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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
Possible loss of tariff: Identifying the interest of the importer (2)
• 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.
Possible loss of tariff: Identifying the interest of the importer (3)
• 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.
Possible loss of tariff: Identifying the interest of the importer (4)
• 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!
Possible loss of tariff: Identifying the interest of the importer (5)
– 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.
Possible loss of tariff: Identifying the interest of the importer (6)
– 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%).
Possible loss of tariff: Identifying the interest of the importer (7)
• 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”?
Pricing databases (2)
• 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.
• Legal consequence: Transaction value might be rejected
Pricing databases (3)
• 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.
• Legal consequence: Transaction value might be rejected
Pricing databases (4)
• 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).
Pricing databases (5)
• 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”.
Pricing databases (6)
• Colombia-Indicative prices (3)
– “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".
Pricing databases (7)
• Colombia-Indicative prices (4)
– “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”.
Pricing databases (8)
• 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”.
Experience – USA (2)
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”.
Experience – USA (3)
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
santiago.ibanez@uv.es
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