Five factors are crucial to retroactive transfer pricing adjustments and potential customs duties refunds
Historically, CBP required payment of applicable duties on any increase in the value of imported goods due to upward TP adjustments, but would not consider refunds for downward TP adjustments. A reason for the difference in treatment has been CBP’s assertion that postimportation decreases in value are to be disregarded, unless based on an objective formula that was previously determined by the parties.
On 30 May 2012, CBP issued an official notice opening the door to potential duty refund opportunities for downward TP adjustments. CBP adopted a broader interpretation of what constitutes an objective formula in this context. If a TP is able to satisfy all of the following five factors, it is more likely to be considered an objective formula, thereby reducing the possibility of price manipulation and subjectivity in claiming post-importation adjustments:
- A written Intercompany Transfer Pricing Determination Policy is in place before importation, and the policy takes IRS code section 482 into account.
- The US taxpayer uses its transfer pricing policy in filing its income tax return. 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 TP 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/or financial statements to support the claimed adjustments in the US.
- No other conditions exist that may affect the acceptance of the transfer price by CBP (e.g. the adjusted price must be considered ‘arm’s length’ from a CBP perspective).
Implicit in factor five is the additional requirement that the importer shows that its relationship to the other party did not influence the price, as detailed in 19 USC Section 1401a.
CBP has stated that the fact that a TP adjustment is made in line with a formula does not in itself indicate the TP is valid or customs purposes, and that transfer pricing studies undertaken for IRS purposes do not in themselves satisfy CBP’s related party tests.
As such, to increase business certainty, an importer should conduct an analysis of the five factors, including a customs related party pricing analysis, to determine eligibility for potential duty refunds resulting from downward TP adjustments.
Without such an analysis, the importer risks failing to comply with CBP’s requirements, rendering them ineligible for potential duty refunds and potentially ineligible to use transaction value as the method of appraisement for customs purposes.