The interaction of customs value and transfer pricing

The post-World War II era saw a broad decline of effective general duty rates in the US and globally (for example, according to the WTO, the US imposed an average 3.4% rate on all imports as of 2024). As such, tax planning from a transfer pricing perspective rarely considered the potential impacts of general duties in cases when they were low or non-existent. Instead, transfer pricing planning focused more on addressing risks and opportunities arising from supply chain changes and intangible property transactions.

Now, with a shifting global trade landscape resulting from new US trade policies, supplemental tariffs have become a main consideration for global importing companies, and transfer pricing principles are often being utilised to help manage the financial implications of new supplemental tariffs.

This article discusses a few of the transfer pricing methodologies and customs value planning opportunities that companies can consider in managing the implications of these new supplemental tariffs. It also provides observations on how tax and customs authorities around the globe employ different methods of evaluating the related-party customs values upon which tariffs are assessed. Finally, it provides insights to help impacted organisations perform more robust transfer pricing and customs value planning from the outset of their tariff management planning efforts.

Taxpayers are examining various mechanisms to understand, analyse, and manage the impact of tariffs, and transfer pricing principles are among those. The invoice price is often the basis for customs values and, for related parties, this is often driven by transfer pricing policies (this article will largely focus on customs values and tariffs in intercompany settings, thereby necessitating alignment with tax and transfer pricing principles and regulations, as well as related-party customs value requirements).

In these contexts, various approaches that utilise transfer pricing principles to lower customs values range from less invasive to the company’s international tax structure to more invasive, potentially requiring people, supply chain, and/or intangible property movements. Such changes to the organisation and associated costs intended to lower customs values should be balanced against related-party customs valuation requirements and enforcement, as well as any potential tariff savings realised.

Generally, transfer pricing is an exercise of examining the functions, risks, and assets in an intercompany transaction to arrive at a supportable price under tax arm’s-length principles. Therefore, in the process of evaluating a tangible goods price for importation purposes, it may be appropriate to examine and potentially adjust, upwards or downwards, for the aforementioned functions, risks, and assets to arrive at a supportable transfer price for the tangible goods sale.

Less invasive transfer pricing planning options for customs value reduction purposes could involve evaluating the possibility of operating lower in the arm’s-length range and/or shifting various risks that are less dependent on substantial people or assets to manage and control such risks. In these cases, the changes in transfer prices tend to be smaller and, therefore, if acceptable from a customs value regulatory perspective, the corresponding tariff savings will also likely be smaller.

Another potential approach that taxpayers are exploring is whether to unbundle the value of non-dutiable cost elements – e.g., for non-dutiable services and/or intangible property – from a tangible goods price. This may result in a lower tangible goods price and, therefore, a lower customs value. It should also be noted that, for some taxpayers, it may be a matter of convenience to bundle multiple transactions into a single tangible goods price. Furthermore, the aggregation principle incorporated through the US Tax Cuts and Jobs Act of 2017 may also encourage such bundling from a US perspective.

However, situations such as these are very fact- and circumstance-specific, and any resulting transfer pricing must also align not only with the company’s overall international tax and transfer pricing structure but also with related-party customs value requirements in the import jurisdiction.

In addition, if dutiable costs are unbundled – e.g., a dutiable royalty or licence fee – under customs valuation principles, the dutiable costs simply become required additions to the price of goods when deriving final transaction values. As such, potential tariff savings stemming from unbundling are limited to only non-dutiable costs, and are dependent on the resulting transfer prices remaining acceptable under customs value principles. Finally, from a US tax perspective, evaluating the impacts of unbundling from Section 59A of the Internal Revenue Code (Base Erosion and Anti-Abuse Tax, or BEAT) may also be required in these contexts.

First sale for export (FSFE) is a US customs value interpretation rooted in long-standing case law (see Nissho Iwai American Corp. v United States, US Court of Appeals, Federal Circuit, 1992) that allows importers, in instances when a chain of sales is involved with an export to the US, to declare a customs value based on a sale occurring earlier in the chain as long as certain conditions are met (the first sale must be a bona fide sale for export to the US that is arm’s-length under US Customs and Border Protection (CBP) arm’s-length principles, which differ from tax arm’s-length principles).

This means that importers may be able to reduce the amount of general duties and supplemental tariffs owed for goods imported into the US by eliminating one or more middleman markups and using an earlier sale as the starting point for declared customs values (required additions to value would still need to be added to the first sale price of goods).

It is important to note that FSFE valuation is US-specific; i.e., it is not recognised by customs authorities in other jurisdictions (other jurisdictions may have alternative ways to achieve similar results). From a transfer pricing perspective, a related-party FSFE structure may involve setting up and/or utilising an internal contract manufacturer that sells to an internal middleman entity, and an internal distributor that takes title to goods from the internal middleman entity when the goods are directly imported into the US from the internal contract manufacturer. In such cases, the first sale price could be determined using traditional transfer pricing principles.

However, care should be taken to confirm that the resulting transfer prices satisfy US related-party customs value requirements. The customs value analysis may involve examining the normal pricing practices of the industry, an analysis of sales of the same or similar goods to unrelated parties in the US, and/or determining whether the transfer prices covered all of the supplier’s costs plus a reasonable profit.

In fact, confirming the acceptability of transfer prices under US customs value arm’s-length requirements for related-party transactions is imperative to the viability of an FSFE structure that relies on a related-party first sale. In addition, if retroactive transfer price adjustments change the cost of goods sold, additional requirements must be satisfied. There are several additional requirements (i.e., the ‘five factors’ requirement) in these situations that are beyond the scope of this article.

While these requirements are collectively numerous, satisfying them can lead to significant general duty and supplemental tariff savings that outweigh the setting up and continuing management of the FSFE programme. Also, leveraging the CBP’s customs value Reconciliation Program, which allows importers that satisfy certain conditions to declare provisional values at the time goods enter the country and true up to final customs values within 21 months of the entry date, can help US importers effectively manage the requirements involved with a related-party FSFE structure.

Finally, in some cases, companies may consider reassessing their supply chain and/or intangible property planning structures in an effort to reduce the impacts of supplemental tariffs. On the basis of such reassessment, they may decide to undertake substantial movements and investments of people, resources, and assets (e.g., factories and other facilities) over a prolonged period, including increased potential for US onshoring. However, in these cases, there will be significant changes to import prices/customs values subject to other considerations, including:

• Valuation;

• Development, enhancement, maintenance, protection, and exploitation (DEMPE) considerations related to intangible property creation;

• Exit tax challenges; and

• The ability to operationalise and maintain the restructured supply chain.

As such, restructuring the company’s supply chain and/or engaging in intangible property planning will likely be a more involved and cost-intensive exercise in comparison with the previous planning methodologies discussed herein.

The level of scrutiny of related-party customs values by customs authorities, and the interpretation of related-party customs value principles, can vary greatly from jurisdiction to jurisdiction, even though those principles derive from the same globally accepted customs valuation principles. For example, in some jurisdictions, customs authorities may request transfer pricing documentation in order to validate that the declared customs values are correct. In some of these cases, the customs authorities use this documentation to modify the customs values declared by the importer, raising the question of whether transfer pricing calculation methods can actually be used for customs valuation purposes in such jurisdictions. At the same time, other jurisdictions, such as the US, readily accept customs values that are based on transfer prices as long as certain requirements are satisfied.

Throughout history, there have been different criteria applied by customs authorities to evaluate the relationship between transfer pricing and related-party customs values. For example, customs authorities may have benchmarked the customs values declared by one importer against customs values declared by another importer of the same or similar goods using data visible only to the customs authorities.

It is only relatively recently that a new hierarchy of customs value methods, which included methods to determine the acceptability of customs values based on transfer prices, arose through the efforts of the WTO and a multilateral valuation agreement that took effect on January 1 1995 (the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994). This new hierarchy of customs valuation methods has subsequently been incorporated into the local legislation by many of the WTO member states that signed on to the agreement and has evolved to become the standard in many jurisdictions.

In the decade that followed the effective date of this agreement, the methods set forth in the agreement for testing related-party prices were complex and difficult to apply, and, consequently, were applied inconsistently. While these new methods represented an evolution intended to get customs valuation closer to the reality of the market and the operationalisation of transfer pricing principles, they initially resulted in an increasing separation between the system for determining transfer pricing and the system for determining customs values. This often led to transfer pricing documentation not being taken into account from a customs point of view in many jurisdictions, especially when post-importation transfer pricing adjustments were involved.

This situation began to change as businesses became more international, transfer pricing documentation became more important, and more and more customs authorities began to better understand transfer pricing principles and how the prices of tangible goods are set and adjusted on an intercompany basis. However, certain challenges remained.

One challenge is related to accepting adjusted transfer prices and the difference in timing involved. Specifically, customs values were declared and checked at the time of importation when it was not yet possible to determine whether a post-importation adjustment would occur upwards or downwards that could change the prices paid for, and the customs values of, the imported goods. This often led to the rejection of transfer prices as a supportable basis for transaction values until the interpretations of the related-party customs value rules further evolved.

Another challenge stemmed from the complexity of transfer pricing documentation, which is not typically prepared from the point of view of the related-party customs value methods. For example, transfer pricing documents could include methods to compensate for a variety of intercompany services – such as marketing, financing, purchasing agent commissions, quality analysis, design, and others that are collectively defined and analysed under a single transfer pricing concept and compensated by a single payment determined using a single calculation.

Such an approach overlooks that, for the purposes of determining which of those costs must be included in customs value, it is essential to distinguish the type of service performed and its individual calculation methodology since, depending on its nature, it will or will not form part of the customs value. Consequently, a single bundled transfer price that compensates for all services, inclusive of services that normally would not have to be added into the customs value had they been separately determined and paid, has resulted in the inclusion of the entire payment within the customs value because they are aggregated. This has led many importers to revisit their transfer pricing documentation and to intentionally bifurcate non-dutiable costs and the methods for calculating them from dutiable costs along with their calculation methods.

Faced with these challenges, several customs authorities eventually began to further analyse transfer pricing documentation and principles to better understand how adjustments may impact the customs value, and some began to adopt new interpretations of the methods established in 1991. Eventually, the WTO published a guide in 2018 highlighting the relationship between customs values and transfer pricing, which included several examples of how customs authorities may analyse the acceptability of transfer prices when used in the calculation of customs values.

More and more customs authorities have also been clarifying or modifying their interpretation of the related-party customs value rules to indicate the possibility of using transfer pricing documentation for the purpose of setting the customs value on imports, as well as establishing systems by which importers may make modifications to their initial import declarations to adjust the declared values to their pricing policy as long as certain conditions are met. Thus, many customs authorities that previously only carried out controls at the time goods were imported have developed post-importation controls to verify adjusted customs values that importers modify on import declarations due to retroactive transfer price adjustments determined through the application of transfer pricing policies.

Therefore, we are once again in the process of rapprochement between transfer pricing and customs valuation principles, moving from direct taxation and transfer pricing having to follow customs valuation methods for the purposes of setting the price of intercompany transactions, to the customs authorities approaching with a little more flexibility the method of valuing intercompany transactions within transfer pricing documentation to set the customs values.

Nevertheless, importers may still face challenges since, fundamentally, the tax authorities are motivated to reduce the customs value to obtain higher internal taxes, while customs authorities are motivated to increase the customs value, also with the aim of increasing revenue.

With respect to linking transfer pricing and customs valuation methods, increased coordination in the policies followed by customs authorities in different jurisdictions could assist companies to navigate this landscape more readily. At the moment, because requirements still vary between many customs authorities, it remains challenging for global business groups to uniformly analyse transfer pricing documentation and support related-party customs valuation so that final transfer prices can be used both for direct taxation and as the basis for customs values. As such, there remains work to be done in this evolving landscape.

In the meantime, when navigating the challenges across jurisdictions, it is essential to consider the following points in relation to transfer pricing documentation:

• Understand the policies of each country of import regarding the relationship between the transfer pricing documentation and the determination of the customs value, and if nothing is established, understand the customs authorities’ recent behaviour and approach to such matters.

• Review transfer pricing documentation to determine whether it defines and compensates for various intercompany services in a bundled manner. To avoid paying general duties and/or supplemental tariffs on otherwise non-dutiable services, it is necessary to separately define each service along with its quantification method to assess whether it forms part of the customs value. There should be a bifurcation between dutiable and non-dutiable services and payments.

• Understand whether domestic policy recognises a system for making post-importation modifications to customs value declarations and for making such modifications in the case of transfer price modifications that impact the cost of goods sold. It should not be forgotten that, depending on the jurisdiction involved, such modifications may entail additional duty/tariff payments, interest, and in some jurisdictions even penalties if customs values go up but may also entail obtaining refunds if customs values go down. Again, the rules in this regard will vary by jurisdiction (for more details on the connections between customs and transfer pricing across 59 jurisdictions globally, see Deloitte’s The Link Between Transfer Pricing and Customs Valuation—Eighth Edition Country Guide).

With global companies exploring various mechanisms to mitigate the potential impacts of an evolving tariff environment, it is likely that customs authorities will increasingly challenge related-party customs values in the future. Understanding the interplay between the customs valuation rules and interpretations as well as the transfer pricing regulations across jurisdictions will be critical in this environment.

Taxpayers are encouraged to get all stakeholders, including those from transfer pricing and customs perspectives, involved in collectively managing the risks and effectively guiding the organisation through the new tariff environment.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.

No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities.

© 2025. For information, contact Deloitte Global.