Currently, the Trump administration has imposed a wide range of new tariffs.
There is a general 10% baseline tariff that has been implemented on most imported goods, with significantly higher "reciprocal" rates—from 15% to 50%—now in place for dozens of countries with whom the United States has a trade deficit. The Trump administration has also imposed targeted, high-rate tariffs on specific products from various countries, including steel and aluminum (50%), most copper products (50%), various imported cars and parts (25%) and many Indian products (50%). While the legal basis for some of the most sweeping tariffs is currently being challenged in federal courts, companies must understand the relationship between tariffs and transfer pricing to maintain operational efficiency and profitability throughout their supply chains.
Transfer pricing, very generally, refers to setting prices for goods, services, or assets traded between related entities within a multinational corporate group. The core guiding principle is the "arm's-length principle," which ensures that related parties conduct transactions as if they were independently negotiating fair, market-based prices. The application of the arm's-length principle typically requires the undertaking of a comparability analysis, whereby transactions between independent entities, which are sufficiently comparable to the related party transaction, are identified and an arm's-length range or margin is developed based on an appropriate transfer pricing method.
Multinational companies face complex customs duties and tariffs when moving goods across borders. To control costs and improve compliance, companies execute a number of strategies, including employing the "first-sale-for-export principle" or "First Sale Rule", duty drawback and unbundling of non-dutiable costs—all of which companies can implement to effectively navigate the international trade landscape to manage the unpredictable cost of tariffs. The First Sale rule offers significant tariff-savings potential, but successful implementation requires careful planning and rigorous execution.
Key challenges include:
Resource Limitations and Regulatory Exposure: Many organizations lack the dedicated staff or systems to actively manage a First Sale program, increasing the likelihood of compliance gaps.
Documentation Deficiencies: An incomplete or non-sequential audit trail can lead to claim denials, costly penalties, and heightened scrutiny from customs authorities.
Organizational Misalignment: Effective programs demand close coordination among different teams (e.g. procurement, finance and trade compliance) to ensure consistent practices across global operations.
We provide a brief overview of these concepts below.
The First Sale Rule allows U.S. importers to pay customs duties based on the price of the first transaction in a multi-tiered supply chain. More specifically, the First Sale Rule allows U.S. importers to pay duties on the value of a product's first sale from its manufacturer to an intermediary, rather than the second sale from the intermediary to the U.S. importer, potentially lowering tariff costs. This doctrine applies if the first sale is a bona fide, arm's-length transaction and the goods are destined for export to the United States at the time of that sale. Proper documentation is crucial to prove the legitimacy of the first sale and to avoid customs penalties. Consider the following example: A French manufacturer sells goods to an Italian trading company for $5. The Italian trading company in turn sells the same goods to a U.S. retailer for $10. Normally, U.S. customs duties would be based on the $10 price. With the first sale rule, the U.S. retailer can pay duties based on the $5 price, if (i) the first sale was bona fide and at arm's length and (ii) the goods were clearly destined for export to the U.S. at the time of that sale.
Additionally, the unbundling of non-dutiable costs involves legally separating costs that are not subject to customs duties from the total value of imported goods, thereby reducing the overall dutiable value and lowering the customs duties owed. Common examples of non-dutiable costs that can be "unbundled" include certain international freight and insurance costs, foreign inland freight, and design fees, particularly if they are not considered part of the "price paid or payable" for the merchandise. This price forms the basis of the "Transaction Value," which is the primary method for determining the customs value of merchandise sold for export. Importers must maintain specific documentation and perform careful analysis to determine which costs are non-dutiable and can be lawfully excluded.
The First Sale Rule is a powerful tool for U.S. importers to minimize tariffs, provided they can prove that the initial sale was legitimate and intended for export. Along with unbundling costs and claiming duty drawbacks, it forms part of a broader strategy to navigate the international trade landscape efficiently.
Finally, duty drawback is a program that refunds a portion of customs duties, taxes, and fees paid on imported goods that are then exported or destroyed. The program encourages international trade and manufacturing for export by offsetting the cost of duties on imports, allowing companies to recover up to 99% of the duties paid under certain conditions. To claim a refund, businesses must meet eligibility requirements and follow specific procedures for filing claims with U.S. Customs and Border Protection (CBP).
As CBP intensifies its oversight, companies must establish clear transaction frameworks and maintain robust records to withstand regulatory review. Buchanan's trade compliance and tax professionals can help you navigate these complexities—and simultaneously reduce your tariff burden with a streamlined, practical approach.
Buchanan has a team of international trade and tax attorneys with experience advising on U.S. trade remedy laws and customs matters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
