Key Takeaways
- For this year's TP report, spend some quality time with those qualitative sections you used to skim over.
The transfer pricing planning implications of the recent tariff and trade measures have been covered extensively – including in this blog. However, another phase of the transfer pricing “lifecycle”, documentation and compliance, stands to be similarly disrupted.
A good transfer pricing report includes a Company Overview and Industry Analysis, which describe the activities and value drivers of a taxpayer’s business as well as the market forces at play in the broader industry sector. However, these sections are often given less attention than their more glamorous cousins, the Functional Analysis and Economic Analysis.
In fact, many taxpayers simply roll forward the Company Overview and Industry Analysis year after year, merely updating the numbers. The introduction of (real or threatened) tariffs into supply networks makes understanding a Company’s sourcing, production, and distribution processes, along with the relative bargaining power of sellers and buyers, critical to defending a taxpayer’s transfer pricing practices.
For example, a US distributor purchasing steel products from a related party Canadian manufacturer must consider the proper intercompany allocation of the 25% tariff it now bears as the importer of record. This will depend heavily on the Company’s internal supply chain, as well as its ability to pass on extra costs to customers. We would expect, for example, that a generic steel components distributor would have far less power to raise prices than would a distributor of unique, specialized metallic components for the medical devices industry.
These considerations have always been important, but the new tariffs have thrust them unceremoniously into the transfer pricing spotlight.
Chad Martin directs Eide Bailly's Transfer Pricing Services practice.
