Recently, word has spread in the importing community that US Customs and Border Protection (CBP) is contemplating changes to the way it interprets the customs valuation statute related to income tax transfer pricing rules for related party pricing, and more specifically, to compensating adjustments. These potential changes could affect the declared value of imported goods (and consequently the import duties/fees paid on those goods) for large companies with many related party sales according to a transfer pricing formula.
The overlap between customs valuation rules for imported merchandise and income tax transfer pricing rules for related party pricing has been debated in trade circles for at least the past decade. Multinational corporations (MNCs) must set transfer pricing policies in accordance with Section 482 of the Internal Revenue Code; and most major players have a bilateral Advance Pricing Agreement (APA) with the Internal Revenue Service (IRS) and a foreign income tax authority.
To justify a transfer pricing systems for customs valuation to CBP, MNCs will often present the APA or similar agreements as evidence to CBP. However, CBP does not automatically accept the agreements; instead CBP has stated this information, alone, is not enough support for the idea that the related party transaction/transfer price has been set to represent an arm’s length transaction (although it may provide persuasive information to CBP’s analysis).
The agency is grappling with the issue of "compensating adjustments" to transfer prices and their impact on declared customs values (especially when duty refunds are involved). Transfer pricing adjustments are made to bring the transaction value of imported merchandise into compliance with IRS arm’s length pricing standards. While most importers and tax authorities would view compensating adjustments as a normal and expected part of inter-company pricing, CBP policy on compensating adjustments in the customs valuation context is complicated and often confusing.
Recent rulings indicate that CBP may be reconsidering its position on compensating adjustments. Our group is monitoring these potential developments.