U.S. importers and exporters will be interested to know that the World Customs Organization (“WCO”) has published (October 30, 2017) its second case study on intercompany transfer pricing and its effect on customs valuation.
The WCO is an international body that is responsible for the development of international conventions, instruments, and tools on topics such as commodity classification, valuation, and rules of origin. The WCO maintains the international Harmonized System (HS) goods nomenclature and administers the technical aspects of the World Trade Organization’s (WTO) Agreements on Customs Valuation (the WTO Valuation Agreement), which is formally known as the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT). The WTO Valuation Agreement replaced the GATT Valuation Code in 1994, as a result of the Uruguay Round multilateral trade negotiations, which created the WTO.
The WTO Valuation Agreement provides a customs valuation system that primarily bases the customs value on the “transaction value” of the imported goods, which is defined as the price actually paid, or payable, for the goods when sold for export to the country of importation with certain adjustments. The WTO Valuation Agreement has been adopted and codified into law by most, if not all, major trading nations. The Agreement provides predictability, stability, and transparency for trade, thus facilitating international trade while at the same time ensuring compliance with national laws and regulations.
As noted, a key feature of the WTO Valuation Agreement is the use of “transaction value” as the primary method of establishing the customs value of imported goods. Other methods of valuation put forth in the agreement may apply, but only if transaction value is found to not apply. An important caveat, however, is that the transaction value applies only if the buyer and seller are not related, or the buyer and seller are related, but the transaction value is acceptable based on the application of “test values,” or an examination of the circumstances of sale of the imported merchandise indicates that the relationship between the buyer and seller did not influence the price actually paid or payable.
A common issue that many related exporters and importers have in international transactions involving the sale of goods is establishing, to the satisfaction of the national customs authorities, that the intercompany transfer price is sufficient to establish that the relationship between the parties did not influence the price actually paid or payable for the goods imported in the specific transaction. If the national customs authorities conclude that the intercompany transfer price is not sufficient to establish that the relationship between the parties did not influence the price, they will apply another basis of appraisement authorized under the Agreement. This alternative method of appraisement may result in a higher appraised value and the resulting assessment of increased duties and fees.
The WCO Committee on Customs Valuation is responsible for issuing guidance and interpretations on the proper application of the WTO Valuation Agreement, which national customs authorities from participating countries may take note of and follow.
In this second case study on transfer pricing, the Committee considered a submission presented by China. The new case study provides an example of Customs making use of transfer pricing information based on the resale price method. The resale price method compares the importer’s gross margin with the gross margins earned by comparable companies in their transactions with unrelated parties (i.e., the comparable uncontrolled transactions) in the sale of similar goods. The transfer pricing report is prepared by an independent firm following the process set out in accordance with the OECD Transfer Pricing Guidelines.
In the example provided, the importer earned a higher gross profit on the sale of the goods than the companies that were used for the comparison. In other words, the intercompany transfer price (resulting customs value) should have been higher.
Based on the information provided, it was concluded that in this particular case the declared import price was not settled in a manner consistent with the normal pricing practices of the industry, and, thus, had been influenced by the relationship between the buyer and seller. It was therefore concluded that the Customs value should be determined by application of the alternative methods of appraisement, applied in a sequential order.
The new case study (Case Study 14.2) is available here. Additionally, further information on this topic can be found in the WCO Guide to Customs Valuation and Transfer Pricing, available via this link. U.S. Customs and Border Protection has published its own guide to customs valuation and transfer pricing, which can be found on its website under tab “informed compliance publications,” and should be consulted with when related parties import into the United States. A white paper on “Customs Valuation Issues for Related Party Transactions” is also available on our website [here] [ 0110397].