Navigating tariffs, tax reforms and regulatory changes: A Canadian transfer pricing perspective

Canadian companies engaged in U.S. trade are facing one of the most complex tariff environments in recent history. Earlier this year, the U.S. administration announced a sweeping 35% tariff on a broad range of Canadian imports, unless products qualify for duty-free status under the Canada-United States-Mexico Trade Agreement (CUSMA), among other trade measures. In addition, a recent U.S. court ruling has called into question the legal validity of certain tariffs, potentially exposing the U.S. government to nearly USD 100 billion in refund claims. Since the verdict is under appeal, tariffs remain in force. At the same time, Canada has adjusted its own position by removing many retaliatory tariffs while maintaining protections for strategic sectors (e.g., steel, aluminum, and the automotive industry). Canada has also introduced strategies and funds to support industries most affected by U.S. trade actions. These policy shifts are already reshaping supply chains and cost structures for Canadian exporters and their U.S. affiliates.

MNEs can use transfer pricing as an effective tool to mitigate the financial impact of tariffs and preserve competitiveness in cross-border supply chains. For example, when U.S. tariffs increase the price of Canadian exports, MNEs can redesign their transfer pricing structures to reduce the transfer price on goods shipped to the United States, thereby lowering the value of the goods for customs purposes and the associated tariff, while ensuring that the U.S. distributor earns an arm's-length profit margin. This strategy, however, is not a one-size-fits-all solution; it requires robust functional and value/supply chain analysis, updated benchmarking studies, and careful financial modelling to satisfy both the CRA and the Internal Revenue Service (IRS) while remaining compliant with U.S. Customs and Border Protection (CBP) rules. Since any changes to the functional profile or supply chain will have long-term implications, MNEs should consider whether the proposed changes can serve broader business needs, rather than just mitigating tariffs.

As the current tax year draws to a close, many MNEs must decide which entity should bear the financial impact of tariffs. Without structured transfer pricing policies, companies risk overpaying duties without recourse to refunds. By preparing robust transfer pricing modelling and supporting documentation, including embedding adjustment clauses into intercompany agreements, businesses may withstand audit scrutiny from both tax and customs authorities.

The strategic role of transfer pricing now extends beyond tariff mitigation to broader supply chain planning. Many Canadian MNEs are reassessing where they manufacture, where they hold intellectual property, and how they distribute their goods to their foreign customers — directly or through an intermediary. Businesses should consider conducting modelling to quantify the financial impact of different supply chain scenarios and identify opportunities to unbundle non-dutiable costs (such as royalties, services, marketing expenses, or freight) from the customs value of imported goods. This approach creates immediate savings while maintaining compliance. Businesses can also leverage mechanisms such as the CBP’s Reconciliation Program, which allows post-import adjustments to declared customs values when appropriately documented in advance. The program is particularly relevant now, as litigation outcomes could retroactively alter tariff liabilities.

In today’s volatile trade climate, robust planning and documentation have never been more critical. Canadian businesses that treat transfer pricing purely as a compliance function risk leaving significant value on the table or worse, exposing themselves to double taxation, denied duty refunds, and operational inefficiencies.

With public CbCR becoming mandatory in the EU and Australia and the possibility of other countries introducing similar rules, MNEs must actively prepare to meet these new compliance requirements. The public CbCR rules, which originated as part of the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Action Plan 13 report (2015), require MNEs operating in the EU or Australia that exceed certain size thresholds to publish certain tax-related information to the public. Although the OECD’s CbCR framework was intended for MNEs to directly provide tax administrators with information about the global allocation of key economic activities, profits, and taxes, the EU and Australia have sought to achieve public transparency and accountability of MNEs.

The public CbCR rules in the EU take effect starting in fiscal year 2025 for calendar year taxpayers, and affected MNEs are generally required to release a public CbCR report due by the end of 2026.¹ Generally, in-scope MNEs include EU-parented as well as non-EU-parented MNEs with consolidated revenues exceeding EUR 750 million in each of the two consecutive fiscal years preceding the reporting year and operations in multiple EU member states. The EU parent entity of the MNE must report the information. In the case of non-EU parented MNEs, each qualifying EU subsidiary or branch must disclose the information for the MNE.² While the information a MNE is required to disclose in the EU report is largely based on the OECD’s CbCR rules, there are requirements for how the information is aggregated and disclosed (e.g., separate for each EU member state and separate for each jurisdiction included on the EU’s list of non-cooperative jurisdictions). The rules provide some exceptions if certain conditions are satisfied.

Australia has also introduced public CbCR rules that apply to reporting periods beginning on or after July 1, 2024. The rules apply to MNE parents (certain Australian or foreign headquartered entities) where global revenues exceed AUD 1 billion. A de minimis threshold also applies — a reporting parent is only subject to the reporting obligation if AUD 10 million or more of its aggregated turnover (i.e., global income) for the relevant year is Australian-sourced income. The public disclosures required under the Australian rules are more extensive than the EU requirements and include certain qualitative disclosures as well.

Canadian-headquartered MNEs that fall within the scope of these rules should be mindful of their obligation to comply with the regulations in every country where they have subsidiaries or branches, which may pose significant administrative complexities, requiring proactive planning. MNEs must establish proper systems, procedures and processes to gather and organize all necessary information, to ensure accurate and timely filings and to avoid penalties for incorrect or delayed reporting.

Companies will also need to assess whether their existing transfer pricing structures and policies can withstand scrutiny under public disclosure of income and tax data on a country-by-country basis and ensure that their current profit allocation aligns with the value created in each jurisdiction. Where required, appropriate adjustments to transfer pricing structures and policies must be made to achieve this outcome. Public CbCR is likely to heighten the risk of tax and transfer pricing scrutiny, as tax authorities will also have access to data from competitors and the broader industry. Therefore, MNEs need to maintain comprehensive documentation to support and validate their transfer pricing arrangements. Companies will also need to ensure consistency between the data publicly disclosed and the information reported in the OECD CbCR, as well as in other filings (e.g., local files, tax returns and financial statements), as any mismatches could lead to inquiries from tax authorities.

The shifting dynamics of international trade, tax, and regulations require a proactive and strategic response from Canadian businesses engaged in cross-border operations. The increasing interconnectedness of tax, trade tariffs and transfer pricing considerations necessitates a holistic approach to compliance and strategy. It also underscores the need for robust planning to ensure that businesses integrate their tax and transfer pricing policies with their trade and customs strategies, while maintaining operational efficiencies and flexibility. Canadian companies should collaborate with their advisors to reassess their operational structures and supply chains, ensuring alignment, consistency, and transparency across their tax and customs positions, reporting obligations and transfer pricing documentation to minimize potential tax risks.