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Negotiating transfer pricing and customs value

As international transfer pricing activities attract even more scrutiny, more attention is also being paid to customs regimes, and how they contribute to the transfer price.

International transfer between related parties, in relation to direct taxes or customs duties, require that the value of goods not be affected by corporate links.

Nevertheless, the determination of customs value often leads to results that vary from the normal value (arm’s length value) established for intercompany transactions by reason of:

·         the different “taxing moment” that is deemed relevant for both administrations;

·         the speed that characterises customs operations;

·         the considerations that are diametrically opposed between the two administrations in the respective evaluations;

·         the different methods applied to determine value in the customs area versus the ones applied to the tax area. 

The International Chamber of Commerce (ICC) published, in February 2012 and subsequently updated in 2015, a Policy Statement entitled “Transfer Pricing and Customs Value”, which emphasises the difficulties existing between the evaluation of cross-border transactions for customs and tax purposes and the consequent feeling of uncertainty, as well as the rise in compliance costs for enterprises.

As a general principle, the ICC confirms the need for tax authorities to ascertain and appreciate such procedures and criteria applied by taxpayers when determining the customs value (and likewise, that customs authorities are to ascertain and appreciate such procedures and criteria applied by taxpayers when determining transfer prices) before issuing a tax assessment notice. 

ICC’s further recommendation to tax and customs authorities involves the need for both authorities to join forces in an attempt to harmonise the value in case of conflicts with the taxpayer.

The same principles were reiterated in June 2015 by the World Customs Organization, which exhorted both operators and authorities in connection with the above matter, by describing the main proposals to settle any current dual aspects.

In line with the above international organiations, the Italian Customs Authorities published on November 6 2015 a Circular (No. 16/D), the purpose of which was to provide clarifications on the above matter while announcing the introduction of a joint working group with the tax authorities on the same topic.

From an operative standpoint, the Circular emphasises the validity of methods provided for transfer price evaluations, in order to analyse the circumstances related to intercompany sales for Customs purposes, underlining however the need to carefully assess transposition of the TNMM from the tax area to the customs area.

With reference to the need to consider transfer pricing adjustments for customs purposes, it is established that multinational enterprises must substantiate in advance to what extent adjustments and amendments deriving from transfer pricing agreements actually refer to imported goods.

In particular, the circular indicates the customs law instruments that may be used to reconcile transfer pricing adjustments with the Customs Office, in that the so-called “incomplete declaration” and the so-called “flat rate adjustment of transaction values”.

To benefit from such instruments, it is established that, where the relevant multinational group has already signed a transfer pricing advance price agreement (APA) with the tax authorities, it must declare the existence of the same to the customs authorities to substantiate its own admission request of the transition value between related buyer and seller. 

Moreover, the customs authorities encourage operators to have recourse to an advance ruling, providing to such purpose a special procedure by means of which multinational enterprises may also expect to have their own transfer pricing policies validated for Customs purposes.

To such effect, the circular is supplemented with a form to be submitted to the customs authorities so as to provide all information and documentation required to support the relevant TP policies. In particular, it is necessary to point out that it might be necessary to compile a “masterfile”, or in the case where the company may have exclusively compiled a national documentation file containing information related to the single group companies residing in Italy, further information related to the multinational group will be required.

Therefore, validation of the documentation compiled for the transfer pricing analysis allows the customs authorities to reconcile the two criteria (customs value and arm’s length value).

By Piergiorgio Valente e Federico Vincenti - Valente Associati GEB Partners

Valente Associati GEB Partners

Viale Bianca Maria, 45

20122 Milan, Italy

Managing Partner: Piergiorgio Valente

Tel: +39 02 7626131

Fax: +39 02 76001091

Email: p.valente@gebnetwork.it

Website: www.gebpartners.it

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