The new tariff environment brought in by the Trump Administration has made international income tax and transfer pricing–already, one of the most complex and difficult areas of the tax code–even more daunting.
And while court-mandated refunds on some of those tariffs may give companies relief, in many cases they have made the international tax problems even harder to untangle.
"With the refunds, everyone was really excited at first, because it sounded like all of this was just going to be wiped out like it never existed," said Chad Martin, an Eide Bailly principal and practice lead for Eide Bailly’s transfer pricing services, who also provides strategic customs and tariff advisory and support. "It became pretty clear that was not going to be the case, for multiple reasons."
The tariffs imposed by President Trump, including the so-called reciprocal tariff regime with at least a 10 percent duty on most imports, create a significant new cost for many multinational companies.
Aside from finding the money to pay them, the importer must also incorporate that cost into the calculation of its global taxable income.
While you could think of tariffs as a tax themselves, to tax authorities they are a cost like any other.
Figuring out how to apportion that cost across a company’s global footprint can pit economics against politics, Martin noted. For instance, it may make some sense for a foreign importer to record the tariff’s cost with the parent entity–therefore reducing its overall income. But foreign tax authorities may be resistant to allowing Trump’s tariffs to eat into their country’s revenue.
On the other hand, the Internal Revenue Service will be suspicious of anyone selling products into the U.S., while reporting a low or negative profit margin for its distributing subsidiary.
“You've got competing objectives, and this will turn into controversy three, four years down the road,” Martin said. “Once this audit cycle comes up, there's going to be a bunch of bilateral and multilateral disputes over who should economically bear the cost of that tariff.”
The history of the IRS and Customs and Border Protection as separate, disconnected agencies–within different departments and with very different procedures and personnel–can add to the tension. This has been a longstanding dynamic, but it was often overlooked when the overall amount of tariffs and duties was small.
“It's not a new problem, it's a magnified problem,” Martin said.
The Supreme Court ruled on February 20 that the tariffs imposed through the The International Emergency Economic Powers Act were not authorized by the statute–while this stopped a majority of the Trump administration’s tariffs, it did not affect those imposed through other laws. Shortly afterwards, the Court on International Trade ordered the government to provide refunds to importers who had paid the invalidated tariffs. Customs and Border Protection set up an online system, the Consolidated Administration and Processing of Entries, for companies to apply to receive the payments.
Now, those same companies which incorporated the cost of the tariffs into their income statements must do the same for the new revenue of the refunds. While it presents many of the same issues as before, the results can be very different.
“There’s not perfect symmetry. It's not like the process works in mirror-image reverse of the original tariff,” Martin said. “Because of the incompleteness of the refund, and because of the economics and the industry.”
Tax authorities evaluate international tax structures by looking at what independent third parties do–and in the case of tariffs and refunds, they’re not always spread in perfectly logical ways.
In these cases, the exact route chosen may not be as important as how it’s traveled.
“There’s no silver bullet answer,” Martin said. “I think the best advice for every company to follow, regardless of the fact pattern, is to be consistent in your accounting treatment. Be consistent in your transfer pricing treatment. And with everything, every position that you take, document what you did, with support on why you did it.”
Contact Eide Bailly International Tax Services or Eide Bailly Transfer Pricing Services if you need assistance with worldwide tax, or projection and advice on the tariff refund process.
