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

Introduction

In today’s rapidly evolving landscape of international trade, tax rules and regulatory frameworks, multinational enterprises (MNEs) face increasing challenges in keeping pace with new developments, ensuring compliance, and maintaining operational competitiveness. Canadian companies engaged in U.S. trade are currently navigating a complex and unprecedented tariff and regulatory environment. Recent U.S. developments have triggered significant pricing policy and operational overhauls for Canadian exporters. On the domestic front, the Canada Revenue Agency (CRA) is ramping up transfer pricing audits, seeking to align intercompany pricing with value creation and commercial realities to ensure appropriate profit allocation. These developments are occurring amid broader tax and regulatory changes, including new U.S. tax changes and the Public Country-by-Country Reporting (CbCR) rules implemented by the European Union (EU) and Australia, underscoring a global shift towards enhanced corporate transparency and accountability.

This article addresses important transfer pricing considerations for MNEs as they adapt their operational models and tax structures to the fluid international tax and regulatory frameworks.

Trade tariffs

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.

CRA activity

Transfer pricing has become a frequently audited area of tax globally, primarily stemming from a global push to improve transparency in MNEs’ tax strategies and their alignment with genuine economic activity. In line with this global trend, the CRA has substantially increased its scrutiny of transfer pricing.

The CRA’s recent audit activity extends beyond a simple review of transfer pricing documentation. It often includes information requests for the presence of local executives, the Canadian entity’s role in the MNE’s global supply chain, conditions relevant to intercompany transactions, profit distribution, and economic activities. In many cases, the CRA is now using its enhanced audit powers to request information related to the parent company or other foreign affiliates, which may not be readily available from the Canadian MNE, often leading to additional time and resources from headquarters. In some instances, the CRA may obtain a compliance order through the courts.

In recent years, the CRA has focused on the following topics:

Government subsidies: The CRA has typically issued reassessments in industries where companies receive government subsidies to attract or retain foreign investments (e.g., video game and software industries)
Intangible assets: The CRA has scrutinized whether MNEs have accurately attributed the value of the assets (e.g., technology, patents, and trademarks) to the jurisdictions where the MNEs have created the value
Pandemic-related shifts: The CRA has scrutinized how businesses adapted to significant economic disruptions caused by the pandemic, particularly in terms of the reallocation of risks, resources, and income within MNEs. The CRA focused on whether these changes are consistent with transfer pricing principles
Plant closures in Canada: The CRA has typically reviewed the transfer of existing sales contracts, inventory, equipment, or personnel, renegotiating existing supplier agreements, as well as costs related to closures, such as severance costs.

MNEs face longer audit cycles, often covering several tax years and a strict application of transfer pricing rules, which requires more reliance on internal company data and external market records as benchmarks. Further, transfer pricing audits can result in significant adjustments, increasing Canadian taxable income and potential penalties as well as, in some instances, double taxation, thereby imposing possible financial strain on MNEs. To navigate these challenges, MNEs should adopt proactive strategies, which include:

Preparing robust transfer pricing documentation that aligns with local standards and the documentation developments around the globe (e.g., local file, master file, country-by-country reports)
Entering into Advance Pricing Arrangements (APAs) with tax authorities on transfer pricing treatments for specific transactions in advance
Undertaking comprehensive internal risk assessments to identify potential areas of transfer pricing risk and to implement corrective measures.

The heightened scrutiny showcases the CRA’s alignment with a global movement toward corporate tax transparency and its proactive enforcement of international tax standards. Businesses must remain vigilant, continually adapting their compliance frameworks and maintaining open communication with advisors to help mitigate risks effectively.

Public CbCR rules

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.

U.S. tax developments

The U.S. Government signed into law the budget reconciliation bill known as the "One Big Beautiful Bill Act" (OBBBA) on July 4, 2025, as part of its continuing efforts to reform the U.S. tax system, which have significant implications for both international tax and transfer pricing perspectives. The OBBBA aims to strengthen and enhance the provisions of the 2017 Tax Cuts and Jobs Act (TCJA), simplify international tax regulations for MNEs and foster an economic environment conducive to targeted investments and growth. The OBBBA contains several international tax provisions that will impact U.S. MNEs with cross-border operations as well as Canadian MNEs with operations or investments in the United States. In particular, the OBBBA introduced changes that affect the following tax rules:

The Global Intangible Low-Taxed Income (GILTI) regime (renamed to Net Controlled Foreign Corporation (CFC) Tested Income rules)
The Foreign-Derived Intangible Income (FDII) regime (renamed to Foreign-Derived Deduction Eligible Income (FDDEI) rules)
The Base Erosion and Anti-Abuse Tax (BEAT)
The business interest deduction (and limitation) rules.

As a result of these changes, MNEs must consider how the new rules will impact their cross-border structures and tax obligations. The revised rules provide MNEs with incentives to restructure their operations. Companies may consider adjusting the pricing of their intellectual property-related intercompany arrangements, considering the new Net CFC Tested Income and FDDEI rules. The changes to the interest deduction limitation rules also likely present MNEs with an opportunity to revisit their intra-group financing arrangements, as they may find it advantageous to fund their U.S. entities through cross-border loans. In addition, U.S. companies with significant deductible payments to foreign related parties, impacted by the increase to BEAT, may be prompted to reassess their related party arrangements and manage any BEAT exposure through appropriate transfer pricing techniques and approaches.

As Canadian MNEs assess the need to restructure their operations and intra-group arrangements in line with the new U.S. tax rules, they need to review their existing intercompany agreements and transfer pricing policies to ensure continued compliance with both Canadian and U.S. transfer pricing regulations. A well-structured transfer pricing strategy, established through a careful assessment of relevant facts and consideration of future business and strategic objectives, can help MNEs optimize their tax structures and mitigate the risk of potential double taxation. It is also essential for MNEs to maintain comprehensive documentation to support any adjustments to cross-border transfer pricing arrangements. Conducting a timely and thorough evaluation of the impact of these changes will enable MNEs to more effectively navigate the evolving tax landscape between Canada and the United States and capitalize on any potential tax planning opportunities.

Concluding thoughts

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.

^{1 Some EU member states have opted for shorter reporting deadlines. Hungary requires reporting within four to five months after the fiscal year end, while Spain requires reporting within six months. Some member states have been early adopters of the rules, e.g., Romania (the rules apply for fiscal years starting on or after January 1, 2023), Croatia (the rules apply for fiscal years starting on or after January 1, 2024), and Sweden (the rules apply for fiscal years starting on or after May 31, 2024).}

^{2 A qualifying subsidiary or branch meets two out of three prescribed criteria (total assets greater than EUR 5 million; net turnover greater than EUR 10 million; and average number of employees greater than 50). Different EU member states may apply different thresholds to determine whether a subsidiary or branch qualifies.}