Transfer Pricing in a Trade War—An Interview with CPA Matthew Wall

Insights for CPAs from a leading transfer pricing expert.

March 31, 2025

Forty years ago, if a multinational company wanted to set up shop in a new market, they would use subsidiaries. Business activities—from research, to manufacturing, to warehousing and distribution—would all be set up to meet the needs of that specific market. That all changed when a wave of globalization ushered in a new approach to the global economy.

For Canada, a series of free trade agreements with the U.S., starting in 1989, which added Mexico in 1994 and underwent revisions in 2020, fundamentally changed how businesses set up their operations. These agreements spurred the establishment of an integrated North American market and global supply chain, encouraging Canadian companies to focus on certain business activities while outsourcing others to related parties in the U.S., Mexico, and other countries.

Business activities were strategically separated across countries to minimize duplication, reduce costs, and maximize profits. To manage this approach to business operations, transfer pricing strategies were used to price transactions between related parties across national borders.

Enter President Trump, who has publicly stated that his tariff strategy is designed to unwind these complex relationships and bring more economic activity—specifically manufacturing—back to the U.S. But, integrated, cross-border supply chains are not easy to unravel. It’s like trying to put Humpty Dumpty back together again.

Tariffs—and the threat of tariffs—present new hurdles for CPAs, and understanding the impact on transfer pricing will be critical for helping businesses navigate the global supply chain. In this exclusive interview, CPA Ontario sat down with transfer pricing expert Matthew Wall, CPA, to discuss his experience with transfer pricing, insights into the current environment, and practical advice for CPAs.

The New Reality of Transfer Pricing

"Transfer pricing involves pricing transactions between related parties in different countries to comply with tax regulations in various jurisdictions," Wall explains. "It's about making sure goods, services, intellectual property, and financial transactions are priced using terms and conditions between independent parties dealing at arm’s length." Put differently, it’s about pricing transactions using market rates for inter-company transactions.

Wall's journey into transfer pricing began in the mid-1990s when Canada introduced new rules that required companies to carefully consider how they structured their supply chains. Since then, global supply chains, and the rules that govern them, have only become more complex. "Back then, we were just 20 specialists across the big firms. Today, there are about 2,000 professionals in Canada alone.”

The Impact of Trade Wars

The Trump administration’s imposition of tariffs, and the retaliatory measures introduced by governments here in Canada and around the world, have added layers of complexity to transfer pricing.

"In Trump's first term, we had targeted tariffs aimed mainly at China. Companies had to restructure their supply routes to avoid these tariffs," Wall recalls. "But now, in Trump's second term, tariffs are more widespread, affecting multiple countries and industries."

One of the key challenges is the unpredictability of these tariffs. "We're dealing with a floating target," Wall notes. "For instance, the Trump administration initially suggested a 10% tariff, which was manageable. But when that was raised to 25%, it became a significant burden for companies."

Wall provides a stark example of the automotive sector to illustrate the impact. "During Trump's first term, companies could reroute their supply chains to mitigate tariffs. Now, they're being pushed to increase manufacturing within the U.S., which is not always feasible."

“Emotionally, it feels like a divorce, but economically it looks like a hostile takeover”—that’s how Wall describes the current state of Canada’s economic relationship with the U.S.

Strategies for CPAs

For businesses looking to effectively navigate transfer pricing during a trade war, Wall emphasizes the importance of “the five Ps”—planning, procurement, production, pricing, and profits.

• Planning: Companies need to have both short-term and long-term strategies. Regular multidisciplinary meetings are essential to discuss operational plans and adapt to changing circumstances. Wall is clear on this point, "management teams need to be meeting regularly, and it needs to be multidisciplinary."
• Procurement: With input materials coming from multiple countries, companies must explore alternative suppliers to mitigate tariff impacts. "Can you buy the same material from a different vendor or country that has a more favorable tariff treatment?" Wall asks.
• Production: Companies must assess their production capacity based on sales forecasts and market conditions. This involves internal communications with staffing, and adjusting production levels accordingly. "Do we still need to produce at full capacity?" is a question production teams need to answer. Wall encourages companies to consider fewer shifts and reduced hours before resorting to layoffs.
• Pricing: Pricing strategies must be flexible to account for tariff-induced cost increases and competitive pressures. Companies need to test different prices and understand at what price point consumers will stop buying their products. Wall explains, "how much of this tariff is going to bump up the cost of the product? How much of that product can we increase its price and pass on to the consumer?"
• Profits: The ultimate goal is to manage profits and, more specifically cash flows, in times of economic uncertainty. Wall points out that financing becomes critical, as companies may face higher lending criteria when renewing loans due to increased risks. "Many companies will struggle, some companies might fail, and a few companies will profit by growing sales, expanding markets, and acquiring competitors", says Wall, drawing from his experience and observations during the pandemic.

And then there’s the importance of understanding the regulatory environment. "Tax authorities are becoming more vigilant," Wall warns. "They use algorithms to flag significant changes on the T106 form involving transactions, amounts, and methods, which can trigger audits. Companies need to ensure their transfer pricing strategies are well-documented and defensible." In the U.S., the Internal Revenue Service has a similar requirement known as Form 5471 and 5472. The IRS searches these using a computer algorithm to identify and select taxpayers for audit.

Wall underscores the need for meticulous documentation that supports the details reported to the Canada Revenue Agency in the T106 and T1134. "The T106 slip details transactions between related companies operating in different countries," he explains “including their industry code to identify their primary activity within the supply chain.” The CRA can use all of the T106 slips to identify the global supply chain for Canadian parent companies and some of it for Canadian subsidiaries. This form also includes information on the purchase and sale of goods, services, and financial transactions, all priced using one of five transfer pricing methods: comparable uncontrolled price method, resale price method, cost-plus method, transactional net margin method, and profit split method.

Canada’s T106 and T1134 forms are essential for good compliance and should be checked for red flags that trigger audits. "Proper documentation can make the difference," he explains, “since the level scrutiny increases during the filing position, audit, and appeal. Detailed documentation that addresses audit questions mitigate issues that end in a reassessment when unresolved."

Practical Insights for CPAs

Drawing from his extensive experience, Wall shares the following practical insights for CPAs. First, he emphasizes exploring supply chain flexibility: "companies that adapt quickly to changing circumstances are more likely to weather the storm.”

Operational efficiency is another area that can provide further insight. Wall points to streamlining month-end closings: “…companies with a 10-day closing cycle spend 80% of their time compiling data and only 20% analyzing it. By reducing this to three days, teams can focus more on the analysis.”

Wall further highlights the need for flexibility and emphasizes internal communication. "Regular updates and clear communication across departments can identify issues early and develop effective strategies.” Regular meetings are needed to align and devise short-term (this year) and long-term (three to five years) strategies.

He also stresses the importance of staying informed and agile. Look for timely updates and practical advice from experts across Ontario, including Wall's MDW Bulletins to help companies navigate the complexities of global trade and transfer pricing. "The average business is not able to keep pace with the news, know what is real in their industry, and how to react to it. Businesses need help staying on top of what is happening because reporting cycles, meetings, and decisions get pushed farther out as they fall behind.”

Transfer Pricing Tips for CPAs

• Involve multidisciplinary teams: Ensure regular meetings with representatives from finance, procurement, production, and sales to discuss transfer pricing strategies. These should focus on sales, supply, production, and staffing—similar to the meetings held during the pandemic.
• Monitor regulatory changes: Stay up to date on changes in tax laws and international trade policies to ensure compliance. For example, President Trump promised to lower tax rates in the U.S. Similarly, keep an eye on the actions of the new Prime Minister following Canada's election on April 28, 2025.
• Maintain flexibility: Be prepared to adjust supply chains and pricing strategies in response to changing tariffs and trade policies. Have three scenarios based on the best, likely, and worst case to identify key performance indicators and timelines before critical issues arise.
• Regular review and analysis: Regularly review financials to identify any discrepancies or issues early on. For example, sales targets and forecasts for 2025 that were prepared in the Fall 2024 before the U.S. election need to be revised for the impact of President Trump’s tariffs on trade.
• Communicate effectively: Ensure clear and regular internal communication with employees and external communications with customers to identify issues and opportunities in the supply chain for purchases, sales, production, delivery, and service.

Conclusion

The ongoing tariff and trade turmoil has added more complexity to the already dynamic world of transfer pricing. Understanding that impact will be critical for CPAs as they help businesses adapt their strategies to this new reality and ensure compliance with tax and regulatory requirements.

For Matthew Wall, the key is to adopt a proactive approach. Staying a step ahead, even in the whirlwind of uncertainty, and understanding the implications of trade and regulatory changes will help businesses across Canada adapt and thrive in this new economic landscape.