KPMG Trade Alert
If your company sells goods to a related company into the U.S., you may now be able to recover U.S. duty paid if the price of the goods is reduced due to a transfer pricing adjustment. Importers should review their imports into the U.S. to determine whether they are entitled to a refund of duty.
The primary method of customs valuation is the Transaction Value Method (transaction value). The transaction value is generally the price paid in a sale for exportation to the U.S., subject to certain adjustments. As such, when a Canadian company sells goods to a related company in the U.S., the value for customs declaration purposes is often based on the selling price from the Canadian company to the related U.S. company. However, this transaction value cannot be used if the selling price is influenced by the relationship between the companies.
In related party transactions, one way to support the transaction value (i.e., to demonstrate that the selling price is not influenced by the relationship) is to establish an arm’s-length price for income tax purposes and use that transfer price as the basis to determine the customs value.
Though using an arm’s length transfer price can be a good way to establish a customs value, complications can arise if the income tax authorities don’t agree with the transfer price and adjust it after the goods are imported.
Decrease in cost of goods sold
Until recently, when a transfer price adjustment resulted in a decrease in the cost of goods sold, the decrease (after importation) in the price paid or payable would be disregarded for U.S. customs purposes. The importer was required to report such adjustments to the U.S. Customs and Border Protection Agency (U.S. Customs) but the importer was not eligible to claim a refund of customs duty overpaid at the time of importation.
U.S. Customs recently announced a change in this policy. Under the new policy, the transaction value may be applied when the selling price is subject to post-importation adjustments under formal transfer pricing policies. As a result, importers may now be able to obtain a refund of duty paid when the transfer price is reduced after the goods are imported.
Increase in cost of goods sold
When a transfer price adjustment results in an increase in the “cost of goods sold”, the customs value is also affected and the importer must correct the declared value. U.S. Customs strongly encourages importers to report transfer price adjustments using its “Reconciliation Program.” Generally, under the Reconciliation Program, the importer may flag import entries and declare an initial value at that time to be subsequently completed or reconciled no later than 21 months after importation.
If the importer is not in the pre-approved Reconciliation Program, the importer may need to rely on other corrective measures such as reporting adjustments through post-entry amendments to the customs entry documentation.
Importers that are not currently reporting upward price adjustments should start doing so immediately and should consider applying for the Reconciliation Program with U.S. Customs to help them meet compliance requirements by reporting accurate values for imported goods. Participating in this program can also reduce the risk of non-compliance penalties.
Transfer pricing requirements for duty refund
The guiding principle of U.S. Customs’ new policy on downward transfer price adjustments is that, even though the parties may be related and certain costs may be within the control of the related parties, the parties’ transfer pricing policy may nonetheless be considered an objective formula for determining customs value if it satisfies five factors:
- A written “Intercompany Transfer Pricing Determination Policy” is in place prior to importation and the policy is prepared taking the relevant section of the Internal Revenue Code into account
- The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return
- The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted
- The company maintains and provides accounting details from its books and financial statements to support the claimed adjustments in the United States
- No other conditions exist that may affect U.S. Customs’ acceptance of the transfer price (e.g., the adjusted price must be an arm’s length price from U.S. Customs’ perspective).
To be eligible for duty refunds for downward transfer price adjustments, importers will need to implement transfer pricing policies, agreements and supporting documentation that are consistent not only with IRS transfer pricing requirements for income tax purposes, but also with U.S. Customs requirements. Thus, importers will have to consider U.S. Customs’ five factors when determining their transfer pricing policies and procedures.
For more information on these subjects, or any trade or customs issue, please contact one of KPMG’s Trade & Customs professionals:
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Information is current to July 15, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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