Because intragroup trade makes up more than half of US imports, multinational groups are inherently exposed. Industries such as automotive and pharmaceuticals are particularly affected. This concentration of related-party trade makes MNEs a primary focus for tariff enforcement. Customs authorities often perceive that related parties may influence pricing outcomes differently from third parties. As a result, scrutiny increases and the compliance burden grows.

US Customs and Border Protection (CBP) evaluates whether the price paid for imported goods reflects arm’s length conditions. Their test, known as the circumstances of the sale (COS) test, focuses on whether the related-party relationship influenced the customs value. Transfer pricing documentation usually does not satisfy this test. CBP is clear that profit-based methods such as the comparable profits method (CPM) or the transactional net margin method (TNMM) do not provide sufficient evidence for customs valuation.

In contrast, the IRS applies US transfer pricing rules to determine taxable income at year end. These rules allow aggregation across product classes and consider profits rather than transactional values. Because higher customs values increase tariff revenue and lower customs values increase taxable income, the IRS and CBP have opposite incentives. They operate separately and coordinate infrequently. This lack of alignment exposes companies to conflicting requirements across the same set of transactions.

TP methods such as CPM and TNMM benchmark overall profitability rather than individual transaction prices. While acceptable for tax purposes, they do not meet the customs requirement to justify the transaction value on a shipment-by-shipment basis.

To substantiate intercompany prices for customs purposes, businesses often need to supplement TP reports with:

• Comparable third party pricing for identical or similar goods
• Internal data showing that transaction-level profitability meets or exceeds group-level profitability
• Evidence that the related-party relationship did not influence the price

For complex supply chains, this level of analysis can be resource-intensive.

The interaction between tariffs and transfer pricing is circular. A decision that reduces tariff costs can create a transfer pricing concern, and vice versa. For example:
If an importer absorbs tariff costs without passing them on, their profitability may fall below benchmark ranges. The IRS may respond by reducing the transfer price to restore arm’s length profitability. This adjustment then reduces the customs value, potentially exposing the company to customs valuation challenges or penalty actions. These domino effects can unfold months or years later, often during an audit.

The Trump administration has stated that it will pursue penalties, damages multipliers, and even criminal referrals for underpayment of tariffs, including cases involving understated customs values. Unlike income tax disputes, customs valuation reviews can escalate quickly into fraud investigations with both civil and criminal consequences. Boards and senior leaders should take this risk seriously.

Although bilateral arrangements such as advance pricing agreements or negotiated customs resolutions can sometimes help, there is no requirement for the IRS and CBP to align positions. Once an audit begins, options become limited.