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Transfer Pricing Adjustments? Don’t Forget About Customs

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Multinationals may make new or larger-than-usual financial adjustments to bring transfer prices within arm’s length ranges as a result of additional tariffs. This article focuses on these transfer pricing adjustments.

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With 2018 in the rearview mirror, multinational enterprises (MNEs) may find themselves making new or larger-than-usual financial adjustments – typically to bring transfer prices within arm’s length ranges for income tax purposes – as a direct result of additional tariff costs resulting from the Trump Administration’s various trade actions. Making these adjustments on a retroactive basis to 2018 transactions may result in considerable customs compliance obligations, including but not limited to needing to report changes in the value of imported merchandise to a local customs authority and, as the case may warrant, potentially owing additional duties or being owed duty refunds.

For example, where MNEs utilize a U.S. importer of record, a compensating payment could be made to this U.S. entity to offset any increase in customs duties (typically recorded as part of the imported products’ inventory cost as a cost of goods sold (COGS)). From a customs perspective, this compensating payment is effectively a reduction in the product price of previously imported merchandise which, in turn, would result in a potential reduction of any value-based duties assessed on the merchandise if appraised using the “transaction value” method of appraisement (e.g., the invoice price, plus certain statutory additions excluded from the invoice price).

From a compliance perspective, MNEs importing merchandise into the U.S. using the transaction value method of appraisement and who are seeking to make retroactive pricing adjustments pursuant to a transfer pricing policy may only do so if an “objective formula” is in place prior to importation, as indicated by whether five formulaic factors established by U.S. Customs and Border Protection are satisfied (see Customs Bulletin and Decisions, Vol. 46, No. 23, dated May 30, 2012). MNEs should consult an experienced trade professional to determine whether these formulaic factors have been met.

In addition, MNEs making compensating adjustments to a U.S. importer of record using the transaction value method of appraisement should be cautious about whether the post-adjustment price of the merchandise is arm’s length from a customs perspective. For example, as the price for the merchandise decreases, the transactional profit margin of the seller also potentially decreases – which may alter the arm’s length result under certain related-party customs tests, such as the “all costs plus a profit” test. If MNEs cannot show their related-party prices are undertaken at arm’s length, an alternative method of appraisement may need to be used for the merchandise (e.g., computed value, deductive value, etc.)

In sum, MNEs making retroactive transfer pricing adjustments should carefully consider the impact on customs values and compliance. Consulting with an experienced trade professional is highly recommended.

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