CUSTOMS VALUATION AND TRANSFER PRICING

New 2018 Edition

The Technical Committee on Customs Valuation under WCO shares ideas and national practices, including the trade view in the New 2018 edition

Quote “The 2018 edition includes updates to reflect developments on transfer pricing at the OECD including the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project (Chapter 3), information on recent texts concluded by the Technical Committee on Customs Valuation (Chapter 4), updates to national initiatives (Annex I) and minor drafting changes.” See the link at ……. For the full text of the publication.

What is the effect of Transfer Pricing and which are the Agencies that should pay heed:

“How transfer prices are determined in practice can be important for, and influenced by, a range of regulatory and non-regulatory factors, including, inter alia, taxes (such as corporate income tax) and duties.

Transfer pricing is a neutral concept that simply refers to the determination of transfer prices for transactions between related parties. As pointed out by Tax Justice Network, “transfer pricing is not, in itself, illegal or abusive. What is illegal or abusive is … transfer pricing manipulation or abusive transfer pricing.” (Tax Justice Network).

How transfer prices are determined is essential for defining the corporate tax base (direct taxation), but in some cases, it may also be important for a range of other regulatory and non-regulatory purposes, including the following:

Who should pay attention:

· Tax Authorities -Taxes and duties (value-added tax/Sales tax, customs duties, mining royalties, and petroleum resource taxes, for example);

· Corporations law (directors’ duties, protection of minority shareholders, for example);

· Contractual requirements (investment contracts, for example);

· Statutory accounting requirements;

· Foreign exchange controls;

· Management accounting;

· Internal performance management and evaluation;

· Employee profit-sharing requirements;

· Competition law; and

· Official trade statistics.

The determination of appropriate transfer prices is also often required for subsidiaries to prepare stand-alone statutory accounts in order to meet local reporting requirements. Although standards or methodologies for determining these transfer prices may or may not be provided for under local, generally accepted accounting principles, the value of associated party transactions will generally require separate disclosure in the notes to the accounts, as may any uncertain tax positions related to them. 

Regulation of transfer pricing for direct tax purposes generally involves the prescription of standards or methodologies. Direct tax transfer pricing regulations, for example, generally require that transfer prices for transactions between associated enterprises be determined in accordance with the arm’s length principle (discussed below). Noncompliance with these regulations will often result in adjustments to the tax liability and the imposition of penalties and interest.

A study by Cools (2003) found that “because of the real threat of audits and penalties, the tax requirements of transfer pricing play a prominent role in the MNE’s decision-making process” As an increasing number of countries introduce transfer pricing legislation and increase audit capacity (see below), this trend will only increase.

Regulation of transfer prices for Customs purposes (i.e. determination of Customs values) and VAT purposes also generally involves the prescription of specific standards or methodologies that must be complied with. However, these standards or methodologies generally differ from those prescribed for direct tax purposes and have a narrower scope of application.

In addition to taxes and duties, foreign exchange controls, contractual requirements, and other regulations and administrative practices can have a substantial impact on the determination of transfer prices. As a result of the different regulatory and non-regulatory factors that can influence the determination of transfer prices, MNE groups sometimes face conflicting requirements. Although congruence is theoretically desirable, different transfer prices may be recorded or reported for different purposes.”

to read further see WCO Guide 2018 Edition

Post dated 8 may 2019