There's a lot of chatter these days about two different transfer pricing planning opportunities for tariff mitigation. While each has its application and promise, in the spirit of drafting this on a Monday, I'd like to offer some dreary notes of caution.
"Unbundling" charges in intercompany transactions.
This strategy, at a high level, applies when a company imports (and pays tariffs on) a product which has bundled pricing - for example, if materials, intellectual property, and back-office support are all included in a single price.
NOTE OF CAUTION: under US customs rules, some services and IP payments are considered "assists" to the product and therefore subject to tariff duties. In this example, the implicit royalty for technology IP may be an assist, and only the back-office support may be carved out of the customs value base.
First Sale for Export.
This is an alternative customs valuation method which allows you to declare the value of the "First Sale" when a product is routed through a middleman/vendor and then exported to the final destination. Applying the First Sale method can remove the middleman markup from the customs declaration and therefore reduce the tariff.
NOTE OF CAUTION: The First Sale Method has specific requirements, including that the sale from the factory to the middleman be arm's length, and that the product be clearly marked for export when leaving the factory. I've had clients seek to "plan into" First Sale by exploring the introduction of a middleman into the supply chain. If this is not accompanied by functions and substance justifying the middleman's markup, you may not only have customs risk that the First Sale is denied as an acceptable method, but also transfer pricing risk in the lack of business purpose in the factory-middleman transaction.
The action items here are to closely align income tax and customs compliance responsibilities within the business, and to ensure that personnel and systems are capable of successful implementation of any joint planning policies.
Chad Martin directs Eide Bailly's Transfer Pricing Services practice.
