President Trump's tariff announcements have shaken the economic and financial world, casting doubt on tariff strategies and provoking a bidding war among the world's major economic regions. You don't need to be an expert in international taxation or geopolitics (for let's make no mistake, this is geopolitics we're talking about) to understand the consequences induced by the risks carried by these customs reforms: a company wishing to import products into the American market will now have to find sources of savings to compensate for the loss linked to the increased share left to Uncle Sam. Yet this potential source of savings is mechanically caught in a simple vice, between the final selling price dictated by the market on the one hand, and production and operating costs on the other, both parameters being relatively inelastic.
For groups of companies established on both sides of the US border, the temptation to play on transfer prices is therefore great.
Indeed, by selling products to a related company at a price reduced by the portion equal to the customs duty overtaxation, a group could, in theory, ensure that its final selling prices remain virtually unchanged, and thus safeguard its outlets and market shares. But like Ulysses, who had to maneuver skilfully between Charybdis and Silla, steering from one tax area to another could lead to shipwreck. By trying too hard to steer clear of the customs risk, these companies could be exposing themselves to heavy and severe consequences in terms of corporation tax, and to penalties as onerous as they are infamous, on the grounds that their transfer prices would thus be voluntarily and consciously reduced to nothing.
So what to do? All eyes turn to tax specialists and advisors. However, just as Ulysses didn't have Pythia on board his ship, tax specialists don't have a crystal ball in their toolkit. So we have to rely on a pragmatic as well as empirical approach, which we believe is based on concrete realities that we share with you below.
Transfer prices must reflect the practices of independent companies in comparable situations.
By way of introduction, you'll forgive us if we reiterate what is a truism for tax specialists: transfer prices must necessarily correspond to market standards, which are referred to as "arm's length". By this terminology, which is less abstruse than its original etymology in English ("arm's length principle"), we mean that intra-group transactions must be remunerated in line with practices observed between economic players who are necessarily independent of each other, functionally comparable, and placed in a similar or close economic environment.
Returning to our exports to the United States between two related parties, we need to know whether a non-American company would be prepared to drastically reduce its selling prices to its American third-party customer in an almost identical environment, in order for the latter to mechanically reduce the base subject to customs duties, and offer an iso final selling price. Indeed, this may well be the case, given that the long-term pursuit of economic activity for market players takes precedence over short-term profitability. But this assertion comes up against two obstacles:
Firstly, the lack of contemporary references. It is certainly conceivable that independent companies might agree to lower their prices in order to reduce the customs duty base. After all, these companies are constrained in the same way by the Trump reforms as business groups. Since the same causes produce the same effects, an identity of behavior between third-party players and groups of companies could be observed. But to assert is not to demonstrate, and it has to be said that the pricing practices of economic players are not available online, nor would they be precise. Only much later, when companies' fiscal years have been completed and declared, will it be possible at best to extract market trends from specialized databases. By then, however, it will probably already be too late.
Secondly, and independently of access to information over time, some markets simply have no independent comparables. Many economic sectors, such as the automotive, aerospace, defense and pharmaceutical industries, are concentrated and operated exclusively by groups of related companies, whose initial investment (capex) is too high a barrier to entry to be overcome alone. For these sectors, waiting will never be rewarded, and it will remain impossible to demonstrate ex post that independent, comparable companies in similar situations have lowered their transfer prices as a result of higher tariffs.
Fortunately, while comparability analysis is the totem of the arm's length principle, it is not the only one. When the arm's length principle comes up against the impossibility of finding comparables, the OECD has, as usual, adapted. This is when the concept of "realistically availlable options" arises, like a tax deus ex machina, which the OECD's 2022 guidelines (cf. § 1.122 to 1.125) define as the approach of assessing whether the intra-group transaction is compatible with what an independent enterprise, acting rationally, would have reasonably accepted given its economic options.
So we're no longer comparing what is, but what might have been - in this case, what two unrelated companies, acting in their own interests, would have accepted in similar circumstances. The premise is attractive. But it is fundamentally based on counter-factual reasoning: we have to imagine the alternatives that would have been reasonably envisaged by each of the parties. Such mental modeling presupposes that we can document the economic constraints of the market, the asymmetries of information, and the alternative strategies left out - in short, that we can make history speak for itself.
This concept is not purely theoretical: it is increasingly used in tax audits to reject a related transaction deemed abnormal, or to reinterpret the group's contractual choice. This is what the French tax authorities did in the Sté Issey Miyake case (CAA Paris, June 29, 2022, no. 20PA03807), when they justified a tax reassessment on the basis of a net margin method deemed more realistic than the distribution contract applied. The French administration saw this as a better expression of the conditions that an independent company would have been able to negotiate - precisely with regard to the realistic options available. In a similar vein, in Socar Trading SA (Case C-282/22, March 7, 2024), the CJEU upheld a policy of intra-group re-invoicing, on the grounds that no independent company would have accepted such a level of risk without proportionate remuneration.
The available realistic option is therefore the tool by which the tax authorities, in a speculative tax exercise, judge after the fact what a company should have done before. As far as we are concerned, the idea is appealing: it aims to correct the effects of asymmetric information or over-skilful tax planning. But its implementation remains tricky, and is often criticized.
Lessons from the COVID period
Fortunately, once the emotion has subsided, history can sometimes teach us a few lessons. We could draw a parallel between the current situation and the COVID period, during which business groups also had to adapt their business models - and therefore their intra-group transactions - to cope with government measures affecting their value chains.
At first glance, however, nothing seems to reconcile the Trump administration's geopolitical tour de force and punitive tariffs with the Covid-19 global pandemic. One is a conscious political choice, the other a global health disaster. And yet, for tax specialists well-versed in functional gymnastics, these two events share a common consequence: they are forcing multinational companies to revise their transfer pricing policies, in a hurry, outside the confines of comparability analyses.
In both cases, functions that had previously been relatively unexposed are suddenly exposed to increased risks (storage, logistics, shortage management for the COVID period; market, financial and storage risks for the customs crisis).
In both cases, groups are urged to reconfigure their functional analysis.
In both cases, there is a sudden, exogenous intrusion of a public player (sovereign state or health authority) into the value chain. Suddenly, the allocation of functions, risks and assets is no longer intangible. The margins of local entities shrink mechanically, not because their function has changed, but because the world around them has changed.
Except that French companies now enjoy a jurisprudential advantage: the reductive and arbitrary concept of limited-risk entity has meanwhile been shattered by the enlightened impetus of the Conseil d'Etat, in the SKF and (RKS CE 8 e -3 e ch. 4-10-2021 n° 443133, SAS SKF Holding France and n° 443130, SAS RKS) rulings.
We therefore believe that if the functional analysis shows that the company exporting to the United States bears and controls the market risk, the financial risk and the customer risk (of non-collection), then it should be able to decide to reduce its sales prices to the importer, without exposing itself to transfer pricing risks, based on two complementary arguments:
Firstly, it is in the company's own intrinsic interest to avoid the aforementioned risks. If lowering its sales prices (and therefore its transfer prices) enables it to secure its outlets, even at the risk of making losses, then the durability of its operations and the commercial nature of its activities (as much as its corporate form!) dictate that it should do so. Basically, the praetorian concept of "acte anormal de gestion" (abnormal act of management), which is in the DNA of our French conception of the arm's length principle (all the more so now that the idea of "available realistic option" exists), is based more on economic common sense than on tax orthodoxy. It does not require companies to pay taxes, but to conduct their economic activities rationally. So, faced with the risk of being audited and redressed on transfer pricing grounds, or losing markets and outlets, a company's "normal" choice should be to continue doing business, even if this means lowering the price of its intra-group flows.
However, this is only relevant if the company in question has the material, human and financial resources to control the risks and thus make these choices. If the decision to reduce sales prices is imposed on the company (by the group's parent company, for example), we feel that the resulting losses should not be its responsibility.
Secondly, and for these companies alone, taking a tax risk weighing on its transfer prices, however significant and strategic, can no longer be qualified as "excessive" since the judge censured this concept (CE, July 13, 2016, no 375801, Monte Paschi). Faced with the threat of a significant increase in customs duties, a related company should therefore be able to take the risk of claiming that it is realistic that an independent company would have followed the same course, even if it means being contradicted later, without being opposed for reckless conduct.
Is the answer in the contracts?
If we are still uncertain about taxation, perhaps this is a sign that the answer lies elsewhere? As a good tax expert is first and foremost a lawyer who likes numbers, he might be tempted to reason in terms of contract law, which is still one of the last cornerstones of our written law edifice. Contracts between two companies involved in an import-export transaction involving the United States may indeed have provided for the consequences of fortuitous and external events on their rights and obligations, including the remuneration of flows. There are two main types of clause: the "hardship" clause and the "force majeure" clause.
A quick reminder for those of us who prefer numbers. A hardship clause is a contractual provision enabling the parties to renegotiate the terms of a contract when unforeseeable circumstances beyond their control arise, making performance of the contract excessively onerous for one of them. The UNIDROIT Principles of International Commercial Contracts define hardship in article 6.2.2 as the occurrence of events fundamentally altering the balance of benefits, allowing the injured party to request renegotiation. Unlike force majeure, which suspends or terminates contractual obligations in the event of impossibility of performance, the hardship clause aims to maintain the contract in force by adapting its conditions to re-establish the initial balance of benefits.
In French law, it is interesting to note that this renegotiation option is now enshrined in Article 1195 of the Civil Code, since the 2016 reform of contract law: "If a change in circumstances occurs which could not have been foreseen when the contract was concluded, making performance excessively onerous for one party [...], that party may request renegotiation of the contract [...]". This provision, which is suppletive in nature, can be modified or set aside by the parties via a conventional hardship clause. In practice, therefore, many commercial contracts are inspired by the UNIDROIT Principles (art. 6.2.2 to 6.2.3) or the ICC Model Clauses, which define hardship as a contractual imbalance resulting from a fundamental event that is external, unforeseeable and beyond the control of the party invoking the clause.
In this sense, the Trump administration's customs reforms can be seen as unforeseeable events for many companies engaged in long-term international contracts. Indeed, these measures will lead to a significant increase in contract performance costs for importers, without them having been able to anticipate or control these changes.
In this context, hardship clauses could be invoked to request a renegotiation of contractual terms, particularly with regard to prices or delivery times, in order to re-establish the initial economic equilibrium of the contract. In the wake of the COVID pandemic, the International Chamber of Commerce (ICC) updated its standard force majeure and hardship clauses in 2020 to help companies cope with this type of economic upheaval.
To make the link with transfer pricing, we believe that the existence of a hardship clause may therefore strengthen the justification for an exceptional adjustment to the intra-group margin or price, at least temporarily, pending further clarification from the tax authorities. Indeed, if an entity is disproportionately impacted by an unforeseeable customs reform, an argument could be made that the price change is the result of a contractual renegotiation based on a hardship clause, and not of a desire to evade tax.
Having said this, it is imperative to stress that the implementation of a hardship clause does not automatically suspend the contract. It merely opens the door to a request for renegotiation. Moreover, the rules governing international contracts vary according to the applicable law. In the United States, for example, the doctrine of commercial impracticability of the Uniform Commercial Code (§ 2-615) could theoretically apply, but it is interpreted more restrictively than in continental law. Hardship clauses are less common, and American judges favor contractual stability, except in cases of absolute impossibility. In an attempt to avoid these pitfalls, the International Chamber of Commerce (ICC) recommends, in its 2020 model clause, explicit wording to the effect that unilateral tariff changes (e.g., "unforeseen economic sanctions or customs duties") may constitute a case of hardship justifying renegotiation. This clause is now commonplace in cross-border supply contracts.
However, if the agreement was not drafted in this way prior to the Trump administration's announcement of the customs reforms, then the parties are obviously at a loss, and the ex-post revision of their contract could amount to an abuse of rights. What's more, our experience also suggests that hardship clauses are rarely included in intra-group agreements. We'll have to wait for the next crisis; we learn from experience and failure.
Without going into too much detail, it seems to us that an alternative argument based on force majeure clauses would also be doomed to failure. A force majeure clause allows a party to a contract to suspend or be released from its obligations when an unforeseeable, irresistible and external event prevents it from fulfilling its commitments. In principle, it applies when performance becomes impossible, rather than simply more difficult or costly. In French law, force majeure is defined in article 1218 of the Civil Code (2016 reform): "There is force majeure in contractual matters when an event beyond the debtor's control, which could not reasonably have been foreseen when the contract was concluded and whose effects cannot be avoided by appropriate measures, prevents the debtor from performing his obligation". Similar wording can be found in article 7.1.7 of the UNIDROIT Principles, as well as in the ICC Rules (2020), which provide a standard clause on force majeure, including an indicative list of events (natural disasters, riots, strikes, embargoes, governmental acts, etc.).
The imposition of new customs duties, however brutal, does not, in our humble opinion as tax specialists, prevent the performance of a contract. It simply makes it more costly. The courts - in France as in most legal systems - are reluctant to admit that foreseeable or absorbable economic or regulatory measures can constitute force majeure. Indeed, the Conseil d'Etat has already ruled that an increase in tax or customs charges does not constitute force majeure, unless it can be shown to have the effect of annihilating the contractual obligation (CE, March 19, 1986, no. 49782). In practice, even COVID-19 decisions have only accepted force majeure in cases of total blockage (administrative closures, confinement, etc.). In addition, the ICC, in its standard clause 2020, also cites "acts of public authority affecting the performance of the contract" as falling within the scope of force majeure, but only on condition that they render the obligation impossible, and not simply more costly.
What if this crisis was an opportunity?
A French tax expert is necessarily an eternal optimist. Otherwise, the often absurd excess of tax regulations and our all-encompassing over-taxation would long ago have had the better of us. We can console ourselves with the belief that crises have a virtuous side: they reveal the plasticity of international tax law.
The current period, marked by the return of protectionism and the assertiveness of national economic policies, reminds practitioners that balances are never set in stone. The tug-of-war between customs logic and transfer pricing will not be resolved by a clash of doctrines, but by a detailed understanding of value chains, the functions performed and the risks assumed - all of which must be skilfully conveyed in a demonstration combining tax techniques, economic projections and legal argumentation.
Above all, this sequence teaches us that legal and fiscal rationality, when solidly demonstrated, remains the best defense against uncertainty. Rather than dreading adjustments, groups would do well to reinforce the contractual robustness of their flows, by integrating realistic adaptation clauses from the outset and rigorously documenting their decision-making.
As geopolitical tensions continue unabated, and governments deploy their tax instruments for strategic purposes, the arm's length principle must also evolve - not by becoming weaker, as the developments of Pillars I and II suggest, but by coming to terms with the realities on the ground. What if, in the future, true competition no longer lay in the quest for the best rate, but in the ability of groups to anticipate and justify their risks?