A tariff is, at its simplest, a tax imposed on imported goods. For APAC exporters, it is often the final—and most unpredictable—hurdle before products reach overseas customers.

The stated aim of tariffs is to encourage domestic consumption by making imported goods more expensive. However, for many goods produced in Asia, especially those requiring specialised manufacturing, tariffs do not necessarily shift demand away from imports. Instead, they often become an unavoidable cost in the supply chain.

In recent years, US tariffs on APAC exports have varied widely—from a flat 10% for countries like Singapore and Australia to over 40% for others, such as Myanmar, and up to 50% in politically sensitive cases like certain Indian exports. This creates an unstable trading environment where pricing models and profitability can change overnight.

Asia’s role as a manufacturing hub means that many companies in the region operate under thin margins—particularly contract manufacturers and distributors serving the US market.

Two major risks stand out:

1. Profit Margin Erosion
   A 10% tariff on goods destined for the US can wipe out a distributor’s profit margin entirely if transfer pricing policies are not adjusted. For example, a distributor with a 6% margin may find itself operating at a loss unless prices or cost structures change.
2. Supply Chain Disruption
   Sudden tariff changes can trigger costly shifts in sourcing, routing, and even manufacturing locations. Moving production is not a short-term fix—establishing new facilities or partners can take five to ten years.

For APAC exporters, these challenges are compounded by the need to maintain compliance with both domestic and international tax regulations.

In Asia, as elsewhere, customs authorities often rely on transfer pricing documentation to determine the transaction value of imports. This creates a direct link between customs valuation and transfer pricing compliance.

If a company changes its supply chain, sourcing, or pricing in response to tariffs, it must ensure its transfer pricing documentation and customs declarations remain aligned and defensible.

The impact of tariffs on APAC businesses depends largely on their intercompany pricing model. Two common scenarios illustrate the difference:

1. Limited Risk Distributor (LRD)
   In an LRD arrangement, the distributor earns a fixed margin, with the manufacturer absorbing most of the market risk. If tariffs are imposed, the manufacturer may need to lower its selling price to the distributor to preserve that margin.
   For APAC exporters, this often means a direct hit to profitability, raising questions about whether local tax authorities will accept the reduced margin.
2. Full-Fledged Distributor
   In this model, the distributor bears market risk and sets final consumer prices. When tariffs increase costs, the distributor may pass the additional cost to customers. While this restores profitability, it can impact competitiveness in the US market.

Both models require careful review when tariffs change, as the allocation of costs must meet the arm’s length principle and be acceptable to tax authorities in both the exporting and importing countries.

The TPS webinar outlined several strategies for managing tariff exposure in the region:

1. Renegotiate Intercompany Pricing

Adjust transfer prices to share tariff costs between related parties. Any changes must be supported by benchmarking studies and comply with local transfer pricing rules.

2. Review Business Models

Consider whether switching between limited risk and full-fledged distributor models (along with substance) could provide more flexibility in absorbing tariff costs.

3. Optimise IP Structures

Separating intellectual property (such as trademarks) from product pricing can lower the customs valuation and reduce tariffs. However, this approach must account for withholding taxes on royalty payments.

4. Explore Rerouting and Origin Shifts

Rerouting goods through other APAC countries with lower tariffs can be effective if rules of origin are met. In some cases, this may require additional assembly or value-add processes to change the product’s origin status.

5. Use Advance Pricing Agreements (APAs)

Review existing APAs to ensure tariffs have not invalidated their underlying assumptions. Consider including tariff-specific clauses in new APAs to provide certainty for both transfer pricing and customs compliance.

For APAC businesses, compliance is not just a legal obligation—it is a strategic necessity. Any changes to supply chains, pricing models, or intercompany agreements must be reflected in:

• Transfer Pricing Documentation – Updated to show changes in functions, risks, and pricing.
• Customs Filings – Accurate, aligned declarations for valuation, origin, and classification.
• Intercompany Contracts – Amended to reflect new cost-sharing or risk allocation structures.

Countries such as Malaysia, Singapore, and Vietnam have increased scrutiny on related-party pricing, especially when margins change unexpectedly. Being audit-ready is essential.

Tariff policy is political by nature. APAC exporters must prepare for sudden shifts, such as US policy changes or regional trade agreement updates. Key recommendations from the TPS team include:

• Scenario Planning – Model the financial impact of multiple tariff scenarios and prepare contingency plans.
• Supply Chain Agility – Build flexibility into manufacturing and routing to respond quickly to changes.
• Benchmarking Refresh – Update comparables to reflect post-tariff market conditions.
• Financial Modelling – Quantify how tariffs affect margins and pricing strategies across multiple markets.

1. Tariffs are both a tax and a cost—and APAC exporters must plan for both the financial and operational impacts.
2. Customs valuation and transfer pricing are inseparable—aligning the two is critical to compliance.
3. Proactive planning is vital—reactive adjustments leave businesses vulnerable to profit erosion and audit risk.
4. Documentation is strategic—it protects positions in both customs and tax audits.
5. Cross-functional coordination is essential—tax, supply chain, and finance teams must work together.