Accounting for transfer pricing adjustments in customs ... Haaren...  The emergence of global value

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  • Accounting for transfer pricing adjustments in customs valuation

    By: M.I. van Haaren, LLM, EU customs Law, 2015/2016

  • Table of contents

    1. Introduction and overview ............................................................................................... 1

    1.1 Transfer pricing adjustments and customs valuation ............................................... 1

    1.2 How to account for transfer pricing adjustments in customs declarations ................ 1

    2. What are related parties? Norms for affiliation ................................................................ 2

    2.1 Related parties for transfer pricing purposes ........................................................... 3

    2.2 Related parties for customs purposes ..................................................................... 3

    2.3 Conclusion for companies within multinationals groups ........................................... 4

    3. Transfer pricing .............................................................................................................. 4

    3.1 Background ............................................................................................................. 4

    3.2 Determining the transfer price ................................................................................. 5

    3.3 Transfer pricing adjustments ................................................................................... 7

    4. Customs valuation .......................................................................................................... 9

    4.1 Background ............................................................................................................. 9

    4.2 Customs valuation methods: transaction value first ................................................10

    4.3 Customs value; specific additions and subtractions ................................................12

    4.4 Customs law and intra-group transactions ..............................................................13

    5. Customs valuation and transfer pricing, similarities and differences ..............................13

    5.1 The same principle yet different practical methods .................................................13

    5.2 Correcting for known practical differences ..............................................................14

    6. Accounting for transfer pricing adjustments ...................................................................14

    6.1 The use of customs valuation for transfer pricing ...................................................14

    6.2 Non-refundable customs duties ..............................................................................15

    6.3 Is a transfer pricing adjustment reason to adjust the customs value? .....................16

    6.4 Timing issues .........................................................................................................16

    6.5 Incomplete customs returns ...................................................................................17

    6.6 The agreement between importer and customs ......................................................18

    7. Conclusions and recommendations ...............................................................................19

    7.1 The same valuation principle means moving in synchronization .............................19

    7.2 Customs legislation should be improved ................................................................19

    7.3 Proposition for improving customs legislation .........................................................19

    8. Literature list ..................................................................................................................19

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    1. Introduction and overview

    1.1 Transfer pricing adjustments and customs valuation The intersection between transfer pricing and customs The emergence of global value chains and the expansion of activities of multinational enterprises have increased the value of intra-group trade flows.1 A large share of world trade is conducted between related parties.2 International intra-group transactions with goods bring about an interesting intersection between corporate income tax transfer pricing and customs that is not provided for by legislators. Both taxes (corporate income tax and customs) need to determine a fair market value for the same goods to prevent tax avoidance. The movement towards globalisation and increasing international intra-group trade has not been missed by tax authorities. Pricing of intra-group transactions is arbitrary and malleable. Transfer pricing offers tempting possibilities to shift taxable profits to low tax jurisdictions. Relieving multinationals of this temptation, governments have implemented transfer pricing rules.3 Because of their arbitrary nature these rules often bring about transfer pricing discussions and transfer pricing adjustments. Transfer pricing adjustments and customs value Historically transfer pricing specialists focus on the corporate income tax aspects of such transfer pricing adjustments. However, international intra-group trading of goods involves importations and/or intra-community supplies and will therefore impact the determination of, respectively, the taxable base for value added tax (VAT) purposes and the customs value.

    1.2 How to account for transfer pricing adjustments in customs declarations

    Transfer pricing and customs valuation, the same basic valuation concept for the same transactions The same basic valuation concept is used for determining customs value and transfer prices. For both purposes the valuation is based on the price unrelated parties would agree to.4 Both aim to determine an 'objective' fair market value of the goods to avoid manipulation. Because transfer pricing regulations and customs valuation rules have different objectives, the implementation of the same basic valuation principle differs on a practical level. Transfer pricing aims to fairly allocate worldwide taxable profits between tax jurisdictions. Customs valuation aims to provide a fair base for the levy of customs duties. Lowering the transfer pricing means lowering the customs value too As the European Union is a relatively high tax jurisdiction companies shipping in goods are tempted to search for the upper bound of the range of acceptable transfer prices, effectively shifting profits towards lower tax jurisdictions. This means that tax authorities often feel they have to intervene by lowering the transfer prices charged to European group companies to protect the European taxable base. This landscape provides the base example for the

    1 R. Lanz, a.o., Intra-Firm Trade: Patterns, Determinants and Policy Implications, OECD Trade Policy Papers, no. 114, OECD Publishing. 2 The exact share of world trade conducted between related parties varies substantially between different sectors of industry and globally aggregated data is not available. For a broad impression I refer to the OECD Economic Outlook, Volume 2002, no. 1, Chapter VI. 3 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD Publishing 2010. 4 The transaction value or the arms length price.

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    illustration of this thesis, namely a Dutch company buying goods from a Chinese group company for a price that is later deemed too high. A primary transfer pricing adjustment generally takes place only in the form of a corporate income tax adjustment years after the transaction was concluded. VAT that is due on import generally is refundable if used for VAT taxable activities. In contrast, customs duties are in principle non-refundable. Furthermore the VAT due on import is based on the customs value.5 Therefore the largest financial interest for companies is with lowering the customs duties after a transfer pricing adjustment. Practical differences between transfer pricing and customs valuation aside, it seems logical and fair that a lowering of the transfer pricing determined for a shipment of goods also leads to a lowering of the customs value. A reasonable and holistic fiscal approach entails that a downward transfer pricing adjustment is followed by a lowering of the customs duties due. Customs valuation rules do not account for transfer pricing adjustments The customs duty, which is based on the customs value, is in principle non-refundable. This poses a problem if, for instance, a retroactive transfer pricing adjustment results in the lowering of a price for a particular shipment of goods. Unfortunately the customs legislation lacks provisions designed to account for retroactive transfer pricing adjustments. It does not offer a clear remedy to retrieve the customs duty after a decrease of the transfer prices paid for goods entering the European Union. In the absence of provisions specifically designed to account for transfer pricing adjustments it is unclear how companies should best account for retroactive transfer pricing adjustments in their customs declarations. In this thesis I will explore some alternative options that companies have to retroactively adjust the customs value after a transfer pricing adjustment. The research question of this thesis is: how to account for retroactive transfer pricing adjustments in customs valuation of intragroup transactions of goods.

    2. What are related parties? Norms for affiliation

    5 Article 19, section 1, Dutch Act on Value Added Tax.

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    In order for the transfer pricing rules to apply and to be able to choose the correct customs valuation method, it is neces