Maximizing profits through customs valuation and transfer pricing: expert strategies and tips
- Arne Mielken
- Jan 7, 2024
- 9 min read
Navigating Customs Regulations: Insights Into Importing Products Across Different Countries
Anywhere in the globe, the relationship between customs valuation and transfer pricing may be difficult.
The application of the World Trade Organization's customs valuation regulations is not uniform across the member states, in contrast to the European Union. The financial effect of customs valuation-related issues may be substantial for both enterprises and customs agencies because of the high duty rates in various regions of the world. Because of this, customs officials in certain areas have made scrutinising intercompany transactions and transfer pricing adjustments a top priority.
This article sheds light on how customs valuation and transfer pricing interact in the area. It also offers strategies for handling conflicts with customs officials.
Intercompany pricing acceptability is governed by regulations in both customs valuation and transfer pricing. The idea is to make sure connected parties follow the arm's-length concept by acting as if they are unrelated to one another. These sets of regulations do vary from one another, however, particularly in the way that they are put into practice. While customs valuation focuses on an appropriate price for each unique goods and import transaction, transfer pricing often considers the profitability of a legal organisation.
Despite these variations, the World Customs Organisation (WCO) believes that transfer pricing documentation can be a useful source of data for customs valuation purposes (refer to the WCO Guide to Customs Valuation and Transfer Pricing (June 2015, updated in 2018), the TCCV case studies 14.1 and 14.2, or the WCO Technical Committee on Customs Valuation (TCCV) Commentary 23.1).
Although most customs officials agree that transfer pricing paperwork might be somewhat helpful, there are wide variations in its actual use across the Asia-Pacific area. Multinational corporations (MNEs) should also be aware that customs valuation is seldom taken into consideration when drafting transfer pricing documents.
The viability of pricing in intercompany interactions
From a customs standpoint, it must be shown that the parties' connection has not affected the transaction price. The majority of MNEs claim that if the importer receives compensation commensurate with a transfer pricing benchmark certified by an independent service provider, then this condition is satisfied. In this case, transfer pricing documents alone won't be enough, as customs officials will make clear. In actuality, the importer has the burden of proving that the intercompany rates are reasonable in light of customs valuation.
Import pricing databases are often used by customs officials to refute import prices they claim are too low. Higher import prices in response to demands from customs officials may draw attention from tax authorities (i.e., a higher import price resulting in a reduced corporate income tax base in the importing market). WCO Guidelines on the development and use of a national valuation database as a risk assessment tool state that customs authorities are not permitted to use customs valuation databases to ascertain the customs value of imported goods as a substitute value for imported goods or as a mechanism to establish minimum values. However, it is unlikely that this will be a viable proposal.
Finding out whether the import prices in the database correspond to items that are identical or sufficiently close is a first step in these situations. This covers not just the goods but also the additional information related to the sale (such as time, numbers, and business level). Alternatively, the importer will need to show that, from the standpoint of customs valuation, the intercompany prices should still be acceptable even if they could be less than those from an import pricing database. Kindly see the "Customs valuation support file" section below for recommendations on how to handle this.
Transfer pricing adjustments made retrospectively
When it comes to retroactive transfer pricing adjustments, most countries have certain procedures that must be followed. Among other consequences, failing to record transfer pricing adjustments might result in:
additional import taxes and levies;
substantial fines; and
Interest changes
With a few exceptions, the customs value is definitive after the import declaration is approved by the customs authorities. There are difficulties in customs valuation since retroactive transfer pricing adjustments take place after the time of importation. There are several APAC governments with well established protocols, and sometimes even guidelines. Retrospective transfer pricing adjustments, however, are treated differently in most countries, necessitating a case-by-case examination.
The customs authorities are usually in agreement that extra tariffs and other import taxes, if applicable, must be paid whenever a transfer pricing adjustment raises the customs value of imported goods. However, in many countries, it is not feasible in reality to get a refund in the case that a transfer pricing adjustment results in a lower customs value. However, in some countries, including Australia, Japan, New Zealand, Singapore, and Korea, refunds are possible if certain steps are taken. In order to be eligible for reimbursements, proactive alignment with the customs officials is often necessary.
Businesses seeking clarification on how to handle retroactive transfer pricing adjustments or other customs valuation-related issues may petition for judgements in certain countries. This often entails giving legal agreements and other pertinent paperwork, as well as outlining the reasoning of the transfer pricing mechanism. The parties agree on the treatment of prospective adjustments to transfer pricing for customs valuation purposes as part of such a determination. This helps to prevent audits and penalties while giving the importing company assurance.
First Example: South Korea
Companies who import goods into Korea have the option to voluntarily disclose to the Korea Customs Service (KCS) any adjustments made to transfer pricing that have occurred in the past. Such revelation may not be accepted by customs officials, nevertheless. The customs officials are likely to look into this at some point, even if an audit may not happen right away.
The KCS often thoroughly reviews transfer pricing adjustments as part of the audit. The importer may forfeit the ability to deduct import VAT for any excess VAT determined during the audit, in addition to having to pay additional duties, import taxes, and fines. 10% of the transfer pricing adjustment's total cost would be added as a consequence (plus extra customs and taxes).
Under the amended VAT law in 2023, it seems that the constraints on the recoverability of the VAT assessed in customs audits have been loosened. To determine whether import VAT on transfer pricing adjustments may be recognised as deductible, the authorities are still aggressively enforcing the legislation. Importers may seek for an advance customs valuation agreement in order to mitigate this risk. This improves the deductibility of import VAT and offers protection against audits and fines.
Second Example: Thailand
Getting a customs valuation determination may not be the solution in other jurisdictions. For instance, while legally binding customs valuation determinations may be obtained in Thailand via an administrative procedure, this often fails to provide a practical resolution. Generally speaking, Thai Customs is more likely to take into account and provide a non-binding "consultation letter." In actuality, taxpayers may often rely on this to support their valuation stance and help with port or customs audit issues. If a duty shortfall results from retroactive transfer pricing adjustments, a voluntary notification may be made. An allegation made to Thai Customs that there is no intent to evade duties in connection with the price adjustment and that the matter should be resolved without penalties is supported by a voluntary disclosure. Interest surcharges will still be applicable, however.
Support file for customs valuation
Numerous businesses have used "customs valuation support files" in response to the difficulties associated with retroactive transfer pricing adjustments and intercompany pricing decisions.
It is challenging to quickly provide an excellent, consistent response in the case of an audit while taking into account all pertinent factors and data sources. As previously stated, transfer pricing paperwork alone usually isn't enough since it doesn't address the acceptability of import prices from a customs valuation standpoint.
The customs valuation reasoning for a number of issues, including intercompany pricing, transfer pricing adjustments, and other often questioned subjects like royalties and value-added service fees, may be explained in a customs valuation support file. This enables the importing company to respond to inquiries from customs officials in a prompt, reliable, and excellent manner. Additionally, it permits the compilation and maintenance of contemporaneous documentation (such as benchmarks specific to customs), which is sometimes impractical to do after the fact, particularly in cases where issues emerge during post-clearance audits years after the relevant import transactions.
This might assist with:
minimise disputes with customs officials;
Prevent needless extra duty payments and penalties; and
Minimise waiting times at the dock.
Additionally, a company may find possibilities or threats by closely examining the customs valuation situation.
Potential adjustments to transfer pricing
Due to retroactive transfer pricing adjustments, multinational corporations are increasingly considering potential transfer pricing adjustments as a way to prevent customs valuation issues. When a multinational corporation employs projected transfer pricing adjustments, it keeps a close eye on the importing entity's profits. The price of the imported items will be adjusted within the year if the profitability is not in accordance with the benchmark. Reducing the amount of the transfer pricing adjustment at the end of the year, or avoiding retroactive adjustments altogether, is the goal.
From the standpoint of transfer pricing and customs valuation, this seems to be a reasonable answer at first look. Prospective transfer pricing adjustments are not without difficulties, however, particularly with customs. The prices of imported items are routinely compared by customs officials to those of other importers and to the importer's past pricing. Considerable changes in price, either up or down, may be cause for concern.
The definition of major varies by jurisdiction and is often confidential. Customs officials may simply keep calculating the customs value using the prior, higher price in the event that the price of the imported items decreases, preventing a decrease in the amount of customs charges that must be paid. Nonetheless, the customs officials could argue that the prior imports' customs value was too low if there is a notable rise in the price of the imported items. This could lead to an increase in customs charges as a consequence of retrospectively raising the price of the previously imported goods (often including the imports of many years).
They may even assert that the earlier import statements were false, which might lead to further penalties and interest. Thus, it is essential to apply potential transfer pricing adjustments carefully.
Proactive customs preparation is essential.
For the majority of multinational companies that import products, the relationship between transfer pricing and customs valuation presents a difficult conundrum. It must be carefully managed due to its intricacy and the differences in procedures across the various countries. A solution that works well in one nation may not in another.
Proactive customs preparation is highly advised in order to prevent noncompliance and the imposition of extra tariffs, other import taxes, penalties, interest, etc. Some possible remedies to take into account are as follows:
Decisions;
voluntary admissions;
a file supporting the customs valuation; and
Prospective transfer pricing adjustments are being implemented.
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