% for Indian

imports—has amplified the intersection of trade policy and transfer pricing.

• These tariffs increase the landed cost of goods, affecting both related and unrelated party imports.

• For multinational enterprises (MNEs), this introduces a new layer of complexity: existing TP models may no longer reflect commercial reality.

• Higher costs absorbed by US importers or distributors without intercompany pricing adjustments can distort profitability and disrupt the arm’s length standard.

• When intercompany agreements are static, but trade realities shift, the compliance and audit risks rise significantly.

2.Commercial Impact: Pricing Models at a Crossroads

As tariffs inflate COGS, tested party margins often fall below benchmark ranges. Common TP methods like TNMM or RPM become harder to defend when tariff-loaded costs are not mirrored in comparable data. Businesses must consider:

Revisiting intercompany pricing to reflect new cost realities.

Adjusting TP documentation to explain short-term margin fluctuations.

Assessing if functions and risks have shifted due to supply chain restructuring.

Additionally, changes in procurement strategies (e.g., shifting from import-heavy to local sourcing) and currency fluctuations further challenge comparability. For companies using multi-year data, the year-on-year impact of tariffs can create volatility in TP analysis.

Transfer Pricing Overhaul: Responding to Tariffs, Risk, and Regulation

3.The APA Landscape: Need for Revalidation

Advance Pricing Agreements (APAs), previously seen as instruments of certainty, now face renewed scrutiny. Key APA-related implications include:

• Existing APAs: These may not account for sharp cost escalations due to tariffs. The critical assumptions underpinning them—such as market stability or cost structures—could be breached, calling for revision or renegotiation.

• New APA Applications: Companies must factor in tariff-inclusive cost modeling. This includes adjustments to tested party profitability, selection of comparables, and setting realistic benchmarks.

• Bilateral APAs (BAPAs): Especially for US-India transactions, BAPAs offer a coordinated approach between tax authorities. However, the negotiation process may become more complex due to divergent views on tariff impacts.

• Rollback Requests: Tariff shifts may render rollback years incomparable unless the impact can be normalized and documented.

4.Growing Role of MAP in Dispute Resolution

As tax authorities reassess profitability outcomes influenced by trade policy, Mutual Agreement Procedures (MAP) will become an essential tool. Key considerations:

• MAP may be invoked when unilateral adjustments by one tax authority (e.g., disallowing a TP loss) conflict with positions in the counterparty jurisdiction.

• Double taxation is more likely in cases where US importers report lower profits due to tariffs but Indian exporters are expected to maintain fixed returns.

• MAP discussions will need to include robust economic justifications and evidence that tariff-related margin erosion is commercially driven—not tax motivated.

Transfer Pricing Overhaul: Responding to Tariffs, Risk, and Regulation

5.Customs Valuation and TP: A Tightrope Walk

Tariff increases intensify the challenge of aligning customs valuation with transfer pricing:

• Post-import price adjustments may be rejected by customs if seen as duty avoidance.

• Discrepancies between customs filings and TP documentation heighten audit and penalty risks.

• Closer coordination between tax and trade teams is critical to ensure consistency and mitigate risk.

6. Strategic Realignment in a Shifting Trade Landscape

With trade and tax rules evolving rapidly, transfer pricing must shift from static compliance to agile strategy. Key actions for MNEs include:

• Reviewing intercompany agreements, tested party selection, and pricing models.

• Updating FAR profiles to reflect revised supply chains and functional roles.

• Considering APAs for prospective certainty and MAPs for existing disputes.

• Strengthening documentation with tariff-aware benchmarking and scenario analyses.

Rising tariffs, regulatory scrutiny, and global risks are driving a shift in transfer pricing strategies. Multinationals must enhance transparency, align with value creation, and ensure compliance to manage risk and adapt to evolving global tax demands.

Conclusion: