The commonalities between some of the OECD transfer pricing (TP) methods and the customs valuation methods contained in the World Trade Organisation valuation agreement (the agreement), have not so far converged to the point where we have regional consensus on how to treat TP adjustments for customs purposes. Additionally, despite the fact that Asia Pacific countries are parties to the agreement, which recognises that the price between related parties is not, in and of itself, reason to question the pricing between those parties, related-party transactions and post-importation adjustments continue to raise the customs risk profiles of importers across the region. Of course, in some countries, this risk is considerably increased where there are higher duty rates, high rates of customs penalties and very active customs audit regimes.
The maturity level of dealing with customs-related party pricing and post-importation adjustments differs greatly across countries in the Asia Pacific region.
At one end of the spectrum countries such as Australia have:
- Formal, publicly available customs valuation TP policies;
- The ability to obtain related party pricing valuation rulings (which provide protection from customs penalties);
- Access to customs duty refunds for post-importation adjustments; and
- Bulk disclosures and payments for post-importation increases to price, customs duty and goods and services tax/value added tax.
At the other end of the spectrum:
- Some countries have limited, if any, guidelines on TP and customs valuation;
- Post-importation adjustments can result in customs audits upon disclosure, or there is no mechanism to disclose such adjustments;
- There is an inability to obtain customs duty refunds for price decreases;
- There can be penalties for short payments of customs duty and value added taxes where there are price increases; and
- Importers can have inter-company prices for goods revalued by customs authorities.
The question of how clients can mitigate customs risks related to TP is one that we, as professional advisers, are faced with on a daily basis. This question, and the question of how we can help provide a level of consistency across the region is not one that is easily answered. However, as a general principle the very first step in mitigating customs risks is to ensure that TP and customs valuation principles and laws are examined in concert and that customs valuation is not an afterthought – after the transfer prices and methods have been set and certainly not at the time post importation adjustments arise.
Organisations must be cognisant that TP methods that best suit customs transactions in Europe and the Americas may not necessarily be as easily dealt with for customs transactions across the Asia Pacific region.
It is also worthwhile noting that, while income tax authorities will generally seek to determine whether or not an appropriate level of profit has been achieved at an entity level, customs authorities seek to determine whether the price of goods in any individual transaction has been affected by the relationship between the parties so as not to understate the value and associated duty liability.
In the context of understanding that customs duty is a transactional tax, in the Asia Pacific there are often high duty rates, little policy on dealing with TP adjustments for customs valuation and considerable customs audit activity. It is important that organisations put in place solid mechanisms to deal with the relationship between TP and customs valuation.
Some simple strategies to deal with the interplay between TP and customs valuation can include:
- Understanding the customs regulatory environment you are dealing with at a country level;
- Achieving a full understanding of and comfort with how the relevant customs regime deals with post-importation adjustments and other inter-company payments (such as royalties, production assist costs, research and development costs, and management fees);
- Preparing a customs-related party pricing analysis at the same time TP policies are documented;
- Obtaining customs valuation rulings where available and, where not available, preparing country-specific customs valuation position papers;
- Ensuring tax and trade teams understand the interplay between the relevant authorities and include customs valuation in internal TP and tax policies and procedures;
- Ensuring inter-company legal agreements reflect company practices and consider the customs and tax treatments of relevant countries; and
- Making sure the business has an escalation process for experienced trade and tax teams to deal with valuation enquiries and audits by customs authorities.
Experience has shown that the harmonious interplay between TP and customs valuation across the Asia Pacific region is some way off. However, it can be achieved with planning, knowledge and bringing customs teams together with TP and tax teams to help ensure tax and customs outcomes play equal roles in inter-company pricing management.
Trade and customs Asia Pacific regional leader and partner
Leonie Ferretter is a partner at KPMG Australia and the Australian and Asia Pacific leader for trade and customs.
Leonie has in excess of 20 years' experience advising clients on customs, excise, logistics and project management.
With prior commercial experience in the customs and freight forwarding industry, Leonie provides a practical and commercial understanding of the end-to-end trade process for clients.
Leonie assists clients across a variety of industries within the Asia Pacific region on customs duty management, duty savings methodologies, compliance matters, use of free trade agreements, complex customs valuation, tariff and origin matters.
Leonie has strong working relationships across the KPMG network and works closely with tax, supply chain and procurement teams, in managing trade and customs outcomes on large-scale projects.
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