The current administration’s whipsaw of imposed and withdrawn tariffs continues to rattle financial markets and industries across the United States.
In New England, annual trade of goods and services with Canada exceeds $42 billion. A 25% on Canadian imported goods would dramatically impact New England’s trade relationship with that country.
Especially hard hit would be Maine, where Canada is the state’s largest trading partner. Each year, Maine imports $5.1 billion in goods and exports $1.4 billion in goods to Canada.
In his recently published article with Tax Notes, Transfer Pricing and Tariffs: Finding Certainty in Trade Uncertainty, Pierce Atwood tax attorney Allen S. Braddock explores the history of tariffs in the U.S., the inverse relationship between tariffs and transfer pricing, and how companies can use intercompany transfer pricing to mitigate tariff impacts.
For example, a U.S. entity and its Canadian subsidiary have a transfer pricing methodology that sets a $100 price per good imported from its Canadian subsidiary. Without tariffs, the U.S. entity imports the $100 good and then sells the good in the U.S. for $130, resulting in $30 U.S. taxable income.
If a 25% tariff is imposed, the U.S. entity imports the $100 good plus pays a $25 tariff (25% * $100). It then sells the good in the U.S. for $130, resulting in $5 U.S. taxable income (assuming the sale price is not raised on its U.S. customers).
However, if the transfer pricing methodology is adjusted or changed to set the import price to $80, then the U.S. entity imports the good at $80 plus a $20 tariff (25% * $80). The U.S. entity then sells the good for $130, resulting in $30 taxable income – demonstrating that, despite the tariffs, the right transfer pricing methodology can help businesses maintain the status quo without raising costs to its customers.
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