Ties Between Customs Value & Transfer Pricing

Strong ties exist between Customs Value and Transfer Pricing: both have opposite interests and different valuation methods. When goods are imported, those goods will constitute an input in the importing country and the value/cost of these goods will be relevant for the determination of the profit that will be taxed by corporate income purposes at the country of import.

The "arm's-length principle" of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm's-length price for a transaction is therefore what the price of that transaction would be on the open market.

From a Customs perspective, the fact that the two parties involved in the transaction are related parties does not automatically preclude the transaction value as customs value. We would like to mention that the concept of related parties may vary; one is base in the Customs Code (EU regulation) and the other one may change from country to country.

Based on the different calculation methods, transfer pricing value and customs value may differ.

The accurate determination of the customs value method to be used is paramount.

It should be noticed that a valuation determination can be accepted by Customs Authorities but not for Corporate Income Tax Authorities or vice versa.

That is why Transfer Pricing design should be aligned with Customs Valuation design to prevent risk and provide certainty.

It is important to highlight that some countries as USA sets up the customs value as the maximum value for the inventory of goods. In this case the link between Customs Value and Transfer Pricing becomes even stronger.

Therefore if the USA taxpayer under declares the value of the imported merchandise and fails to properly adjust the value prior to the liquidation date, Tax Authority may decrease the cost of the goods. Post transfer price adjustments further complicate this situation.

There is not formal direct link in most of the EU countries but reviewing Transfer Pricing Policies is a common practice in Customs Audits where Customs and Direct Tax Authorities share information on a regular basis. 

In most of the EU countries is not possible to reach APAs regarding customs valuation as it happens with transfer pricing (due mostly to the lack of legal basis). But reaching Customs Valuation Agreements with Customs Authorities  is in some countries a standardized practice.

Post transaction adjustments regarding customs value based on previous Customs Valuation Agreements do not have the same treatment in every EU member state.

"It is recommended that in the case of post-transaction transfer pricing adjustments (up or down), companies be relieved from:  a) The obligation to submit an amended declaration for each initial customs declaration b) The payment of penalties, as variations of the transfer price". International Chamber of Commerce (ICC) Policy Statement regarding Customs Valuation and Transfer Pricing

Import VAT plays as well an important role regarding post transaction adjustments, e.g some countries require additional VAT filling or differences may arise regarding VAT assessments or refunds.

We are not going to go into import VAT implications for two main reasons. First at all, if the importer has the right to fully deduct the import VAT (no pro-rate), any additional import VAT assessment will have only a cash impact. Secondly some EU member states have implemented Import VAT deferment accounts and in most of the cases if any import VAT assessment arises, any additional import VAT will be declared on the monthly VAT return with no cash impact. Therefore no additional tax-cost should arise in any case regarding import VAT (except for the loss profit or opportunity cost).

Recovering import VAT as non established company is a different topic we have already commented briefly in other posts.

However it is truth that in practice some EU Tax Authorities use to levy default interests for late payments regarding import VAT against the criteria sets up by the EU Court of Justice.

Penalties for incorrect declarations is a different topic.