Effects of US-China Tariffs on Transfer Pricing: Key Considerations for Multinational Corporations

US tariffs on Chinese imports are 145%, while China imposes 125% on US goods. Companies may alter transfer pricing to mitigate costs, but this risks tax noncompliance. Multinational corporations must analyze and document pricing to comply with regulations amid escalating tariffs.

At the time of writing, tariffs on imports from China to the US are at 145 percent, while imports from the US to China face an 125 percent tariff. US imports from all other jurisdictions are subject to a 10 percent baseline minimum tariff. Certain products, including smartphones, computers, and semiconductors, are exempt from the US import tariffs.

In response to the rising tariffs, companies may look to adjust their transfer prices or prepare transfer pricing (TP) risk mitigation plans to offset the increased costs of imports. However, this strategy brings potential tax implications for the importing companies, as well as the risk of noncompliance with the arm’s length principle. To ensure that the tax benefits of reducing the transfer price are not outweighed by the risks of violating transfer pricing regulations, multinational corporations (MNCs) must conduct thorough analyses and maintain robust documentation to withstand scrutiny from both customs and tax authorities in both jurisdictions. 

Under both US and Chinese import regulations, tariffs are usually imposed on the value of the transaction at the time of import. This means that the 145 percent tariff currently imposed on Chinese goods entering the US and the 125 percent tariff on US goods entering China will be applied to the transfer price agreed upon between the affiliated entities. In both cases, customs authorities may make adjustments if they deem the declared value to be inaccurate. 

The escalation of tariffs between China and the US may incentivize MNCs to adjust their transfer pricing policies to offset the import tariff burden. This is primarily achieved by reducing the prices charged by the exporting subsidiaries for goods and services sold to affiliated importing entities. However, while this strategy can mitigate tariff-related costs, it has the secondary effect of increasing the profit margin of the importing entity, leading to higher income tax exposure in that entity’s jurisdiction. As the US currently imposes a lower corporate income tax rate than China (21 percent flat rate on resident companies to China’s 25 percent flat rate), this will mostly be a concern for arrangements that increase the profits of the Chinese affiliate (however, various preferential tax arrangements in both countries could affect this dynamic). 

Such pricing adjustments often involve a trade-off between reduced customs duties and increased corporate tax liabilities. The overall financial impact depends on a range of factors, including tariff rates, profit margins, applicable income tax rates, and the structure of the MNC’s supply chain. In practice, companies may weigh these competing outcomes to assess the net economic effect of modifying intercompany pricing in response to higher tariffs. 

Both China and the US adopt the arm’s length principle to assess the legitimacy and fairness of intercompany transfer prices. Mitigating TP risks created by the increased cost of import tariffs, therefore, requires careful navigation to ensure compliance with transfer pricing regulations. This means taking care when transferring tariff costs, making necessary changes to the operational transaction models, being flexible in the face of changes in customs valuation and transfer pricing methods, and making necessary allocations of the increased tariff costs.  

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