Transfer Pricing Considerations in an Uncertain Tariff World

In a global economic system in which multinational companies source products from around the world and where complicated products can include technology, components and/or inputs from multiple countries, managing the potential risks related to tariffs and transfer pricing compliance is particularly difficult. In light of the new and ever-changing tariff regime under the current U.S. administration, these risks and complexities are now a major topic reaching C-suite executives. Given the potential consequences of newly imposed tariffs, many companies and advisors are utilizing transfer pricing tools to help mitigate the tariff risk and burden for multinationals. Similarly, those multinational companies that may be considering consolidation of intellectual property (“IP”), acquisitions or post-acquisition IP planning, will need to pay close attention to the impact that existing and prospective tariffs may have on the valuation of any IP or other assets, being moved intercompany.

Tariffs are an ad-valorum tax i.e., they are driven by the value of goods as they are moved into a country and reported for customs and duties purposes. The pricing rules related to how values are determined for customs purposes are different but have some overlap with the rules used for transfer pricing purposes, as they both ascribe to the arm’s-length standard. However, customs values are generally declared at the SKU level where transfer pricing may consider the value of goods on a more consolidated basis and the methods ascribed in each of the rules are sometimes similar, but not necessarily consistent. Finally, its important to note that many companies may not have adhered strictly to customs rules when the applicable duty rate was zero and may be facing substantial exposure.

Companies that are considering IP planning as a result of acquisitions or managing general tax rate risk are facing considerable uncertainty related to the effect that tariffs may have on the valuations of those assets. It is difficult to estimate the timing, magnitude, duration, etc. of tariffs that have been imposed or proposed by the United States government; not to mention how to estimate how other countries may retaliate. If the potential tariff cost in one country is significantly different than in another country, it could create a wedge between the anticipated buyer and seller of the IP and their relative realistic alternatives. Allocating tariff risk contractually between the parties can mitigate some risk of the uncertainty related to which entity will bear those risks but also creates the necessity to quantify that risk. It should be noted that a global economic system with relatively higher uncertainty would likely, ceteris paribus, result in lower values of assets like IP and may, therefore, create the opportunity to move IP at lower values than otherwise would be the case.

It should be noted that transfer prices are often set at a more aggregated basis where the resulting product price may be a bundle of services, IP and tangible product value. For purposes of tariff values, certain services and IP value must be included in the declared price, but not always, depending on facts and circumstances. Therefore, multinationals should be careful to look at the respective rules closely to ensure that appropriate values are being recorded. For both purposes, the value of imported products should be reflective of the functional/risk profile of the importing entity (e.g., the amount of distribution functions performed and the risk undertaken, exclusivity, etc.).

Finally, we offer a note of caution. Customs standards include something called the first sale rule which may lead companies to believe they can ignore other more specific asset rules, but that assumption could lead to a misinterpretation of value under certain fact patterns.

How We Can Help

• Kroll’s Transfer Pricing team are experts at performing IP valuations and have sophisticated approaches to consider multiple scenarios under different assumptions.
• Kroll’s Transfer Pricing experts can work with you and internal or external customs experts to help quantify the exposure related to historical customs declarations
• Transfer Pricing policies can be helpful in mitigating the impact of tariffs, such as:
  
  1. Adjustments to operational transfer prices (e.g., within benchmark ranges)
  2. Unbundling of products, services and IP within an intercompany transaction
  3. Modifications to supply chains (e.g., eliminating centralized procurement)
  4. Migration of IP
  5. Changes to the importing legal entity’s functional or risk characterization to align with customs rules.