How Tariffs Are Affecting Year-End Transfer Pricing Adjustments 

Year-end transfer pricing adjustments are looming for foreign-owned U.S. distributors, and tariffs imposed in 2025 have increased the complexity of this commonly utilized intercompany pricing maintenance mechanism. 

The United States stepped up tariffs on imported goods this year, prompting many multinational businesses to revisit their transfer pricing strategies. Wholesalers and distributors, which regularly employ year-end adjustment mechanisms to meet target profitability benchmarks, are likely exposed to larger-than-usual pricing adjustments.  

Significant adjustments can raise alarm bells for tax and customs authorities, underscoring the importance of taking a proactive approach to transfer pricing. 

A Review of Transfer Pricing Adjustments 

According to U.S. transfer pricing rules, related companies must transact as if they’re unrelated. The rules prevent related companies from escaping U.S. taxation through pricing or contract terms that are not arm’s-length in nature.  

The IRS and Treasury provide several methods for determining what constitutes an arm’s-length transaction. A popular method for wholesalers and distributors, called the comparable profits method (CPM), calls for targeting the profit margins of independent businesses that possess similar functions and risk profiles and engage in comparable transactions. Tax advisors conduct research and perform economic analyses to assist companies in determining fair and appropriate pricing for related-party transactions. 

As business conditions change, businesses make monthly, quarterly, or year-end adjustments to ensure profits fall within the targeted range for a given year. These adjustments are necessary to mitigate the risk of violating U.S. transfer pricing rules. Changes in the broader economy, product-specific demand, supply chains, and tariffs can generate the need for pricing adjustments. 

Companies are generally free to make necessary mid-year transfer pricing adjustments, but many companies default to a single year-end adjustment. Companies that work with proactive transfer pricing tax advisors benefit from real-time adjustments that limit the risk of overpaying duties costs and the likelihood of a larger-than-desired year-end adjustment.  

Example: Year-End Transfer Pricing Adjustment for a Wholesaler/Distributor 

Consider a foreign-based wholesaler with several subsidiary companies worldwide that distribute its products to local markets. One of the subsidiaries is based in the United States and serves the North American market. 

The parent company and U.S. subsidiary use the CPM to guide the pricing and terms of related-party transactions. In early 2025, before tariffs began, their tax advisor conducted a transfer pricing study and determined that the U.S. subsidiary should target a profit margin of roughly 6%–7%. To meet the target profit margin, the related companies worked with their tax advisor to price various goods imported to the United States. 

Things changed in mid-2025, when a 20% tariff applied to goods imported from the parent company’s country. The related companies chose not to react to the tariffs, assuming they were temporary and would not materially affect the U.S. subsidiary’s profit margins. However, by year-end, it became clear that the sizable tariff would result in the U.S. subsidiary generating a loss for the year. 

A negative profit margin generally increases IRS scrutiny during the course of examination given the IRS’s presumptive view that the loss was generated as a result of intercompany pricing policies that were not aligned with the arm’s length standard.  As a response to the loss position, the related parties agree to effectively reduce the price charged to the U.S. subsidiary for all goods imported during the year through a substantial year-end adjustment.  

The adjustment significantly reduced the cost of imported goods and raised the U.S. subsidiary’s profit margins to an acceptable level, but it also resulted in the U.S. subsidiary overpaying duties to U.S. Customs and Border Protection (CBP). If the goods subject to the year-end adjustment are not tagged for reconciliation, claiming a duties refund will be a very daunting and time-consuming task. 

Benefits of Proactive Transfer Pricing Policies 

If the companies in our example had agreed to make transfer pricing adjustments earlier in the year, the U.S. subsidiary could’ve benefited from improved cash flow and lower duties. The foreign parent could’ve better managed its cash flow and the negative effects of lower-than-expected revenue. 

In general, proactively managing transfer pricing matters yields the following benefits: 

• More predictability: Responding more swiftly to regulatory and economic changes can make it easier for business leaders to assess their companies’ current financial performance and make more informed decisions. 

• More time to react: Multinational wholesalers and distributors are contending with the 2025 tariffs on their transfer pricing agreements. Companies that made changes earlier in the year had more time to make business decisions that can alleviate the negative effects of revised transfer prices. 

Tariffs and Transfer Pricing in 2025 and Beyond 

Despite plenty of speculation about the transience of tariffs imposed in 2025, they remain in place as we close 2025. They appear to be part of the administration’s medium- to long-term strategy to raise revenue.  

The U.S. Supreme Court is currently hearing a case challenging the President’s authority to impose tariffs. The resulting ruling could potentially eliminate many of the so-called reciprocal tariffs —  designed to match tariffs imposed on U.S. exports to certain countries — that began this year. 

There is no certainty about what 2026 holds. However, working with a transfer pricing expert can ensure that your business stays compliant with transfer pricing rules in the U.S. and abroad while maintaining agility to react to further changes to the U.S. tariff regime. 

Smith + Howard: Providing Actionable Transfer Pricing Guidance to Global Businesses 

It pays to proactively manage transfer pricing agreements, especially in light of the tariffs added in 2025. Smith + Howard’s Specialty Tax Services team advises clients with cross-border operations on how best to structure transactions to comply with local tax laws and optimize their financial position. Our advisors stay on top of legislative, regulatory, and executive changes to help their clients grow and succeed. 

Contact the Smith + Howard Specialty Tax Services team to learn more.