Customs is also interested in your transfer pricing

By Bart de Gouw and Jeanne Du Buisson

Importers who find they need to change the value of goods after importation can be subject to fines and penalties on underpaid GST and customs duty. Where goods are imported from an associated party (like a parent company or a subsidiary), the value may have to change later due to the transfer pricing rules. This might mean a different amount of GST or customs duty is payable. From 1 October 2018, some importers have been able to use the provisional value scheme to avoid penalties and interest on these adjustments.

What is transfer pricing?

Transfer pricing is the process of setting prices for the transfer of goods, services, money or intangibles with associated parties in different tax jurisdictions.

How are transfer pricing and custom duties interlinked?

For customs purposes, the transfer price between associated enterprises of goods and certain “add-ons” such as royalties can have a direct impact on determining the customs value and import GST.  For goods imported by associated enterprises, due to the special relationship, the transaction value of goods imported may differ from the value of similar goods due to competing incentives.  The lower the transfer price, the lower the customs value and import GST.  Custom duties and to a certain extent import GST can be a toll on a company’s profits and competitiveness.

However, there is no convergence between the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing methods and the methods contained in the World Customs Organisation Valuation Agreement. This can lead to potential difficulties for importers.

Customs and Excise Act 2018

The provisions in the Customs and Excise Act 2018 (the Act) came into effect on 1 October 2018.  The 1996 Act had become out of step with modern business practices.  One of the changes made in the Act relates to importers who cannot determine the value of imported goods at the time of importation or know that the Customs value is likely to change after importation. The Act allows for registered importers to use a Provisional Customs Value in an entry for imported goods.

Importers need to determine if the provisional value scheme is appropriate for their circumstances.  If it is, importers need to determine if they automatically qualify and only need to notify NZ Customs, or whether the importer needs to apply in order to use the scheme.

Without applying the provisional value scheme, under the new Act, adjustments post importation would be subjected to compensatory interest on the GST and duty shortfall and late payment penalties may also arise.

The Act specifies three instances when importers can automatically qualify to use provisional values. These are:

(1)   If there is transfer pricing that is governed by an Advance Pricing Agreement; or

(2)   If the importer pays royalties and licence fees in respect of the imported goods; or

(3)   The importer pays ‘further proceeds’ to another party.

If you use the provisional value scheme, you must provide Customs with a final value within 12 months after the end of the financial year in which your provisional values were made.  For example, if you have a year end of 31 March 2019, you have up to 31 March 2020 to declare your final Customs value for all of your import made for that income year and the duty balance is then paid or refunded and no compensatory interest charged on the difference between provisional duty and the final duty.

What does it mean if you do not qualify automatically?

You can apply and if your application is approved, you may still use provisional values to determine your Customs value of the imported goods. 

The Act has led to a much greater collaboration between Customs and the transfer pricing team at Inland Revenue in order to conform compliance with both regimes.

It’s never too late…

If you have a transfer pricing arrangement that involves the supply and acquisition of goods, (i.e. the supplier is your associated party and is a cross-border arrangement for the importation of goods), then you should consider the provisional value scheme, it is not too late to apply.  You need documentation to support that the transfer pricing method applied to establish how your provisional value will be determined and why the final value at the time of importation is not available.  Our Transfer Pricing and Customs teams at Deloitte have experience with registration and implementation for a range of importers and are able to advise on specific requirements.

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