Technical Committee on Customs Valuation issues case study

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November 2017


The World Customs Organization’s Technical Committee on Customs Valuation (the Committee) issued Case Study 14.2 to address whether certain transfer pricing documentation was sufficient to support the arm’s length nature of a related party pricing transaction.  While the Committee found that the companies included in the transfer pricing report were suitably comparable, their gross margins were significantly lower than that achieved by the importer. Also, the Committee noted that the the importer did not make a transfer pricing adjustment to address the inconsistency. Accordingly, the Committee determined that the relationship between the parties had influenced the price.  As a result, the Committee concluded that declared value had not been settled in a manner consistent with the pricing practices of the industry, and that alternative valuation methods must be used.

The takeaway

Case Study 14.2 is a reminder to importers that without coordination, transfer pricing documentation and the attendant decisions regarding transfer prices may also be used by customs authorities to undercut the arm’s length nature of related party pricing. 

The importer’s decision to forgo a transfer pricing adjustment to bring its results in line with the interquartile range identified in the transfer pricing documentation led the Committee to conclude that the prices were not settled in a manner consistent with normal pricing practices of the industry. Thus, the related party pricing was not arm’s length, and requires an alternative method of customs valuation.  This result potentially leaves the local importer in a worst case scenario.  From the income tax perspective, the high gross margin will be subject to taxation. From the customs perspective the imported merchandise likely would be subject to the increased administrative burden of applying an alternative valuation method plus a likely adverse duty impact based on such alternative customs values. Close cross-functional coordination of tax and customs considerations can help importers mitigate their risk of being challenged by customs and tax authorities.

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Anthony Tennariello

Customs and International Trade Co-leader, PwC US

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