The following narrative is based on conversations with Roth&Co clients and colleagues. Names and identifying details have been changed to maintain confidentiality.
On a Monday morning in early March, the loading docks at Lumina Electronics’ sprawling Ohio warehouse are quieter than usual. Pallets of smartphone components sit deliberately motionless. “We’re rethinking every box that comes in,” says CFO Maria Ortiz, gazing at rows of unopened crates. Just the week before, Lumina had been paying a 10% duty on circuit boards from Vietnam; now, with the administration’s tariff hikes and the removal of longstanding exemptions, that duty had ballooned to 25%. “Our margins are getting squeezed from every angle,” she explained. “We’re being forced to rearrange our entire supply chain.”
The Tariff Shock and the Vanishing De Minimis Exemption
In 2017, the Trump administration raised tariffs on hundreds of imported goods entering the United States. But the administration’s more recent elimination of key exemptions was a bigger blow—especially the “de minimis” rule, which had allowed duty-free entry for packages under $800. That provision quietly supported billions in small-package shipments and was vital to the cost structure of many mid-sized and large e-commerce sellers. After the rollback, those same shipments were hit with import duties of 10–25%, depending on their country of origin.
“You wake up one day and discover your cost of goods sold has jumped by 15% overnight,” said Ortiz. Companies across many sectors—consumer electronics, apparel, automotive parts, etc.—are scrambling to mitigate this new cost.
The most immediate response for many has been to pursue alternative sourcing strategies. Many companies have responded directly by shifting manufacturing away from high-tariff regions. Products made in China, for instance, are often charged a 25% tariff under the latest Section 301 actions. But if those same products are made in Vietnam, the duty drops to around 10%. This shift may appear straightforward in theory, but transitioning away from established, trusted suppliers and identifying alternative sources that align with a business’s pricing, quality standards, and minimum order requirements is often complex and challenging.
The Transfer-Pricing Maneuver: A Tax and Tariff Tightrope
While some companies pursue alternative manufacturing sites, others are restructuring their global distribution networks, and using a transfer pricing model, to reduce their tariff costs.
When the U.S. imposed steep tariffs on imported apparel, Wexford Tailoring—a London-based maker of high-end men’s suits—found itself in a financial bind. “We were staring at a 20% tariff that would wipe out our U.S. profit margins,” said Jonathon Davies, the company’s CFO. “Shifting production wasn’t realistic in the short term, so we needed a smarter solution.”
Instead of moving factories, Wexford established a wholly owned U.S. subsidiary. By shifting key distribution and marketing functions to the new American entity—and adjusting intercompany pricing accordingly—Wexford was able to allocate more profit to the U.S. arm and lower the customs value of its imports.
“It wasn’t about dodging rules; it was about making sure our profits matched where real business activity was happening,” Davies explained. Wexford’s transfer pricing strategy helped it reduce its tariff exposure while keeping its supply chain intact.
Wexford’s case is a case study of transfer pricing done right. They weren’t artificially shifting profits to the U.S. just to lower tariffs—they were restructuring their business, so the U.S. arm was genuinely doing more, and then pricing intercompany transactions to reflect that reality. This approach is both strategic and compliant with international tax and trade rules.
“It wasn’t easy—we had to invest heavily in legal, tax, and compliance work to get the transfer pricing right,” Davies said. “But for us, it was worth it. We protected our U.S. market, stayed compliant, and built a structure that’s more resilient for the future.
The Numbers at Work
Here’s a simplified illustration of the mathematics of transfer pricing:
PowerCore Manufacturing is a Chinese company that exports portable generators. Originally, PowerCore sold its generators directly to U.S. retailers at $200 per unit, and with a 10% tariff, it paid $20 in duties per unit. But when tariffs rose to 25%, the duty per unit jumped to $50, seriously eating into their profit margins.
To adapt, PowerCore set up a U.S. subsidiary called PowerCore USA, and restructured its pricing strategy. Instead of selling directly to retailers, PowerCore Manufacturing now sells the generators to its U.S. subsidiary at a transfer price of $80 per unit—well below the $200 final sale price.
U.S. customs apply the 25% duty on the $80 transfer price, resulting in only $20 in duties per unit.
PowerCore USA then sells the generators to retailers at the usual $200, completing the transaction. This shift effectively saves $30 in tariffs per unit ($50 original duty minus $20 new duty). Across 50,000 units per quarter, that translates to $1.5 million in savings every three months.
Bifurcating Costs Adjusts Real Value
Some companies that already use a U.S. subsidiary for distribution are reevaluating their transfer pricing arrangements to determine whether those structures truly reflect the arm’s length nature of their transactions. In many cases, they’re analyzing whether multiple distinct activities—such as services, support, or intangible contributions—have been bundled into a single transfer price that only reflects the cost of the tangible goods being imported.
Many discover that some of what they were treating as product cost actually represents support services and other related operations. These service-related costs are embedded in the overall transfer price and may need to be separated—or bifurcated—from the tangible goods cost for proper tariff and tax treatment.
Bifurcating costs involves disaggregating the total cost into its component parts: the cost of the physical product and the cost of associated services. Since service fees aren’t subject to tariffs, this separation can yield significant savings.
Let’s revisit our fictitious exporter, PowerCore, which sells a product originally valued at $200 per unit. We’ll revise the script and say that they conducted a comprehensive transfer pricing analysis to properly valuate their product costs. The analysis revealed that, based on arm’s length standards, the actual cost of the product should be $80. The remaining $120 can more accurately characterized as management and service fees attributed to product support.
By implementing proper transfer pricing rates—and bifurcating their costs— the company legitimately brings down the value of their product and gains significant tariff savings. This restructuring does not require any changes to the company’s organizational structure or product distribution.
Both Customs and the IRS can and likely will question declared values and transfer pricing rates used to compute income tax. Therefore, the values used for these purposes should be supported by Transfer Pricing documentation. In the absence of a documented valid analysis both Customs and the IRS can reassess the values resulting in potentially higher tariffs and/or income tax.
A Range of Reactions
Some importers are chasing new manufacturing sources and seeking to diversify their suppliers, some have turned to transfer pricing, and others have tried a hybrid approach. They split their procurement into two separate tracks where some manufacturing is relocated to low-tariff countries while other products are imported at a lower value due to restructuring or re-evaluating the true transaction for transfer pricing purposes.
This layered strategy highlights the complexity of today’s global supply chains and the need for thoughtful planning that considers both business operations and financial impacts in a shifting trade landscape.
Riding the Regulatory Roller Coaster
Since 2017, tariffs have inadvertently transformed businesses into trade experts, forcing them to master complex rules and overhaul supply chains. Companies have consolidated suppliers, reworked logistics, and built advanced transfer-pricing strategies that seemed impossible only a short time ago.
This complexity brings audit risks and operational strain, but it also opens the door to more resilient business models. Many executives now see tariffs not as a challenge, but as strategic tools that strengthen their competitive position. Those who adapt are now treating trade policy as a central part of their sourcing strategy rather than a passing obstacle.
“What started as a crisis forced us to completely rethink our business model,” says Wexford’s Jonathon Davies. “We’ve built something that goes beyond just tariff protection—we’re smarter, more agile, and honestly, more competitive today than we were a year ago.”
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
