Prepared by Enrique Díaz Tong[1], Sophia Castro Jurado[2] and Jack Ortega Torres[3]
Introduction
The United States has entered a new era of trade policy characterized by increased tariffs, impacting global supply chains and creating significant challenges for transfer pricing compliance. This shift necessitates a careful re-evaluation of intercompany transactions and pricing strategies for multinational enterprises (MNEs) operating within and trading with the U.S.
Specifically, tariffs directly impact the cost of imported goods, thereby altering the profitability of cross-border transactions adding a layer of complexity. From a transfer pricing perspective, this new tariff landscape presents both opportunities, such as the potential to renegotiate intercompany pricing and restructure supply chains for greater tax efficiency, and challenges, including the increased difficulty in benchmarking, the need for robust documentation to justify tariff cost allocation, and the potential for disputes with tax authorities regarding compliance with the arm’s-length standard in a distorted market.
Tariffs in a Nutshell
Tariffs are taxes levied on imported goods, historically serving as a source of government revenue and a tool to protect domestic industries by increasing the cost of foreign products, potentially raising consumer prices. These taxes can have compounding effects, such as tariff stacking and increased costs for domestic manufacturers using taxed intermediate goods, which can also lead to higher prices for consumers. Furthermore, tariffs can trigger retaliatory measures from other countries, escalating into trade wars that negatively impact export-oriented sectors and the broader economy. Collected by customs authorities from domestic importers, tariffs in modern developed economies like the US represent a smaller portion of government revenue but remain a strategic instrument for safeguarding specific domestic industries from international competition.
Current Tariff Landscape
The current US tariff landscape, shaped by the February 2025 “American First Trade Policy Memorandum” prioritizing domestic industries and reduced trade deficits, initially saw a minimum 10% tariff on nearly all imports starting April 2, 2025, followed by a plan for higher reciprocal tariffs (11% to 50%) on 86 countries with significant trade deficits. However, on April 9, President Trump announced a 90-day pause on these reciprocal tariffs for most nations, while drastically increasing tariffs on Chinese imports to a 125% reciprocal rate, a 20% fentanyl crisis tariff, and existing Section 301 tariffs (7.5% to 100%), potentially leading to dramatic price increases for consumers, as illustrated by a smartphone’s price more than doubling due to tariffs alone, and contributing to inflation. Although subject to change based on trade negotiations and political factors, including a recent suggestion of potential tariff reductions on Chinese goods, the specifics and timing of such changes remain unclear.
Overlap Between Customs and Transfer Pricing
The overlap between customs and transfer pricing arises because both disciplines deal with the valuation of cross-border transactions, particularly the pricing of goods. However, they serve different primary purposes and operate under distinct sets of rules, which can create complexities, especially with increasing tariffs.
Moreover, the relationship between customs duties and transfer pricing presents an inverse optimization challenge for taxpayers. For customs purposes, the primary goal is typically to minimize the dutiable value of imported goods to reduce the amount of tariffs payable. Conversely, for transfer pricing purposes, the objective is to establish an adequate and arm’s-length profit margin for each related entity involved in cross-border transactions to comply with tax regulations. This often requires setting transfer prices that reflect the value added by each entity. Therefore, a conflict arises because a lower import price for customs might not reflect an arm’s-length price that provides a sufficient margin for the importing distributor from a transfer pricing perspective.
Implications for Latin American Exporters to the U.S. Market
The US market is exceptionally relevant for Latin American exporters, consistently ranking as the largest or second-largest trading partner for most countries in the region[4]. Those engaged in business with related parties in the U.S. are particularly vulnerable to the effects of the current baseline tariff. This increased cost can significantly erode their profit margins and consequently will require them to review their transfer pricing policy and tax compliance approach.
Even if the U.S. distributor can increase the consumer price, it might still face pressure on its margins if it cannot fully pass on the tariff cost or if the decreased sales volume reduces overall profitability. This is especially pronounced if the price elasticity of demand is high, meaning consumers are sensitive to price changes and readily switch to alternative products (either domestically produced or imported from countries without such high tariffs).
If the tariffs are expected to be long-lasting and significantly impact demand, the Latin American exporter might need to reconsider its supply chain strategy, potentially exploring alternative markets or even establishing production facilities within the US to avoid tariffs altogether. This would have significant transfer pricing implications related to the new functions and risks assumed in the altered supply chain.
Implications for Tax Compliance
Tax authorities, both in the U.S. and Latin America, will likely scrutinize transfer pricing policies in light of significant tariff changes to ensure profits are not being artificially shifted to avoid tax or customs duties. It is crucial to ensure consistency between the valuation declared for customs purposes and the transfer prices used for income tax purposes. Significant discrepancies can trigger audits and penalties.
Moreover, without careful planning, the changes in their business models due to the interaction of tariffs and transfer pricing could lead to non-arm’s length positions that can be ultimately challenged by the tax authorities. For Latin American exporters, understanding the specific tariffs affecting their goods and proactively adapting their business models and transfer pricing policies is crucial for maintaining competitiveness and ensuring tax compliance in the uncertain global trade landscape.
For a comprehensive exploration of this topic, including detailed examples and actionable short-term and long-term mitigation strategies, we invite you to access the full version of this article at the following link:
[1] Leading Partner at Altus Transfer Pricing.
[2] U.S. Technical Lead at Altus Transfer Pricing.
[3] Economist at Altus Transfer Pricing..
[4] As of 2022, the United States absorbed approximately 41.71% of the total goods exports from Latin America and the Caribbean. Notably, Latin America is a crucial supplier of fresh produce to the US market, with significant exports including fruits, vegetables and cut flowers.