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Analysis

The Link Between Transfer Pricing and Customs Valuation

2018 Country Guide

This guide compiles essential information regarding customs-related requirements and implications of related party pricing adjustments in key jurisdictions around the world.

The Link Between Transfer Pricing and Customs Valuation

This guide has been expanded to include several new countries, including Angola, Greece, Kazakhstan, Nigeria, Serbia, and Panama, bringing the total number of contributing countries to 58. For past contributing countries, this year’s responses have been updated to address ongoing country-specific regulatory and enforcement changes, as well as other events affecting related party customs valuation.

For example, the Court of Justice of the European Union issued a decision in December 2017 that raises questions and challenges for EU importers and customs authorities related to the use of transaction values based on transfer prices that may be the subject of transfer pricing adjustments.

Read about this and other key developments in the 2018 edition of the guide.

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2018 country guide trends

The past year has seen the following trends and developments, among others:
  • There remains a significant variance in the types of evidence the customs authorities will consider as supportive of the acceptability of transfer pricing as the basis for transaction value. This includes referrals by the customs authorities to reference prices, information contained in transfer pricing studies, as well as various commercial documentation supporting the business transaction such as invoices and agreements. There also remains a significant variance in the application of the related party value tests, as well as a variance in focus on profits achieved on in-country sales versus intercompany sales when evaluating the acceptability of intercompany pricing.
  • Thirteen of the 58 countries surveyed have published and made publicly available specific guidance on the treatment of related party prices and/or transfer pricing adjustments, including Australia, Austria, Belgium, Canada, Croatia, France, Germany, Israel, Italy, Russia, the United Kingdom, the United States, and Vietnam. New guidance is expected to be published in New Zealand and, potentially, several of the EU Member States in 2018.
  • Thirty-six (up from 29 last year) of the 58 countries surveyed have noted related party customs valuation as an increasingly high-focus enforcement area.
  • Twenty-six of the 58 countries surveyed continue to note that retroactive transfer pricing adjustments may require corrections on previously reported export values.
  • Eighteen of the 58 countries surveyed have noted that prospective transfer pricing adjustments will likely invite scrutiny by the customs authorities, while an additional 20 of the 58 countries surveyed have noted that increased scrutiny may be possible.
  • India finally implemented its new Goods and Services Tax (GST) regime in July 2017, which appears to have increased the tax authorities’ scrutiny with respect to related party customs values upon which import GST is assessed. In addition, new Value Added Tax regimes came into effect in Saudi Arabia and the United Arab Emirates for 2018, which are expected to result in similar impacts.

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Changes at the global and regional levels

Several changes continue to occur at the global and regional levels that could significantly influence the management and enforcement of related party customs valuation in the coming year.

These include:
  • From a broader policy perspective, the international trade world continues to face changes and increasing uncertainty with respect to new national political policies and a shift towards protectionism. For example, in the past year, the US withdrew from the TransPacific Partnership trade negotiations and initiated a renegotiation of the North American Free Trade Agreement with Canada and Mexico. In the UK, the impact on trade policy of the “Brexit” decision to secede from the European Union in 2019 remains uncertain.

    Additionally, more countries have implemented value-added tax systems, while more tax and customs authorities are scrutinizing transfer pricing more closely. Each of these events continues to have the potential to impact supply chains and production models that could change the footprint of related party transactions and create new issues that require attention under the customs valuation rules.
  • The World Customs Organization (WCO), in October 2017, published a second case study intended to provide guidance to Member States’ customs authorities on the use of information contained in transfer pricing documentation. “Case Study 14.2, Use of Transfer Pricing Documentation when Examining Related Party Transactions Under Article 1.2(a) of the Agreement,” provides an example of the examination of the acceptability of related party pricing based on the resale price method, which focuses on an importer’s gross margin achieved on domestic sales with those achieved by comparable companies in their transactions with unrelated parties in the sale of similar goods on the domestic market.

    In the example, the importer earned a higher margin than the range earned by comparable companies set forth in the importer’s transfer pricing study, which led to the conclusion that import prices were not settled in a manner consistent with the normal pricing practices of the industry and, accordingly, had been influenced by the relationship between the related buyer and seller.
  • Finally, there was an important development that occurred in late December 2017 in the EU that could substantially change the way customs values are declared and supported in the future. Specifically, the Court of Justice of the European Union (CJEU) issued a judgment in the Hamamatsu case (C-529/16) that raises many questions and potential challenges for both companies and the customs authorities centering on the use of the “transaction value” method of customs valuation based on transfer pricing that, subsequent to importation, may be the subject of retroactive transfer pricing adjustments.

    In this case, the CJEU opined that the customs valuation methods of the Customs Code (which was in effect until April 30, 2016, and was replaced by the new Union Customs Code (UCC)) must be interpreted as “meaning that they do not permit an agreed transaction value, composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down.” It remains to be seen how the customs authorities throughout the EU will interpret and apply the holdings of this CJEU case under the new UCC.

Because it remains to be seen how events will unfold in the wake of this decision, all of the answers provided in this year’s Country guide for EU Member States reflect local practice as it stood at the end of 2017, and may be subject to dramatic change during the course of 2018.

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