The simple definition of a tariff is a tax imposed by one country on goods imported from another. Its primary purpose is to make imported goods more expensive, encouraging consumers to buy domestically produced alternatives.

However, in practice, tariffs can have far more complex and sometimes unintended consequences. For certain products, even with tariffs applied, imports may still be more cost-effective than domestic alternatives—meaning the desired shift in consumer behaviour may never occur.

In today’s global economy, tariffs are more than just a government revenue tool. They are a disruptive force, reshaping pricing models, supply chains, and profitability in ways that ripple through global markets.

The Asia–Pacific (APAC) region is deeply integrated into global trade flows, with significant volumes of exports destined for the United States. Rising tariff volatility presents two key challenges for APAC-based firms:

1. Profit Erosion – Without proper arm’s length calibration of pricing, tariffs can quickly erode profit margins, particularly for companies operating on tight distribution margins.
2. Supply Chain Disruption – Tariff changes can force manufacturers and distributors to re-evaluate sourcing, routing, and pricing structures.

Recent US tariff rates have varied widely by country and product category—from a flat 10% in some APAC countries to as high as 50% in politically sensitive cases, such as certain imports from India. This volatility makes long-term planning more difficult, underscoring the need for proactive tariff management strategies.

One of the most important but often overlooked aspects of tariff planning is the relationship between customs valuation and transfer pricing.

While the rules governing customs duties and transfer pricing differ, they are interdependent. Customs authorities frequently rely on transfer pricing documentation to determine the transaction value of imports. This means:

• Incomplete or inaccurate transfer pricing documentation can undermine customs compliance.
• Transfer pricing policies must align with customs valuation requirements to avoid disputes and penalties.

Any changes in supply chain, sourcing, or pricing must be accurately documented to remain compliant with both customs and transfer pricing regulations.

When tariffs are applied, they directly increase the landed cost of goods, which can disrupt existing transfer pricing policies. For example, a distributor operating at a 6% profit margin can see its margin completely wiped out—or even turn into a loss—if a 10% tariff is imposed.

Two common scenarios illustrate the impact:

1. Limited Risk Distributor Model
   If a distributor’s contract guarantees a fixed profit margin (e.g., 4% annually), the manufacturer may need to reduce its selling price to the distributor to offset the tariff’s impact.
   This shift can reduce the manufacturer’s own profitability, raising questions about whether the tax authority in the manufacturer’s country will accept the reduced margin.
2. Full-Fledged Distributor Model
   If the distributor bears market risk, it may respond by increasing selling prices to consumers. While this can restore profitability, it passes the cost of tariffs directly to the consumer—contrary to the common perception that tariffs are paid by the exporting country.

In both cases, the tariff’s cost must be allocated between the parties in a way that satisfies the arm’s length principle and is defensible to tax authorities in all relevant jurisdictions.

In our recent webinar we highlighted several strategies for mitigating the financial impact of tariffs, including:

1. Renegotiating Intercompany Pricing

Adjusting transfer prices to share the cost of tariffs between related parties may be necessary. This should be done with careful consideration of benchmarking studies and arm’s length principles.

2. Reviewing Business Models

In some cases, switching from a limited risk distributor model to a full-fledged distributor model (or vice versa) may allow for more flexible cost sharing.

3. Exploring IP Structuring Opportunities

Unbundling intellectual property (e.g., trademarks) from product pricing can reduce the customs valuation of imported goods, potentially lowering tariffs. However, this may trigger withholding taxes on royalty payments—so the net benefit must be carefully assessed.

4. Rerouting Supply Chains

Shifting final assembly or value-add processes to countries with lower tariff rates can reduce overall duty costs. This strategy must comply with rules of origin to be effective and avoid penalties.

5. Leveraging Advance Pricing Agreements (APAs)

Existing APAs may be disrupted by tariffs if they alter the economic assumptions underlying the agreement. Renegotiating APAs, or incorporating tariff-related clauses into new APAs, can provide certainty and reduce audit risk.

Any changes to supply chains, intercompany pricing, or product flows must be reflected in:

• Transfer Pricing Documentation – Updated to reflect changes in functions, risks, and pricing.
• Customs Documentation – Accurate valuation, origin, and classification details to support tariff calculations.
• Intercompany Agreements – Amended to reflect revised pricing policies, cost-sharing arrangements, and risk allocations.

Tax authorities will closely scrutinise changes that reduce taxable income. Being “audit ready” is critical.

Tariff policy is inherently political, and sudden changes—such as the imposition, suspension, or escalation of duties—can occur with little warning. The TPS team emphasised the importance of proactive planning, including:

• Scenario Planning – Develop Plan A, B, and C to adapt quickly to new tariff structures.
• Supply Chain Agility – Build flexibility into sourcing and distribution networks.
• Benchmarking Refresh – Update comparables to reflect post-tariff market realities.
• Financial Modelling – Quantify the impact of potential tariffs on margins and profitability.

1. Tariffs are both a tax and a cost—and ultimately, they often affect end consumers as much as businesses.
2. Transfer pricing and customs valuation are intertwined—alignment between the two is essential.
3. Proactive planning beats reactive adjustment—companies that prepare for multiple scenarios will weather volatility better.
4. Documentation is non-negotiable—accurate, up-to-date records are critical for defending transfer pricing positions and customs valuations.
5. Collaboration is key—finance, tax, supply chain, and legal teams must work together to manage tariff risks effectively.