Related party transactions account for $2.3 trillion of the $5.3 trillion cross-border trade in the United States1 and sit at the intersection of two US regulatory regimes that assess the same intercompany pricing through different lenses.
Customs valuation rules determine the value of imported goods for customs duty and tariff (hereinafter jointly referred to as tariffs) purposes. Arm’s-length pricing rules determine whether intercompany prices on cross-border transactions are consistent with the arm’s-length standard. The two regimes serve different policy objectives and are not necessarily designed to align.
The recent expansion in the scope and extent of tariffs in the United States has heightened the economic consequences of intercompany pricing decisions. For this reason, companies should aim to ensure that intercompany pricing of cross-border tangible goods transactions is supportable under both customs valuation and arm’s-length pricing frameworks.
This article compares the customs valuation regime under 19 USC Section 1401a with the arm’s-length pricing framework under 26 USC Section 482 and underlying Treasury Regulations Section 1.482 and describes the constraining role of 26 USC Section 1059A on customs and tax positions. It also explains how tariff-driven intercompany pricing adjustments can impact transfer pricing arrangements and why coordinated planning is important.
The discussion is limited to a US perspective. It does not address any foreign or international customs valuation or arm’s-length pricing rules, such as the World Trade Organization’s Customs Valuation Agreement or the Organisation for Economic Co-operation and Development’s Transfer Pricing Guidelines.
The discussion begins with a comparative overview of the US customs valuation and arm’s-length pricing regimes and explains why their intersection may warrant careful attention.
Legal Frameworks for Valuing Imported Merchandise
Customs Valuation Hierarchy
The customs valuation rules under 19 USC Section 1401a require imported goods to be appraised for tariffs using a sequential hierarchy of valuation methods. If the first method, transaction value, cannot be used, the statute moves to the methods listed afterward.2
Transaction Value
The first method is the transaction value method, defined as the price actually paid for the goods when sold for exportation to the United States plus certain statutory additions. This value includes packing costs, sales commissions, value of assists, royalties or license fees, and proceeds of subsequent resale, disposal, or use that accrue to the seller. The statute excludes certain separately identified costs, including post-importation construction, assembly, maintenance, technical assistance, and transportation costs, as well as customs duties and other import-related federal taxes.3
The transaction value method assumes that the parties are unrelated. When parties are related, the transaction value method is acceptable only if the relationship has not influenced the price actually paid or if the declared value closely approximates one of the statutory test values.4
Identical or Similar Goods
In the absence of the transaction value method, companies may use the value of identical or similar goods exported to the United States at or about the same time adjusted for differences in commercial level and quantity.5
Identical goods are goods that are identical in all respects and were produced in the same country. Similar goods do not need to be identical in all respects, but they must have similar component materials and characteristics and be commercially interchangeable with the appraised goods.6
Deductive Value
The deductive value method is based on the unit price at which the imported goods, or identical or similar goods, are sold in the greatest aggregate quantity at or about the same time in the United States with certain deductions. These deductions include commissions, profit and general expenses, transportation and insurance costs, customs duties and other import-related federal taxes, and post-importation processing expenses.7
Computed Value
The computed value method is based on the cost or value of materials, fabrication, and other processing expenses used to produce the goods increased by assists, packing costs, and the amount of profit and general expenses usually reflected in sales of goods of the same class or kind by producers in the foreign exporter’s jurisdiction.8 The computed value may be difficult to apply, because it requires detailed information about the foreign exporter’s costs and profits, which may be difficult to establish for US importers.
Fallback Method
If none of the preceding methods can be applied, the fallback method permits a value derived from the statutory methods, reasonably adjusted. However, the statute prohibits values based on arbitrary or fictitious amounts, minimum values, domestic market prices in the foreign exporter’s jurisdiction, export prices to other foreign jurisdictions, and several other specified valuation bases.9
Arm’s-Length Standard
According to 26 USC Section 482 and underlying Treasury Regulations Section 1.482, transactions between controlled parties must be priced on the same terms that uncontrolled parties would use under the same circumstances. Specifically, a controlled transaction meets the arm’s-length standard if the results of the transaction are consistent with the outcomes that would have been realized if uncontrolled parties had engaged in the same transaction under the same conditions. However, since identical transactions are rarely available, arm’s-length pricing is often determined by reference to the results of comparable transactions under comparable circumstances.10
Unlike the transaction-specific hierarchy governing customs valuation, the selection of arm’s-length pricing methods is governed by the best method rule. Taxpayers need to apply the best method available that provides the most reliable measure of an arm’s-length outcome. Reliability is evaluated based on the completeness and accuracy of the underlying data, the reliability of the assumptions, and the sensitivity of the results to possible deficiencies. Rather than following a hierarchy, the arm’s-length pricing framework is comparability driven and economically oriented, permitting a variety of pricing methods and economic analyses depending on the facts and circumstances of the transaction. Although a specific comparability factor may be of particular importance, each method requires an appropriate analysis of all the comparability factors, including functions, contractual terms, risks, economic conditions, and property or services.11
Comparable Uncontrolled Price Method
The comparable uncontrolled price (CUP) method determines the arm’s-length price based on prices of comparable uncontrolled transactions. This method requires a high degree of transactional comparability and is most reliable when there aren’t any material differences affecting price or when only minor differences exist for which reliable adjustments can be performed.12
The CUP method is similar to the identical or similar goods method under the customs valuation regime, but the two standards differ somewhat. The customs rules establish comparability based on specific product categories and characteristics, whereas the arm’s-length rules apply a comparability analysis based on economic principles.
Resale Price Method
The resale price method (RPM) evaluates whether an intercompany price is consistent with the arm’s-length standard based on the profit margin realized in comparable uncontrolled transactions. The RPM is typically used by distributors who purchase and resell goods without substantial physical alteration. Activities such as packaging, labeling, and minor assembly do not disqualify the use of this method.13
The RPM is similar to the customs deductive value method. Both methods begin with a downstream resale price and work backward to establish the intercompany price that the US importer pays to the foreign exporter. The difference is that customs deductive value applies statutory deductions, whereas the RPM uses comparable margins to deduct the reseller’s arm’s-length return from an economic perspective. The RPM may be particularly relevant for US limited risk distributors, where the US importer’s return is expected to reflect routine distribution returns.
Cost-Plus Method
The cost-plus method (CPLM) establishes the arm’s-length price by adding an appropriate arm’s-length markup to the underlying costs incurred in producing the goods. It is commonly used in limited risk manufacturing arrangements where the related party manufacturer performs routine manufacturing functions and earns a markup on its cost base.14
The CPLM is similar to the computed value method under the customs regime. Both of these methods establish the intercompany price from a cost base plus an appropriate profit element established through two different approaches. Computed value relies on profit and general expenses usually reflected in sales of goods of the same class or kind by producers in the foreign exporter’s jurisdiction. In contrast, the CPLM derives comparable profit markups from comparable uncontrolled transactions.
Comparable Profits Method
The comparable profits method (CPM) is often applied when transaction-level comparable data is unavailable, but reliable profit-level data for comparable companies may be identified. The CPM evaluates whether a controlled transaction is priced at arm’s length by comparing the least complex participant’s profits to the profits achieved by comparable uncontrolled companies engaged in similar business activities under similar circumstances through appropriate profit-level indicators such as profit margins or profit markups.15 In practice, the CPM is often applied to test limited risk distributors and manufacturers.
The CPM has no direct customs analogue, since customs valuation focuses on transaction-level values, whereas the CPM measures entity-level profitability. Because transaction-level tariffs imposed by customs authorities may reduce the US importer’s profits, this mismatch may impact the US importer’s compliance with the arm’s-length standard from a US income tax perspective.
Profit Split Method
The profit split method (PSM) establishes the arm’s-length price based on the allocation of combined profits based on the relative value of each party’s contributions. The PSM may be relevant in transactions where both parties make valuable contributions or where activities are highly integrated. The allocation must reflect functions performed, risks assumed, and resources employed by each participant, consistent with how uncontrolled parties would divide profits among themselves.16
Like the CPM, the PSM has no direct customs analogue, since customs valuation generally focuses on transaction-level values, whereas the PSM focuses on entity-level profit allocation, which may make it difficult to translate a profit split result into an appropriate customs value for a specific shipment or product.
Unspecified Methods
An unspecified method may also be applied if the taxpayer can demonstrate that the unspecified method provides a more reliable measure of an arm’s-length result than any method specified above. An unspecified method is typically applied in complex or unique scenarios, and its use may carry a higher burden of proof and increased tax authority audit scrutiny.17
Intersection of the Two Regimes
The two regimes—customs valuation and arm’s-length pricing—may require reconciliation when the intercompany price is adjusted after US importation, since post-importation rebates or price reductions may be disregarded in determining customs value according to 19 USC Section 1401a.18 Therefore, any year-end arm’s-length pricing adjustments may not automatically affect customs value.
Section 1059A addresses this interaction by capping the intercompany price at the declared customs value with certain adjustments.19 The rule operates asymmetrically by prohibiting taxpayers from applying an intercompany price for US income tax purposes that is higher than the customs value declared for US customs purposes, thus prohibiting taxpayers from reducing US income tax expense and reducing US tariff expense at the same time.
For example, when a US limited risk distributor imports goods from a foreign full risk principal, the arm’s-length nature of the US limited risk distributor’s profit may be assessed under the CPM through an entity-level operating margin. When tariffs arise, the US limited risk distributor may initially bear the tariff costs through increased inventory costs and cost of goods sold upon resale to US customers. If the US distributor is unable to pass the tariff costs to foreign exporters or to US customers, the distributor’s profit will decrease, and its operating margin may fall below the arm’s-length range. Restoring the arm’s-length return of the US limited risk distributor to the arm’s-length range may require implementing a year-end arm’s-length pricing adjustment for US income tax purposes. Although an arm’s-length pricing adjustment may be appropriate under 26 USC Section 482, such post-importation price reductions may be disregarded for customs valuation purposes under 19 USC Section 1401a.
On the other hand, if a US full risk principal purchases goods from a foreign limited risk manufacturer, the foreign limited risk manufacturer may be the party whose cost-plus markups are assessed under the CPM through an entity-level cost-plus markup, not the US full risk principal. Therefore, the US full risk principal may be able to absorb the economic burden associated with the tariffs through reduced residual profits without an arm’s-length pricing adjustment. Section 1059A may play a more limited role in this case, since the intercompany price may already align with customs value in the absence of arm’s-length pricing adjustments. But, if the US full risk principal passes the tariff costs to the foreign exporter, thereby reducing the foreign manufacturer’s income, the arm’s-length nature of the foreign manufacturer’s returns may be impacted instead.
Conclusion
The interaction between customs valuation and arm’s-length pricing may be an important consideration for taxpayers engaged in cross-border related-party trade. In those cases, taxpayers may need to navigate not only the customs valuation rules under 19 USC Section 1401a but also arm’s-length pricing requirements under 26 USC Section 482. The two regulatory regimes apply different legal frameworks, valuation approaches, and pricing methods; operate on different time horizons; and serve different policy objectives.
Tariffs, post-importation intercompany price adjustments, and profit-based arm’s-length pricing methods may amplify the consequences of intercompany pricing decisions. Since tariffs may continue to play a significant role in US trade policy, integration of customs valuation and arm’s-length pricing analysis may remain important to managing compliance risk.
Tom K. Gottfried is managing director, national tax valuation; Phil Gregorcy is a senior advisor; Jacob Lottes is a senior associate; and Ron Walsh is a vice president, all with Valuation Research Corporation.
Disclaimer: This article is provided solely for educational purposes; it does not take into account any specific individual’s or entity’s facts and circumstances. It is not intended, and should not be relied upon, as accounting, financial, legal, tax or valuation advice. Valuation Research Corporation and the authors of this article expressly disclaim any liability in connection with the use of this article or its contents by any third party.
Endnotes
- US Census Bureau, US Goods Trade: Imports and Exports by Related Parties, 2024, July 3, 2025, www.census.gov/foreign-trade/Press-Release/related_party/rp24.pdf.
- 19 USC Sections 1401a(a)(1) and (2).
- 19 USC Sections 1401a(b)(1), (b )(3), and (b)(4)(A).
- 19 USC Section 1401a(b)(2)(B).
- 19 USC Section 1401a(c).
- 19 USC Section 1401a(h).
- 19 USC Section 1401a(d).
- 19 USC Section 1401a(e).
- 19 USC Section 1401a(f).
- Treasury Regulations Section 1.482-1(b).
- Treasury Regulations Sections 1.482-1(c) and 1.482-1(d).
- Treasury Regulations Section 1.482-3(b).
- Treasury Regulations Section 1.482-3(c).
- Treasury Regulations Section 1.482-3(d).
- Treasury Regulations Sections 1.482-5(a) and (b).
- Treasury Regulations Sections 1.482-6(a), (c).
- Treasury Regulations Section 1.482-3(e).
- 19 USC Section 1401a(b)(4)(B).
- Treasury Regulations Sections 1.1059A-1(a), (c)(1-2).
