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Transfer Pricing meets Customs & Duties: Highs vs Lows
Transfer Pricing (TP) tax advisors and their Customs & Duties counter parts are often pulled by tax authorities into opposite directions.
While one side of the tax authorities wishes lower transfer pricing rates, their direct peers desire high duties to increase government income. In this article, we put the opposing “tax forces” into comparison to emphasize why an expertise and collaboration is crucial between the two to provide holistic client solutions.
The various intersecting areas between transfer pricing and Customs can be explained with the help of an example case that involves the delivery of goods between group companies across the EU customs borders which is carried out on the basis of transfer prices. The question in focus is which price will be used as a basis for services in group companies? This can be done by keeping in mind both the areas of law affected which is as follows.:
- Transfer price Law: Transfer price as per arm’s length principle to avoid inappropriate profit shifting (no transfer price that is too low or too high).
- Customs Law: Levying of legally owed import duties for imported goods (no customs value that is too low).
There are other relevant fields where transfer pricing meets Customs & Duties:
- A joint development of solutions for clients.
- The consideration of customs implication when preparing a TP documentation.
- An advice on intended relocation of functions.
- The impact of the modified TP documentation on customs preferences.
- Reviewing existing licence agreements and adjustment if necessary.
- Having proof of the appropriateness of a price during an audit (reversal of the burden of proof).
- The legal assessment and preparation of a statement of defence in case costs are not added.
- Critical review of the so far uncharged licence fees which have to be paid.
A key common factor for both departments would be communication between the two within the company (regular consultations). A few to-dos that the Customs department should keep in mind are:
- Analysis of the transfer pricing agreement on statements for cross-border deliveries of goods.
- To know how compliance with the arm’s length principle are ensured and documented.
- To know about subsequent price adjustments.
Similarly, the transfer pricing department should also keep the following in mind for efficient results:
- Analyse the agreement regarding statements on cross-border transactions of any kind.
- Comply with the arm’s length principle.
- Include end-of-year adjustments or subsequent price adjustments in order to achieve flexibility.
- Documentation of the agreement:
– Preferably in written form, if necessary, record subsequently verbal agreements in writing (regularly not in relation to specific business transactions, but comprehensively in the form of a so-called transfer pricing guideline or in framework agreements).
– Verifying whether there is an extraordinary business transaction. - Actual execution as agreed, i.e. modifications should preferably be agreed in writing only.
This gives an insight to discover what degree TP and Customs & Duties are opposing forces, and helps one understand why Customs & Duties expertise represents such an important puzzle piece for broad tax coverage and how it fits perfectly to complete existing TP services and learn how to deal with such situations.
For more information, please contact:
Nexia Tax Team
E: tax@nexia.com
