Executive summary

The recent implementation of tariffs on goods imported into the United States (US) has presented a fresh layer of complexity for Middle East and North Africa (MENA)-headquartered multinationals exporting to the US. While the tariff landscape is shaped by trade policy, its impact on intercompany pricing, profit allocation and tax planning requires deliberate transfer pricing (TP) strategy. This Alert outlines key considerations for businesses evaluating whether to absorb, pass on or share tariff costs, as well as issues involved when aligning TP models to help manage profitability, risk and compliance effectively.

Effective 5 April 2025, the average tariff rate for MENA-origin products exported to the US is approximately 10%. A higher rate of 25% applies to certain categories, such as steel, aluminum and automobiles. Importantly, US customs authorities apply tariffs based on a product's harmonized tariff code along with its origin — not simply the invoicing location. For instance, products financially exported from the United Arab Emirates (UAE) but physically produced in China, may still attract China-origin tariffs.

From a profit-and-loss (P&L) perspective, customs duties typically increase the cost of goods sold (COGS) for the US importer, affecting margins and profitability. For MENA-based multinationals, this raises the question: Which entity should bear the burden of tariffs — and how should this be reflected in the TP model?

The simplified scenario below illustrates the commercial and TP considerations for a UAE-based group with a US distribution entity.

Illustrative scenario

Based on these facts:

• The US entity is a routine distributor purchasing finished goods from a UAE headquarters (HQ) at a transfer price of US$70.
• The US entity sells the goods at US$100, targeting a 5% operating margin under the existing TP policy.
• A 10% US tariff is introduced, affecting the landed cost of imported goods.

The business has several options:

• The business decides to pass on the increased tariffs to the end consumers, increasing the price at which the products are sold in the US market to customers. The UAE HQ will operationally need to adjust the resale minus percentage to maintaining the same level of operating margin for the US distributor.
• Based on the TP model, the US distributor bears the cost of the increased tariffs and there is no change in the transfer price. The increased tariffs will increase the COGS for the US distributor, reducing the distributor's operating margin.
• Based on the TP model, the UAE HQ bears the tariffs, reducing the transfer price to maintain the targeted profitability of the US distributor.

A company can choose to implement a mix of the above options based on the business strategy and TP model. The implemented option will have a total tax impact dependent on a number of tax variables, including the impact on US federal and state taxes, UAE corporate tax, US customs duties and foreign tax credits, among others. It would be prudent to undertake a tax impact model before finalizing the business's chosen approach.

Strategic TP responses

There are a number of TP considerations for a company to evaluate in response to the US tariffs. It is important to assess the customs implications of these TP considerations as the customs interpretation of arm's-length pricing might be different. For example:

• Defining the overall TP model. Assess whether the US entity is a limited-risk or at-risk distributor. The model dictates who bears the economic burden. A shift in functional profile may be required if tariffs are to be allocated differently.
• Amending the TP policy/target operating margin of the US distributor. Companies may consider revising the target margin for the US distributor to reflect real-world erosion of profit from tariffs — particularly if price increases are not commercially viable.
• Updating intercompany agreements. Review contractual terms to ensure they reflect the intended allocation of tariff costs. Clauses related to cost-sharing, force majeure or changes in law should be considered.
• Applying tariff-related adjustments to benchmarking analysis. Standard benchmarking might not capture tariff-related costs. Consider adjusting historical financials of comparables to reflect tariff burdens or isolating periods with similar trade distortions when benchmarking FY2025 results.
• Evaluating whether to unbundle intangibles or services from the product cost. If product pricing includes embedded service or royalty elements, assess whether these can be excluded from the customs-valuation base to potentially reduce dutiable value.

Conclusion

Tariffs are often viewed as a trade issue — but for MENA multinational groups, tariffs increasingly present a TP and tax-planning challenge. A thorough response requires a coordinated review of the group's TP model, contractual framework, benchmarking approach and tax profile across jurisdictions.

As US trade policy evolves, proactive adaptation of intercompany pricing models will help ensure resilience, compliance and sustainable profit allocation across the value chain.

Any change in the TP model to address tariffs may have broader tax implications, including:

• Increased or reduced taxable income in the UAE or the US
• Customs and trade compliance risks
• Impacts on the UAE's Qualified Domestic Minimum Top-Up Tax (QDMTT) exposure