One immensely disruptive dimension of the new "reciprocal tariff" regime announced is its implication for transfer pricing analyses relying on comparable profits method/transaction net margin method data sets. (CPM/TNMM). Such analyses are common in the TP world. They attempt to indirectly measure of an arm's length result by testing a company's overall or segmented transfer pricing margins against those earned by companies with comparable functions, assets, and risks.
If enforced for any meaningful duration, one effect will be that comparable companies, EVEN WHEN BASED IN THE SAME JURISDICTION, may have significantly different Cost of Goods Sold/Operating Profit impact from tariffs depending on the geographic footprint of their sourcing (or, more indirectly, sales). Furthermore, the previous approach of emphasizing "functional comparability" over direct product comparability goes out the window when the slightest change in Harmonized Tariff Schedule origin code can be the difference between, say, a 10% and 50% tariff. Sets spanning regions rather than specific countries confuse things even more. The impact of retaliatory measures spreading worldwide makes it worse.
Transfer pricing practitioners are already devising methodologies for adjusting comparable sets to account for such "noise," but as the US and OECD TP guidelines make clear, such adjustments decrease reliability and, perhaps more importantly, will be viewed very differently by counterparty jurisdictions in a controversy context.
A potential approach is to conduct a corroborative economic analysis which applies a different method to further support the CPM/TNMM results. This should be considered in both transfer pricing planning (setting forward-looking policies) as well as compliance (documentation justifying results after year-end). We are actively developing and applying such approaches for our clients, and highly encourage any affected taxpayers to contact Eide Bailly LLP ASAP for a no-cost diagnostic conversation.
Chad Martin directs Eide Bailly's Transfer Pricing Services practice.
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