Best Practices in Linking Transfer Pricing and Customs Valuation: Overseas Experiences

Abstract

          Importation of goods by multinational corporations (MNCs) where the importer and the exporter are companies within the same group and related, faces a risk that the parties may set a transfer price of imported goods differently from the Arm’s Length Price. In that case, the revenue official can adjust the transfer price to conform to the Arm’s Length Price. In the context of importation, the adjustment of the transfer price would affect the customs value and the import duty charged by the customs agency at the time of importation. Consequently, the customs agency has to collect additional import duties or refund the overpaid portion. Concerning the current practice in Thailand, the Customs Department is willing to collect additional duties but often refuses to refund any overpaid amount. Without substantive law or clear guidelines to empower the Customs Department to refund the import duties when the change in customs value results from transfer pricing adjustment, taxpayers would technically have to pay tax twice to two different government agencies on the same transaction.

            In the global context, international organizations and leading economic countries have spent great effort to fix that issue to ensure fairness for taxpayers by studying possibilities in applying transfer pricing principles in harmony with customs valuation to limit any discrepancy that creates unnecessary burdens for taxpayers. The international approach encourages the customs agency to consider transfer pricing information approved by the revenue agency when the circumstances of the sale are being assessed to determine whether the transaction value declared by the importer is affected by the relationship between the seller and the buyer. Therefore, inter-agency exchange of pricing information is key to supporting that initiative. This would ensure certainty in applying the rules on transfer pricing and customs valuation while the cost of preparing similar pricing information for different agencies is diminished. Moreover, countries that accept the link between transfer pricing and customs valuation usually allow the adjustment of customs value following the transfer pricing adjustment and open for taxpayers to adjust their Import Declaration and the paid import duty. Consequently, taxpayers are entitled to a duty refund or to pay additional duty without penalty or with penalty at a reduced rate.

            The study of the experiences of the United States, Canada, Australia, and China finds that these countries have established clear solutions by utilizing transfer pricing information approved by the revenue agency in the process of customs valuation, especially in preparing Customs Advance Rulings. Best practice in those countries allows customs value adjustment following the transfer price adjustment without penalty or with a penalty at a reduced rate if done within a specified period and in compliance with imposed conditions. This ensures certainty in taxation performed by the two government agencies, helps reduce the workload in preparing pricing information, and facilitates the audit process of both the public and the private sectors, preventing potential lawsuits regarding the pricing of imported goods in the inter-group transactions which would adversely affect the country’s economy as a whole.