During last June, the World Customs Organization (WCO), published a document titled “Guide to Customs Valuation and Transfer Pricing” (hereafter “The Guides of the WCO”), which contains a set of guidelines and recommendations that multinational enterprises, tax and customs administrations may follow in compliance of the customs valuation regulations. This document can be consulted on the following link: “New WCO Guide to Customs Valuation and Transfer Pricing”.
To whom it may concern, who should be interested?
To all multinational enterprises that perform or intend to perform operations of import and export of goods or merchandise with related parties residing abroad.
What is the issue?
For customs purposes, taxpayers who decide to apply the transactional value method in order to determine the customs value of imported merchandise from related parties, must comply with the variant of the arm’s length principle, in the sense that import values should not be affected by the relation between importer and exporter. Otherwise, customs authorities might reject the application of the mentioned method and the values declared by the importer and, in consequence, make the corresponding adjustments to determine the correct taxable basis, similarly to the transfer pricing regulation applicable for tax purposes.
The methodology to determine the transaction value of imported goods subject to ad valorem tax is contained in Article VII of the General Agreement on Tariffs and Trade 1994 of the World Trade Organization (“WTO”). All Members of the Agency, including Mexico, have the obligation to implement the Agreement and to apply this methodology.
Due to the difference in approaches and objectives between the regulations of both tax and customs authorities, the interpretation about the compliance on the obligations of multinational enterprises may differ among these two authorities, however, both cases are about the same taxpayer, same operation, same import price and same fiscal period, generating uncertainty and failure to comply risk. How to solve the problem?, What solutions do the tax and customs authorities offer?, What should multinational enterprises do to eliminate or reduce the risk of uncertainty in the fulfillment of tax and customs obligations?
Guidelines’ main contributions
Although WCO’s document does not provide a definitive solution to the abovementioned problematic, it does represent a breakthrough in the pursuit of convergence between both regulations, and consequently to tax payers’ legal certainty.
As a summary, following you will find the conclusions of the WCO’s document that we considered the most relevant:
- Can the transfer pricing study prepared for tax purposes be accepted or used for customs purposes? According to WCO’s Guidelines, the transfer pricing study prepared for tax purposes can provide useful information for customs purposes, however its acceptance must be reviewed in a case by case basis;
- Should the transfer pricing adjustments made for tax purposes be accepted by customs authorities?Acknowledging that currently the customs treatment to transfer pricing adjustments is globally inconsistent, i.e. there is no consistent criteria among the countries, the WCO and the business community that actively participated in the elaboration of the Guidelines, consider that transfer pricing adjustments performed after the importation of the goods should be accepted by customs authorities, particularly when the multinational enterprises have established transfer pricing policies to guarantee, through the adoption of decremental or incremental price adjustments, the compliance of tax and customs regulations.
- Is there a legal mechanism to solve tax payers’ inquiries regarding customs valuation matters? According to WCO’s Guidelines there is a proper mechanism to provide legal certainty to the operations and investments of multinational enterprises. Based on the established in Article 3 of the WCO’s Trade Facilitation Agreement, this Organization encourages the customs administrations to promote the use of advanced price agreements (APA’s) on customs valuation, similar to the APA program created for tax purposes.
Finally, WCO’s Guidelines provide a list of recommendations (“good practices”) to multinational enterprises to improve their position or compliance in customs valuation matters, among which are: a) improve the communication between tax and customs areas/assessors of multinational enterprises, b) consider the customs implications when the transfer pricing documentation for tax purposes is prepared or in the APA’s development, c) opportunely analyze and inform the customs implications of the possible transfer pricing adjustments, and d) consider the possibility of negotiating an APA in customs valuation matters.