When tariffs and transfer pricing collide

March 2026 | SPOTLIGHT | CORPORATE TAX

Financier Worldwide Magazine

March 2026 Issue

Multinational enterprises (MNEs) are increasingly being asked to explain the same intercompany prices to different regulators applying different rules.

In an environment of heightened tariffs and customs enforcement – driven by the Trump administration and, reciprocally, other governments – business decisions that once raised primarily income tax considerations now carry significant trade, customs and enforcement risk.

In this new reality, it is increasingly vital that MNEs involve a multidisciplinary group of stakeholders that includes both tax and international trade advisers to optimise their competitive position and shareholder value, while managing overlapping and potentially competing legal exposure from governments seeking to collect revenue from the same profit pools.

For years, transfer pricing (TP) has been top of mind for tax executives and finance leaders, reflecting both its role in shaping global effective tax rates and the sustained enforcement pressure brought by the US and other countries seeking to increase tax collections and curb perceived abuse. TP has been, and continues to be, one of the biggest – if not the biggest – tax risks identified by tax leaders.

Tariffs, on the other hand, were generally not a significant item on businesses’ radars until April 2025, when President Trump made his sweeping ‘Liberation Day’ tariff announcement. What had long been viewed as a relatively mechanical customs exercise quickly became a material earnings and compliance issue.

Since then, business executives have been weighing how to respond to both higher tariff rates and heightened enforcement of the customs-valuation rules, as well as the possibility that additional tariffs could be imposed rapidly through executive action.

The US tariff compliance burden falls disproportionately on MNEs. Intrafirm trade accounts for more than half of all US imports of goods, with an even higher percentage originating from advanced economies. For certain industries, such as autos and pharmaceuticals, MNEs are responsible for the vast majority of cross-border transactions.

MNEs are expected to be the primary focus of increased tariff enforcement by the Trump administration, not only because of the substantial volume of intrafirm imports but also because intercompany pricing creates a perception – fair or not – that related parties have a greater ability to influence customs values than unrelated buyers and sellers.

Because of this perceived risk, we expect the Trump administration to focus its increased tariff-enforcement resources on MNEs in the same way governments have devoted substantial attention to perceived TP abuses. Under the customs-valuation rules, this scrutiny will occur under the ‘circumstances of the sale’ (COS) test through which US Customs and Border Protection (CBP) will examine whether the related-party nature of the transaction influenced the import price paid or payable.

TP documentation reports prepared for income tax purposes generally will not satisfy CBP that the importer satisfied the COS test. The Trump administration has already indicated that it intends to seek damages multipliers and additional penalties under the Tariff Act and False Claims Act, and to pursue criminal prosecutions for trade fraud where companies are found to have underpaid their tariffs, including by understating customs values.

This enforcement rhetoric should be taken seriously by senior management and boards alike. Unlike income tax disputes, customs valuation cases can quickly take on a fraud posture, with parallel civil and criminal exposure and a narrower margin for explaining pricing decisions after the fact.

For intrafirm imports, the Internal Revenue Service (IRS) and CBP both seek to evaluate the pricing of imported goods, but they do so for different reasons, under different legal frameworks, and with opposite economic incentives. The two regimes are enforced by different agencies that lack meaningful coordination, creating significant risk for companies that assume consistency in both realms.

In general, tariff rates apply to the value of each imported good (ad valorem) at the stock-keeping-unit level at the time of import, requiring a transaction by transaction analysis. CBP’s incentive is straightforward – higher transaction values yield higher tariffs. Because of this transaction-level focus, both MNEs and CBP generally start with the actual transaction value reflected in the intercompany transfer price. But that value may only be used for customs valuation if the relationship between related parties did not influence the import price paid or payable under the COS test.

In contrast, the US TP rules determine the taxable income of a US entity at the end of the taxable year and permit aggregation across transactions of similar classes of related goods, as well as related intercompany services and intangibles transactions. The IRS’s incentive runs counter to CBP’s – the lower the value of imported goods (and therefore the US importer’s cost of goods sold) – the higher taxable income subject to US income tax. Although rarely invoked, the US Internal Revenue Code prohibits any related-party purchase of goods from exceeding the customs’ transaction value in order to protect the US income tax base.

To allocate taxable income between related parties, taxpayers and the IRS often apply the comparable profits method (CPM), referred to as the transactional net margin method (TNMM) under the Organisation for Economic Co-operation and Development’s ‘Transfer Pricing Guidelines’, to determine arm’s-length outcomes for intercompany goods transactions. Rather than pricing individual transactions, the CPM and TNMM reverse engineers pricing outcomes by benchmarking the profitability of the related-party buyer or seller against independent third-party companies.

CBP has historically rejected the CPM and TNMM (and TP analyses more generally) as sufficient evidence that related-party pricing satisfies the COS test, even where those analyses are accepted by the IRS or foreign tax authorities. As a result, companies may find themselves compliant for income-tax purposes while exposed on the customs side.

Nevertheless, CPM and TNMM-based TP often forms the practical starting point for customs valuation, making it critical that MNEs substantiate the COS through additional evidence such as third party transaction data for identical or similar goods or internal data demonstrating that the related-party seller’s profitability on a transaction by transaction basis equals or exceeds the MNE’s consolidated profit for the same class or kind of goods. For complex supply chains, assembling and analysing this data can be a significant undertaking.

Importantly, tariffs and TP interact in a self-reinforcing feedback loop. For senior management, this means that a decision intended to solve a tariff problem can create an income tax controversy – or vice versa – often months or years later and in a different forum.

If an MNE cannot pass increased tariffs on to its customers, then the tariff expense reduces the affiliated importer’s profitability. If those profits drop below CPM benchmarks, or result in losses, the IRS could seek to reduce the import price to ensure arm’s length profitability of the US importer, thereby creating a customs-valuation issue.

Historically, the IRS and CBP have had little interaction or coordination, leaving taxpayers caught between two regulators seeking to collect revenue on the same transaction from very different perspectives and with divergent goals.

Although bilateral advance pricing agreements or negotiated customs resolutions can sometimes ease the tension, there is no requirement that the IRS and CBP defer to one another. Any coordination between the IRS and CBP is discretionary, fact-specific and often unavailable once an examination or enforcement action has begun.

MNEs are struggling to manage the duelling TP and customs-valuation regimes at a time when the US government is aggressively seeking revenue under both the income tax and tariff systems with respect to the same transactions.

There are no ‘one size fits all’ solutions, and in many cases, no risk-free options. In this environment, it is more critical than ever for MNEs to involve TP and international trade advisers early – not simply to document positions after the fact, but to help business leaders understand trade-offs, anticipate enforcement risks and make informed judgment calls that can withstand enforcement scrutiny.

Terrell Ussing and Saul Mezei are partners at Gibson, Dunn & Crutcher, LLP. Mr Ussing can be contacted on +1 (202) 887 3612 or by email: tussing@gibsondunn.com. Mr Mezei can be contacted on +1 (202) 955 8693 or by email: smezei@gibsondunn.com.

Terrell Ussing and Saul Mezei

Gibson, Dunn & Crutcher, LLP