NASHVILLE — At this year's Tax Executives Institute Annual Conference, a session on tariffs and trade underscored why corporate tax departments must work with their organizations' trade functions. Indeed, one message ran through the discussion: Modeling the tax effects of a tariff response cannot be an afterthought.

In 2025, tariffs climbed to their highest average effective rate since the 1930s, according to the Yale Budget Lab, and the legal basis for their impostion, collection, and categorization keeps shifting. After the U.S. Supreme Court held in Learning Resources v. Trump that the International Emergency Economic Powers Act (IEEPA) does not authorize the president to impose tariffs in February, a temporary Section 122 surcharge followed. And in July, that was replaced by Section 301 duties, resulting in many organizations deciding their tax pathway based on duty savings alone.

The savings number is only half the answer

Three attributes determine duty exposure: classification, country of origin, and value. Classification and origin follow from the goods and the supply chain; whereas value follows from the intercompany price, which is also a transfer pricing result.

That connection invites a shortcut: Lower the price, and the duties fall. Some operations teams have even suggested a 0% markup on intercompany sales for that reason. However, a related party price is acceptable for customs only if the circumstances of sale or recognized test values support it, and the gating question is whether the pricing methodology is objective, documented, and fixed before importation.

A model shows what the shortcut leaves out. Moving margin into the United States shrinks the duty base, but moves taxable profit here as well. Depending on the rate-differential, the duty benefit can be partially or totally offset by the added income tax. The effects on both withholding taxes and and the Value Added Tax (VAT) and Goods and Services Tax (GST) can shift the result further. Therefore, a savings figure should not be presented until it has been netted against all three.

Supply chain moves change the tax profile

Common responses to this problem include tariff engineering, supply chain optimization, diversification, bonded warehouses, foreign trade zones, and duty drawback. Several leave the tax position largely untouched. Relocating functions, assets, or operations does not.

A sound model covers both sides of the border, and the U.S. rules themselves have moved. The 2025 One Big Beautiful Bill Act (OBBBA) renamed Global Intangible Low‑Taxed Income (GILTI) to Net CFC Tested Income (NCTI) for tax years beginning after 2025 and eliminated the deemed return on tangible assets — which means that a footprint analysis built on the 2017 rules may be out of date.

To make sure their analysis is the most up-to-date, corporate tax professionals need to consider these factors:

• In the departure country — Examine the potential exit tax, business valuation or local rulings, employment law implications, as well as the severance funding and deduction questions.
• In the destination country — Look at the future income tax rate, indirect and withholding taxes, the treaty network, operating and labor costs, and the possibility of future tariffs.
• In the US — Analyze Subpart F of the anti-deferral consequences, the effect of foreign operations and asset movements under NCTI, and direct and indirect tax consequences in every jurisdiction involved.

A destination with lower duties and a worse tax outcome may not be the better choice, and only a model will show that.

Transfer pricing belongs inside the model

Transfer pricing connects the tax and trade analyses, so it needs to sit inside the model rather than beside it.

Yearend true ups or any accounting adjustments can alter the price paid or payable. The U.S. Customs and Border Protection (CBP) strongly encourages the Reconciliation program for reporting these adjustments, and downward adjustments generally require a formula in place before importation. That is a practical reason to set the transfer pricing policy at the start of the year and pair it with a customs memo. Adjustments can run both ways, so a downward true up may support a partial duty refund while an upward one may result in additional duties to be paid.

Data sources matter too. Transfer pricing often relies on the US distributor's resale results, while customs value reflects the price at importation. Netting intercompany balances in aggregate helps the organization's treasury function, but it removes the transaction level payment trail that supports a customs position.

The TEI conference session offered a simple cycle for corporate tax departments to follow: Monitor tariff changes, model the tax and customs effects together, decide on the supply chain response, align transfer pricing and customs values, and review contracts and allocation.

The question of which parties bear the tariff needs to be addressed here as well. The end customer, the US distributor, or a manufacturer or principal elsewhere in the chain could carry the cost. For related parties, the answer should follow the intercompany agreements, the control and risk framework, and the conduct of the parties. Modeling each allocation shows what it does to entity level profit and to the arm's length range.

Advance pricing agreements deserve a place in the model as well. A change in business results often does not breach an agreement's critical assumptions, but each agreement is different. That means that tax departments should conduct due diligence on new and renewal agreements around tariff impact and product-level profitability.

Refunds and substance add two more inputs

In another wrinkle of the Court's tariff decision, IEEPA refunds are moving through the CBP's CAPE system, and Phase 3 for finally liquidated entries opened October 6, generally for importers with a court order.

Further, the tax answer depends on facts. Under the tax benefit rule, a refund is income only to the extent the original duty reduced tax, so refunds on inventory still on hand often reduce inventory cost instead. For accrual taxpayers, the all events test governs timing, and filing a claim alone may not be enough. If the business owes customers a share, that obligation needs its own analysis.

Substance is the other input. Principal and limited risk structures, carving royalties and service fees out of the price of goods, and First Sale for Export all depend on the US entity having real function and risk. Executive Order 14411 does not change valuation law, but it directs the CBP to tighten importer eligibility and apply a good standing test that looks at an importer's compliance history and its affiliates.

A model built on a structure that cannot withstand that scrutiny is not a useful model.

Building the habit

The TEI conference session offered a simple cycle for corporate tax departments to follow: Monitor tariff changes, model the tax and customs effects together, decide on the supply chain response, align transfer pricing and customs values, and review contracts and allocation.

Modeling comes before the decision for a reason. Supply chain changes take time and tariff rules can shift quickly, so the cycle is worth repeating.

Every failure discussed traced back to corporate functions that never spoke to each other. A good first step is to ask whether the next tariff response on the table has been tested for duty, income tax, withholding, and VAT/GST together, and whether both the tax and trade functions have seen the same numbers.

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