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Customs Valuation for US Multinationals Living in a Tax-Centric World

As most multinationals that import goods know well, setting cross-border intercompany transfer prices between U.S. and foreign affiliates poses both income tax and customs valuation issues.  More often than not, international tax rules—that attempt to mimic the results achieved in an arm’s-length transaction—dictate the approach taken in establishing intercompany transfer prices.  These tax rules may also require multinationals to make unilateral transfer pricing adjustments, potentially in the millions of dollars, well after the goods have been imported into the United States.

Post-importation transfer pricing adjustments have historically raised customs valuation issues.

Multinationals rightly consider the tax regulatory environment in which they operate as a “tax-centric world.”  However, companies that ignore the corresponding–and sometimes conflicting–valuation requirements of customs laws administered by national customs authorities may forego significant cost-saving opportunities or, worse, face the unhappy situation of a customs investigation and/or costly penalty for failure to satisfy applicable customs valuation rules.  For imported goods valued under the transaction value method, as are the vast majority of customs entries, the tension between the income tax and customs rules has historically been particularly pronounced when the tax transfer pricing rules require a pricing adjustment—especially downward—for previously imported products.

U.S. Customs and Border Protection policy change provides relief.

Consistent with the World Trade Organization Customs Valuation Agreement, U.S. customs laws have long presented multinational importers with customs valuation requirements that differ from the tax rules under which intercompany transfer prices are set.  In a large body of rulings precedent built over many years, the view of U.S. Customs and Border Protection (CBP) has been that, while customs and income tax laws broadly share the common goal of ensuring that related parties value their transactions at arm’s-length prices, the fact that an importer’s transfer prices satisfy Internal Revenue Service requirements is not determinative of whether the CBP will accept the price for U.S. customs valuation under the transaction value method.  Nevertheless, CBP has shown some willingness in certain circumstances to consider a multinational importer’s IRS approved Advance Pricing Agreements (APAs), transfer pricing studies, and other tax-related pricing practices in establishing the customs valuation of imported goods.  CBP guidance states that importers must take the initiative, including involving CBP in the transfer price-setting process, if they want CBP to consider tax related information in connection with a customs valuation inquiry.

In December 2011, CBP proposed a policy change that could provide multinationals who adopt formal transfer pricing policies with much needed relief.  CBP’s proposal to ease its strict valuation policy moves one step further towards recognizing that multinational importers live in an income tax-centric world.  The proposed ruling would overturn years of CBP policy by allowing an importer to use transaction value for appraising imports from related-party sellers even when the transfer prices are subject to post-importation adjustments, upward or downward (see pp. 15-35, Customs Bulletin).

To date, CBP has disallowed use of related-party transaction value when there were post-importation price adjustments because, in CBP’s view, such adjustments indicated the prices were not fixed before importation.  Under its new proposal, CBP would expand its view of what constitutes an acceptable price-setting formula for purposes of determining transaction value by considering the importer’s transfer pricing policy.  Importers wishing to take advantage of this new CBP policy would need to be prepared to report carefully to CBP any post-importation price adjustments (either upward or downward) made pursuant to a documented transfer pricing policy.  Depending upon the circumstances, an upward adjustment may require an additional customs payment and a downward adjustment may permit a refund.

Good news–and valuable opportunities–for multinational importers living in a tax-centric world!

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