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New U.S. tariffs on Canadian goods could force multinational entities (MNEs) to reconsider their transfer pricing strategies to mitigate exposure to tariffs. Here are some approaches MNEs could take to prepare for potential tariffs.<\/p>\n
Canadian businesses face rising costs and trade uncertainty as the threat of U.S. tariffs lingers\u2014but adopting new transfer pricing strategies could be an avenue to provide some relief.<\/p>\n
Multinational entities (MNEs) are subject to transfer pricing rules that govern intercompany prices for goods crossing borders. Tariffs add another layer of consideration for managing transfer prices. Higher tariffs incentivize MNEs to lower the transfer price of imports to minimize duties, while lower tariffs may encourage shifting profits to lower-tax jurisdictions.<\/p>\n
However, aggressive pricing adjustments could trigger transfer pricing audits from tax authorities. Balancing tariff optimization with compliance could allow companies to reduce tariff exposure while maintaining compliance with tax regulations and steering clear of excessive audit risks.<\/p>\n
Understanding the intersection of trade policy and transfer pricing is critical for any MNE with transactions between Canada and the U.S. to develop a platform to reassess their structures.<\/p>\n
Here is a look at three potential approaches to transfer pricing which could help mitigate the impact of tariffs.<\/p>\n
Tariffs generally were not a significant consideration for transfer pricing policies between Canada and the U.S. due to the countries\u2019 historically strong trade relationship.<\/p>\n
Other taxes such as withholding taxes (WHT) were often more pertinent. As a result, many businesses adopted a straightforward approach to transfer pricing, such as targeting a distribution margin.<\/p>\n
While targeted margins may have been efficient, they may not be ideal when tariffs are considered. There may be other transactions, such as services, that should exist and would reduce the intercompany transfer price of goods.<\/p>\n
When considering future strategies, it is important for MNEs to review whether past practices were in fact the most appropriate. By reassessing prior situations, MNEs can identify areas where adjustments may be necessary to better align with the current tariff landscape.<\/p>\n
Companies evolve over time, but transfer pricing strategies may not be updated as quickly.<\/p>\n
Consider this scenario: a business starts with two or three sales individuals and distributes Canadian-purchased products in the U.S. through a U.S. subsidiary (USCo), which is compensated with a target operating margin. Over time, the USCo hires executives and establishes its own HR, IT and other functions.<\/p>\n
The historic transfer pricing policy may no longer reflect the actual risk and functionality of the USCo. Additionally, new comparable arrangements may have been struck with an arm\u2019s length distributor, which could serve as a strong comparable uncontrolled price (CUP). Reviewing these facts may lead to a position that results in the intercompany sales price being lower than what it was historically.<\/p>\n
There are many supportable methods to price intercompany transactions, and each may result in different intercompany prices. MNEs should explore alternative transfer pricing to ensure they are using the most appropriate and beneficial approach amid the potential enforcement of new tariffs.<\/p>\n
Goods resold by a Canadian or U.S. company can have components, and not all components may originate from or be further processed in either country.<\/p>\n
Understanding a company\u2019s supply chain may identify these facts. This presents a potential opportunity to bifurcate the goods or components sold, since it\u2019s possible that not all goods sold will face tariffs if their point of origin is another country.<\/p>\n
By conducting this analysis alongside trade advisors and transfer pricing experts, MNEs can identify opportunities to effectively deal with tariffs.<\/p>\n
The potential introduction of tariffs between Canada and the U.S. presents new challenges for MNEs\u2014but there are planning opportunities available.<\/p>\n
Aligning transfer pricing with trade and tax compliance is critical to managing costs and avoiding regulatory challenges. As protectionist policies grow, Canadian companies must navigate these disruptions to stay competitive.<\/p>\n
Given the potential financial implications, it is essential for companies who trade between Canada and the U.S. to consider these factors carefully and develop effective transfer pricing strategies.<\/p>\n
This article was written by Sean McNama and originally appeared on 2025-02-25. Reprinted with permission from RSM Canada LLP. RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com\/about<\/a> for more information regarding RSM Canada and RSM International.<\/p>\n The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.<\/p>\n<\/div><\/div>\n
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