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WCO releases new instrument on transfer pricing and Customs valuation

An important new instrument was finalized at the April 2016 session of the WCO Technical Committee on Customs Valuation (TCCV). The instrument is Case Study 14.1, illustrating a specific scenario where Customs took into account transfer pricing information in the course of verifying the Customs value, which should benefit Customs authorities and business alike. Transfer pricing refers to the price for goods and services sold between controlled or related legal entities. Multinational companies determine a transfer price in order to allocate profits among their different parts, which in turn determines how much tax it pays and in which country.

Most tax administrations require companies to calculate the price following ‘the arm’s-length principle.’ Broadly, this means that operations should be priced by comparing them with similar operations carried out on a commercial basis at market prices, as if the parties were independent entities – at arm’s length from one another. This can be a lot more complicated than it sounds, leading to the Organisation for Economic Co-operation and Development (OECD) producing ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ on the application of the arm’s length principle.

Transfer prices are also of interest to Customs when verifying the Customs value and, more specifically, that the price for transactions of imported goods has not been influenced by the relationship between the buyer and seller, as stipulated in the Valuation Agreement of the World Trade Organization (WTO). A previous TCCV instrument – Commentary 23.1 – supported the idea that business documentation developed for transfer pricing purposes may contain useful information for Customs.

In the case study, XCO, a manufacturer in country X, sells relays to its wholly-owned subsidiary, ICO, a distributor in country Y. ICO imports the relays and does not purchase any products from sellers unrelated to its parent company. Likewise, XCO does not sell relays or similar goods to unrelated buyers. This then led to the question: how can one estimate whether ICO and XCO were buying and selling at a ‘real’ price which was not influenced by the fact that XCO and ICO are related?

The answer is found in the case study. By using the company’s transfer pricing information based on the transactional net margin method – that is, by comparing ICO’s operating margin with those of similar, but unrelated companies doing similar business in the country. On the basis of this information, Customs accepted that the sale price in question had not been influenced by the relationship. The conclusion notes that the use of a transfer pricing study for examining the circumstances surrounding a sale must be considered on a case-by-case basis.

WCO Secretary General Kunio Mikuriya, in congratulating the TCCV on the work that it had recently done in the transfer pricing area, said: “This new instrument is an important step for the WCO and demonstrates its relevance by providing guidance on the management of Customs valuation in an increasingly complex trade landscape, whilst maintaining consistency and strengthening cooperation with tax authorities.”

Writing in an OECD blogpost, Pascal Saint-Amans, the Director of the OECD Centre for Tax Policy and Administration stated: “This will be increasingly important in a global environment. As a result of the OECD’s Base Erosion and Profit Shifting (BEPS) project, more and more countries are applying transfer pricing rules, and those rules are becoming stronger and more sophisticated, in particular with regards to the treatment of risks and intangibles, rather than just tangible goods.”

In view of the strong interest in the business community, the WCO has made Case Study 14.1 available via its website. It will be published in the WCO Valuation Compendium, subject to approval by the WCO Council, in July 2016. Further information on this topic can be found in the WCO Guide to Customs Valuation and Transfer Pricing, which is also available on the WCO website.

The Guide, designed to be accessible to both experts and non-experts in both fields, sets out the relevant methodology for both regimes, and explores the linkages and the possibilities for Customs to use transfer pricing information in examining related party transactions.

Both the WCO and the OECD advocate closer cooperation between Customs and tax administrations in order to strengthen the ability of governments to identify the correct taxes and duties legally due, and to enhance trade facilitation for the compliant business sector. A key message is that Customs and tax authorities are encouraged to work together, and to exchange information and knowledge in this area.

Similarly, businesses are encouraged to take into account Customs’ needs when preparing documentation, such as transfer pricing studies and advance pricing agreements (an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology for a set of transactions at issue over a fixed period of time).

The WCO would like to thank the OECD and the International Chamber of Commerce (ICC) for their ongoing assistance in this important work programme.


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