Challenges with transfer pricing in customs valuation Part 2€¦ · •The panel upheld Panama's...

Workshop on Advance Ruling for Customs Valuation and

Challenges with Transfer Pricing

co-organized by the Delegation of the European Union to Thailand

and Department of Customs Thailand

Challenges with transfer pricing in customs valuation – Part 2

Prof. Santiago Ibáñez Marsilla

University of Valencia (SPAIN)

21 November 2012

Outline

• Possible loss of tariff: identifying the

interest of the importer.

• Pricing databases

• Experience of other countries with

advance rulings on customs valuation – USA – Canada – Australia - Spain

Possible loss of tariff: Identifying the interest of the importer (1)

• In general, we assume that the best scenario for an

importer consists in minimizing customs value and

maximizing the value for CIT purposes (thus reducing

profits).

Taxpayer* Tax Administration

TP CV TP CV


• When the authorities force consistency in valuations

(customs value and CIT value), the importer will usually

decide based on the tax rate of both taxes.

– Imagine Maraco Th imports watches. The customs tariff is 10%.

The CIT rate is 25%. Maraco Th will prefer a high customs value

(taxed at 10%) if that allows a high CIT value (reducing profits

that are taxed at 25%).

– But if the tariff rate were 40% and the CIT rate 25%, Maraco

would prefer a low customs value.


• But that is not always the case. Imagine now that the

importer has losses in previous years that he can

compensate for a limited time. The additional profit will

not be taxed until full compensation of past losses. Here

the importer might prefer a low customs value even if

that results in higher profits.

– Imagine Maraco Th had losses of 1M $ pending compensation

and about to expire. Maraco Th will prefer a low customs value

(saving taxes at 10%) because no additional CIT will result.


• The situation is more complex when we factor in the tax

implications for the foreign related party. If the foreign

parent company is resident in a country that credits

CIT paid by the subsidiary, a low customs value could

minimize the global burden.

– Imagine Maraco Jp pays income tax at 30%, but is allowed a tax

credit for CIT paid by Maraco Th. Here the CIT of Maraco Th is

irrelevant for the group, and therefore the saving is in reducing

customs duties.

• Notice: They would be paying extra CIT in Th!


– The situation would be different if Maraco Jp paid CIT at 15%.

Then it can not credit the full 25% paid by Maraco Th. If the tariff

is 10% the balance is neutral (although customs duties are paid

inmediately and CIT is deferred: for financial reasons they might

prefer a low customs value).

• Again, they would be paying extra CIT in Th.

– Imagine now the same situaton but with a 5% tariff. The group

would prefer a high customs value. They would pay less CIT in

Th.

– Imagine now the same situaton but with a 15% tariff. The group

would prefer a low customs value. They would pay more CIT in

Th.


– If the residence country of the parent company has

established a CIT with exemption of foreign income, then the

parent company gets no tax credit for the CIT paid by the

subsidiary. Here, in general, the importer will declare a high

customs value if that allows him a high value for CIT purposes.

• Imagine the customs tariff is 10% and the CIT rate is 25% in

Th. Maraco Th will prefer a high customs value (taxed at

10%) if that allows a high CIT value (reducing profits that are

taxed at 25%).

• Now imagine the customs tariff is 40% and the CIT rate is

25% in Th. Maraco Th will prefer a low customs value (saving

40%) even if that means higher profits in the CIT (paying

additional tax at 25%).


• Conclusions

• Assuming consistency between customs valuation and

value for CIT purposes, in order to know the global

preference of the taxpayer we need to determine:

– If the residence country of the exporter has a credit regime or an

exemption regime for foreign income.

• If it is a credit regime, we need to know if the tax rate is higher or

lower in the residence country of the exporter than in the importing

country.

– We need to be aware of the relationship between the tariff rate

and the CIT rate in the importing country.

– We need to take into account other special circumstances of the

taxpayer (such as the existence of losses pending compensation)

Pricing databases (1)

• Legal starting point:

– WTO’s “Decision regarding cases where customs

administrations have reasons to doubt the truth or

accuracy of the declared value”.

• Decision 6.1 TCCV

• The “reasonable doubt standard”

• Legal consequence: Transaction value might be rejected

• The question is:

– A discrepancy of the declared price with the results offered by

a pricing database, is enough grounds to satisfy the

“reasonable doubt standard”?


• TCCV :

– Case Study 13.1. The excessively low price triggers an

investigation. The investigation reveals that: 1) The

accounting records do not support the declared value; 2)

The importer fails to provide any additional evidence, other

than the invoice; 3) Suspicious and unjustified payments in

a foreign country are detected disguised as “administrative

charges”.

• Under the circumstances, the TCCV finds that there are enough

grounds to reject the declared price as basis for TV.



• TCCV :

– Case Study 13.2. The excessively low price triggers an

investigation. The investigation reveals that: 1) The

importer does not keep detailed accounting records to

support the declared value; 2) The importer fails to provide

any additional evidence, other than the invoice; 3) The

importer fails to evidence the amount paid.

• Under the circumstances, the TCCV finds that there are enough

grounds to reject the declared price as basis for TV.



• WTO’s DSB :

– Case Colombia-Indicative prices and restrictions on

ports of entry, WT/DS/366R. Colombian law provided the

systematic rejection of prices declared below the reference

prices established by the authorities.

• The panel upheld Panama's claims that Colombian law establishing

indicative prices was inconsistent “as such” with the obligation

established in the Customs Valuation Agreement (CVA) to apply, in

a sequential manner, the methods of valuation provided in Articles

1, 2, 3, 5 and 6 of the CVA and with Article 7.2(b) and (f) of the CVA

(prohibition of a system which provides for the acceptance for

customs purposes of the higher of two alternative values; prohibition

of minimum customs values).


• Colombia-Indicative prices (2)

– “7.129. The Panel's analysis in the previous sections

demonstrates that payments made by importers in the situation

described by Article 128.5 e) of Decree No. 2685 and Article

172.7 of Resolution No. 4240 are payments strictu sensu and

not ‘guarantees in the form of a cash deposit’“ (…).

– “7.130 Accordingly, the Panel concludes that Colombia's use

of indicative prices as mandated by Article 128.5 e) of Decree

No. 2685 and Article 172.7 of Resolution No. 4240 constitutes

customs valuation within the meaning of the Customs Valuation

Agreement”.



– “7.138 The Panel therefore understands that the Customs

Valuation Agreement imposes an obligation on national

authorities to determine the customs value of imported goods

based on the "transaction value" and, whenever that is not

possible, to sequentially apply the customs valuation methods

provided for in Articles 1, 2, 3, 5, 6 and 7.1 of the Agreement”.

– “7.142 (…) The Panel considers that, inasmuch as the customs

values for subject goods are established on a fixed basis for broad

categories of products without any examination of the specific

circumstances surrounding the transaction at issue, indicative

prices do not reflect any of the methodologies set out in the referred

provisions. In fact, as acknowledged by Colombia, "the customs

value as determined following the methods of the [Customs

Valuation Agreement] will indeed be different from the indicative

price in practically all cases".



– “7.143 (…) However, the structure and design of the indicative

prices system as provided (…), prevents Colombian customs

authorities from sequentially applying the customs valuation

methods provided in Articles 1 through 6”.

– “7.144 The Panel therefore finds that Article 128.5 e) of Decree

No. 2685 and Article 172.7 of Resolution No. 4240 as well as the

various resolutions establishing indicative prices, which together

mandate the use of indicative prices for customs valuation

purposes, are inconsistent with the obligation to conduct

customs valuation of subject goods based on the sequential

application of the methods established by Articles 1, 2, 3, 5 and

6 of the Customs Valuation Agreement”.


• Conclusions

– Price databases can be used as triggers for an

investigation about the acceptability of the price declared.

• A risk management instrument

– In order to reject the declared price (“reasonable doubt”

test), Customs must provide additional elements, such as

inconsistency of the declared price and the accounting

records; or suspicious payments that the importer fails to

appropriately explain.

– Price databases are not acceptable as an alternative

valuation system.

Experience of other countries with

advanced rulings on customs valuation

• The administrative interpretation in:

– USA

– Canada

– Australia

– Spain*

* Court interpretation

Experience – USA (1)

USA CBP Informed Compliance Publication (published: April

2007) – Determining the acceptability of transaction value for

related party transactions (ICP 2007)

• “CBP has determined that an APA or transfer pricing study by itself

is not sufficient to show that a related party transaction value is an

acceptable transaction value. CBP has noted that although the

broad goal of both the relevant provisions of the customs and the tax

law is the same, i.e., to ensure that related party transactions are at

arm’s length, there are substantial differences in the legal

requirements”.

• “(…) Importers are required to declare the customs value on an

entry-by-entry and product-by-product basis. (…) If an importer

purchases different products from a related company, it is necessary

to determine the correct customs value for each product, not for all

the products as a whole”.


ICP 2007 (2)

• “The IRS’s goal of clear reflection of income does not necessarily

require a valuation of each transaction for each product, and

the IRC section 482 regulations allow for aggregation of

transactions and offsetting adjustments in appropriate

circumstances”.

• “Although the transaction-based methods utilized by the IRS in

determining an arm’s length price under Section 482 have some

similarities to the customs methods, they are not the same. The

comparable profits method (CPM) has little similarity to the customs

methods. For example, the profitability of the related party is usually

compared with the profitability of companies that perform similar

functions, e.g., contract manufacturer. Most CPM cases apply an

“interquartile range” test. That is, if the related party’s profit falls

within an acceptable range of profits for the comparable

companies, the IRS arm’s length requirement is met”.


ICP 2007 (3)

• “In contrast, under the customs methods for determining the

acceptability of transaction value, product similarity is required.

For example, the all costs plus profit method relevant to the

application of circumstances of sale requires that the transfer

price be adequate to ensure recovery of all costs plus a profit

equivalent to the firm’s overall profit realized over a representative

period of time in sales of goods of the same class or kind. Similarly,

the circumstances of sale test is met where the price was settled in

a manner consistent with the normal pricing practice of the industry

in question. The industry in question depends on the product that is

imported and not the functions that the seller performs. In addition,

under the test value method, the customs value law requires

consideration of customs values relating to identical or similar

merchandise”.

Experience – USA (4) ICP 2007 (4)

• “CBP recognizes that in some cases, the underlying facts and the

conclusions reached in an APA or transfer pricing study may

contain some relevant information about the circumstances of

sale and thus may be considered in applying the circumstances of

sale test”.

• “an APA that is based on the comparable uncontrolled price

method (CUP) has the most relevance for customs valuation

purposes and would be given much more weight than an APA that is

based on the comparable profits method (CPM), which generally

has the least relevance for customs valuation purposes”

• “In addition to the methodology used, other relevant considerations

are whether the transfer pricing study has been considered by

the IRS, whether the APA is bilateral or unilateral, and whether

the products covered by the study are comparable to the imported

products at issue”.

Experience – Canada (1)

Canada Border Services Agency – Memorandum D13-4-5 (9

April 2001) – Transaction value method for related persons

• Referring to the acceptability of prices between related parties

(examining if the relationship did influence the price), Memorandum

D13-4-5 states:

• “The Canada Customs and Revenue Agency will accept, for

valuation purposes, a price paid or payable which is derived from

one of the methods set out in the OECD’s report, unless there is

information on prices available which is more directly related to the

specific importations”.

Experience – Canada (2)

Canada Border Services Agency – Memorandum D13-3-6 (18

October 2006) – Income Tax transfer pricing and customs

valuation

• “CBSA will accept transfer prices established through an APA

negotiated between income tax and the taxpayer as a price paid or

payable, but will adjust for subsection 48(5) of the Customs Act

additions and deductions, as required”.

• “For customs purposes, as previously noted, reductions in the

price paid or payable by the Canadian purchaser to the foreign

vendor made after goods are imported will not be allowed”.

• “Where the differences in the calculation of these two values are

due to factors that are not legislative requirements, attempts will

be made to reduce the number of cases where customs valuations

are found unacceptable for tax purposes or vice versa”.

Experience – Australia (1)

Australian CBP Pactice Statement No: PS2009/21 (published:

13 July 2009) - Applying for a Valuation Advice relating to

Transfer Pricing

• “By applying and documenting various accounting and economic

testing methods, a transfer pricing study aims to verify whether the

group’s transactions are arm’s length for tax purposes. This

transfer pricing study may also be useful for Customs and

Border Protection’s purposes where the data includes values for

traded imported goods”.

• “Before any adjustment can be made to the Customs value, there

must be an actual transfer of funds related to the transaction that

flows into or out of Australia. Customs and Border Protection will not

accept adjustments to the Customs value when the transfer pricing

arrangements between related parties are merely notional

adjustments”.

Experience – Australia (2)

• “Customs and Border Protection recognises that in some

instances, an applicant for a VA may also negotiate an

Advance Pricing Arrangement (APA) with the Australian

Taxation Office (ATO). While there may be some overlap

between the two, Customs and Border Protection must not

issue a VA for transfer pricing based on unseen APA

documentation. The applicant must produce the APA and

any documents that supported the APA to substantiate

the VA application”.

– VA: Valuation Advice

Experience – Spain (1)

• Judgement of the Tribunal Supremo of 30 November 2009

– The authorities uplifted the customs value. The importer imputed the

uplifted value as a cost for CIT purposes. Tax authorities rejected the

CIT value, merely stating that the customs value and CIT value follow

different methodologies. The CIT value was determined by a different

method, resulting in a lower value. The methodology used for customs

value purposes was an acceptable one for CIT purposes.

The Tribunal Supremo held:

– Both customs valuation and CIT share the same concept of value. The

customs methodology was acceptable for CIT purposes.

– The authorities can not ignore their previous decision (stoppel).

Consistency demands that they accept their previous –customs- value

determination.

– NOTICE: Consistency works both ways!

Challenges with transfer pricing in customs valuation – Part 2

Thanks for your attention!

Prof. Santiago Ibáñez Marsilla University of Valencia (SPAIN)

http://www.uv.es/ibanezs

[email protected]

Date post:	23-Sep-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

Challenges with transfer pricing in customs valuation Part 2€¦ · •The panel upheld Panama's...

Documents