When the United States introduced reciprocal tariffs in April 2025, public debate focused primarily on trade balances and industrial policy. Policymakers framed the tariffs as instruments for correcting perceived trade imbalances and reshaping supply chains. For multinational enterprises (MNEs), however, the tariffs represented something far more immediate and concrete. What appeared in public discourse as a policy tool quickly manifested in the financial performance of MNEs by increasing the cost of goods sold (COGS) and compressing operating margins.
In response to the reciprocal tariff regime, many MNEs modified their transfer pricing structures to mitigate the impact of the tariffs. Those changes included, for instance, modifying distribution supply chains (shipping directly from the vendors to customers), sourcing alternative suppliers with more preferential tariff rates, and reviewing transfer pricing flows to unbundle royalty and service payments from product pricing.
However, since the imposition of the tariffs, MNEs have continued to operate under significant uncertainty due to rapidly changing policy stances related to tariff rates and the legality of these tariffs. The legal controversy surrounding those tariffs ended on February 20, when the US Supreme Court invalidated the reciprocal tariff regime in Learning Resources, Inc., et al. v. Trump et al. Yet the economic consequences of the policy did not disappear with the court’s ruling. For MNEs, the central question no longer is whether the tariffs were lawful but rather how the refund-related benefit should be recognized within the corporate structure. Tariffs and potential refunds of those tariffs are mirror-image economic events. Imposed tariffs reduce profit, whereas refunds would restore profit. Section 482 of the Internal Revenue Code and the Treasury Regulations promulgated under it require the allocation of both the loss and the recovery consistent with economic substance.
To understand the significance of the Supreme Court’s ruling, it is necessary to first understand how tariffs affect profits and how Treasury Regulations Section 1.482 governs the distribution of those profits within MNE groups. Although the Supreme Court did not address potential refunds arising from the illegality of the tariffs, the practical process of the refunds has unfolded through subsequent proceedings before the US Court of International Trade (CIT). On March 4, 2026, the CIT issued an order directing that entries subject to the International Emergency Economic Powers Act tariffs be liquidated or reliquidated without regard to those duties, effectively requiring that refunds be issued to importers that paid the tariffs.1 Two days later, on March 6, US Customs and Border Protection (CBP) filed a declaration explaining that it intended to develop a new function within the Automated Commercial Environment (ACE) system to process refunds on an importer-by-importer basis, including the calculation of statutory interest. CBP indicated that it expects to complete this system change in approximately forty-five days from the date of the declaration.2 Based on that filing, the CIT subsequently paused its earlier directive requiring immediate refunds, giving CBP time to implement the proposed refund mechanism.
From a transfer pricing perspective, the procedural posture of the refund process highlights an important distinction between customs entitlement and economic entitlement. Under the system described by CBP, refunds will be issued to the importer of record through the ACE platform. However, the importer of record may not necessarily be the entity that bore the economic burden of the tariffs within an MNE group. Rather, the entity that bore the economic cost of the tariffs during the tariff period is the entity that should receive the corresponding benefit when those tariffs are refunded.
This article discusses how refunds must be allocated within an MNE group to reflect arm’s-length considerations.
Transfer Pricing Structure and Economic Burden
Treasury Regulations Section 1.482 authorizes the Internal Revenue Service to allocate income, deductions, credits, or allowances among related parties to prevent tax evasion and clearly reflect income, based on where value is created.3 The arm’s-length standard governs how related parties must contract to clearly reflect income. According to the arm’s-length standard, controlled transactions must produce results consistent with those that would have occurred between uncontrolled parties in comparable circumstances.4
In applying the arm’s-length standard to tariff refunds, one first must determine which entity bore the economic burden during the tariff period. The answer depends on the group’s transfer pricing architecture. Many MNEs structure their operations so that a US subsidiary functions as a limited-risk distributor. Under this model, the US entity performs routine distribution functions and earns a benchmarked operating margin determined under the comparable profits method, often measured by return on sales. A foreign principal retains ownership of intellectual property, controls procurement decisions, and assumes inventory and market risk. The principal, therefore, will earn the residual profit or loss after the distributor’s routine return is satisfied.
When tariffs increase COGS at the US limited-risk-distributor level, the distributor’s operating margin might fall below the arm’s-length range established under the comparable profits method. To maintain compliance with the arm’s-length standard, the group may adjust transfer prices so that the distributor continues to earn its target margin. These adjustments often occur through year-end true-ups or contemporaneous modifications to intercompany pricing during the year. Economically, the foreign principal absorbs the tariff cost through reduced residual profit. In such a structure, the legal incidence of the tariff, the fact that the US limited-risk distributor paid the duty at the border, is not dispositive. Treasury Regulations Section 1.482 focuses on economic substance. Specifically, Section 1.482-1(d)(3)(ii)(B)(1) states that contractual terms will be respected if they are consistent with the economic substance of the transaction. This foundation implies that if the distributor’s profitability remained within the arm’s-length range and the principal’s residual profit declined, then the principal bore the economic burden.
Alternatively, the US entity may operate as a full-risk distributor or entrepreneurial entity. In that case, the distributor’s margin might decline when tariffs increase input costs and no compensating adjustments occur. The distributor therefore absorbs the margin compression and bears the economic burden of the tariff. During the tariff period, some multinational groups adopted hybrid approaches, allowing distributors to absorb temporary margin compression while partially adjusting transfer prices. In those cases, the entities shared the burden. The allocation of refunds must mirror that allocation to avoid distortions under Treasury Regulations Section 1.482.
The architectural framework of intercompany pricing therefore determines the distribution of tariff shocks. Treasury Regulations Section 1.482 requires that this design reflect actual functions performed, risks assumed, and assets employed. The Supreme Court’s ruling does not alter that requirement. Instead, it forces companies to revisit whether the allocation of refunds aligns with the allocation of risk during the tariff period. To be consistent with the arm’s-length standard, when tariff refunds are issued, the entity that bore the cost of the tariff must reap the benefits of the tariff refund. Furthermore, as noted earlier, MNEs might have modified their transfer pricing structures in response to the tariffs. Should refunds be available now, it is necessary to evaluate those transfer pricing structures to ensure that the allocation of refunds is at arm’s length.
Risk Control and the Arm’s-Length Standard Under Section 1.482
Treasury Regulations Section 1.482 provides detailed guidance on risk allocation and states that the allocation of risk must be consistent with the economic substance of the transaction. An allocation of risk is respected only if it is supported by the parties’ conduct and if the party assuming the risk has the financial capacity to bear it.
In the context of tariffs, the relevant risks include procurement risk, inventory risk, and market risk. To determine these risks, businesses must consider the following questions: Which entity decided on the change in suppliers? Which entity determined pricing strategy in response to higher import costs? Which entity had the financial capacity to absorb margin compression? If a foreign principal retained control over sourcing and pricing decisions and possessed the capital to absorb losses, then assigning tariff risk to that principal is consistent with the arm’s-length standard under Section 1.482-1(b). If, however, the US distributor made independent pricing decisions and bore market risk without guaranteed margin protection, then the distributor may properly be treated as the risk-bearer.
Contractual terms included in the intercompany agreement governing the transaction do not alone determine the assumption of risk. Treasury Regulations Section 1.482 emphasizes that actual conduct is critical and can be used to override contractual terms that are inconsistent with the parties’ actions. If the transfer pricing analysis shows that the distributor’s margin was preserved through transfer pricing adjustments, then that conduct indicates the principal’s assumption of tariff risk.
This analysis becomes crucial when refunds are issued. The refunds represent a reversal of the economic shock created by the tariffs. Treasury Regulations Section 1.482 demands symmetry. If one entity absorbed the tariff loss because it controlled and bore the relevant risks, allocating the refund to another entity would distort income and fail to clearly reflect economic reality. The recovery must follow the same economic burden that governed the allocation of costs.
Refund Allocation Mechanisms Under Section 1.482
Once a business determines which entity bore the economic burden of the tariffs, it then must determine the mechanism for allocating tariff refunds. Treasury Regulations Section 1.482 does not prescribe a specific method for reallocating extraordinary recoveries, but it requires that the method chosen must produce arm’s-length results and clearly reflect where income must be allocated.
One approach involves prospective transfer price adjustments. If a foreign principal absorbed tariff costs through reduced transfer prices, a refund may justify restoring those prices to pre-tariff levels. The adjustment effectively returns profit to the principal over time.5 In other cases, a lump-sum compensating adjustment might be appropriate to ensure that results conform to the arm’s-length standard.6 When profit-split methods apply under Treasury Regulations Section 1.482-6, refunds could increase the combined profit pool subject to allocation under the established allocation factors, preserving symmetry with the prior allocation of losses.
Regardless of form, the allocation must align with the best method rule under Section 1.482-1(c). The chosen approach should be consistent with the group’s established transfer pricing methodology and supported by transfer pricing analysis. More important, refund allocation decisions could attract scrutiny if they produce tax advantages inconsistent with prior loss allocation. If tariff costs are allocated to a high-tax principal during the tariff period but refunds are retained in a lower-tax US entity, that asymmetry might invite adjustment. Section 1.482 empowers the IRS to reallocate income to clearly reflect economic reality.
Conclusion
The reciprocal tariffs imposed in 2025 and invalidated in 2026 demonstrate how external policy shocks interact with an MNE’s transfer pricing in ways that directly impact profitability. Refunds now promise to restore profitability; however, under Treasury Regulations Section 1.482, the restoration must reflect economic burden.
The entity that bore the economic burden of the tariff is entitled to the refund. Risk allocation, actual conduct, and financial capacity determine that entitlement. Any other allocation mechanism risks distorting income distribution and will invite adjustments from tax authorities.
The reciprocal tariff episode illustrates the importance of coherence in transfer pricing design. The Supreme Court’s decision eliminated the legal basis for the reciprocal tariffs, but it did not eliminate the need for careful transfer pricing analysis. Section 1.482 requires that both losses and recoveries be allocated consistently with economic substance. MNEs should ensure that intercompany agreements explicitly address extraordinary duties and retroactive refunds. Clear documentation of risk allocation during the tariff period will support consistent refund allocation. Additionally, MNEs should incorporate tariff sensitivity into financial modeling to evaluate the impact of those cost shocks. Transfer pricing architecture determines where those shocks are recognized.
As companies pursue refunds through administrative claims and litigation, maintaining consistency between allocating losses and recoveries will be essential. Doing so not only satisfies the arm’s-length standard but also ensures that the financial consequences of extraordinary policy events align with economic reality.
Daniel Moalusi, Ph.D., is a managing director at Crowe LLP. Sowmya Varadharajan, Ph.D., is a principal at Crowe LLP.
Endnotes
- Atmus Filtration, Inc. v. United States, Court No. 26-01259.
- Declaration of Brandon Lord, Executive Director, Trade Programs Directorate, Office of Trade, US Customs and Border Protection, Atmus Filtration, Inc. v. United States, Court No. 26-01259.
- Treasury Regulations Section 1.482-1(a)(2).
- Treasury Regulations Section 1.482-1(b)(1).
- Note that Treasury Regulations Section 1.482-1(a)(3) states that no untimely or amended return will be allowed to decrease taxable income based on allocations or other adjustments.
- Treasury Regulations Section 1.482-1(a)(3) permits year-end true-ups to ensure that results are consistent with the arm’s-length standard. A compensating payment from the distributor to the principal may reallocate the refund directly.
