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a) The customs valuation rules set out six methods to determine an acceptable customs value and these rules must be applied in cascading order
b) Over 90% of all customs values are determined using Method One, which states "the customs value of imported goods shall be the transaction value, that is, the price paid or payable for the goods when sold for export to the customs territory of the Community...[1]"
c) This transaction value can be used for related party sales provided the relationship does not affect the price
d) The importer has two alternative ways of demonstrating that the relationship does not affect the price, namely
a. Showing the transaction value closely approximates one of the test values set out in the customs valuation regulations, or
b. By a review of the circumstances surrounding the sale
e) Importers rarely have access to acceptable test transactions set out in the regulations and usually have to rely on the circumstances of sale test
f) Using the transfer price as the basis for the customs value rather than carrying out the process separately for each tax type should reduce the time and costs involved and ensure greater consistency
g) The importers transfer price is usually based on OECD guidelines and principals and these differ to the rules used for customs valuation purposes which are derived from GATT 1994
h) It will be necessary to:
a. Have a written transfer pricing agreement that is actually used for direct tax purpose
b. Demonstrate that the transfer pricing (usually set at entity level) links to individual items being sold for an arms-length price
c. Adjust the transfer price to meet the specific rules of the customs valuation regulations on items that may need to be included (transport costs, insurance, royalties, assists) or that may be deducted (finance charges, rights to reproduce the items in the EU etc.)
i) If the transfer price allows for retrospective adjustment then this gives rise to further complications from a customs perspective.
j) The customs value is declared when the goods are imported and any subsequent adjustment will result in the value previously declared being incorrect
k) Any increase in what is paid to the exporting entity will give rise to additional customs duty costs. Failure to disclose these will result in retrospective duty demands going back up to three years and possible penalties
l) Any decrease in what is paid to the exporting entity may give rise to potential customs duty reclaims providing the transfer pricing agreement used clearly provides for this possibility before the goods are imported and sets out a rational for calculating any adjustment
m) If your transfer price allows for retrospective adjustment then prior disclosure is required so you can agree a process of bringing adjustments to account and avoid making incorrect declarations at time of import
n) Given these complicated inter-relationship between customs value and transfer pricing it is advisable to seek advance agreement HM Revenue & Customs in advance setting our your proposals in order to minimise the risks that a subsequent audit by the tax authorities will find your approach unacceptable
Transfer pricing and customs valuation is a hot topic for the tax authorities. We trust the above provides a useful overview of this topic but we appreciate this is a complex matter. If you would like to discuss the matter in greater detail then call Rob Jenkins on UK 1905 619229 or email
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[1] Article 29(1) Council Regulation 2913/92 |
