Post on 02-Oct-2020
Workshop on Advance Ruling for Customs Valuation
and Challenges with Transfer Pricing
Co-organized by
the Delegation of the European Union to Thailand and
Department of Customs Thailand
Potential benefits of advance rulings and challenges with transfer pricing
Prof. Santiago Ibáñez Marsilla
University of Valencia (SPAIN)
21 November 2012
Outline
• Customs valuation and transfer pricing
– Detailed comparison of valuation methods
– Findings of the comparison
– The US normative approach
• The need for certainty
– Advance rulings as an instrument for certainty
Customs valuation
and transfer pricing (1)
• On importation goods are subject to customs duties.
– Duties are based on the customs value of the goods.
• The imported goods enter the economic circuit of the
importing country. They are sold, or transformed and the
resulting product sold. Or they are an asset used to
procude other goods.
• The Corporate Income Tax (CIT) taxes the income
obtained in the subsequent resale or use of the goods in
the country of importation.
– The value of the imported goods becomes relevant in
order to ascertain the profit made on the subsequent
resale or use.
Customs valuation
and transfer pricing (2) • Both taxes share the same concept of value > value as
determined by the parties (price as starting point), in an
open market transaction.
• But there are conflicting interests on the valuation of
imported goods:
Taxpayer* Tax Administration
TP CV TP CV
Customs valuation
and transfer pricing (3)
• When the exporter and the importer are related parties,
there is the possibility that the price agreed is not what
two independent parties would have agreed. This fact is
relevant for both customs duties and CIT.
– In customs valuation: Article 1 sets a condition for the
application of TV > TV would be rejected if the relationship
had an influence on the price.
– In CIT: The price agreed is subject to a transfer pricing
analysis to determine if it is an acceptable value. The profit
of the resident corporation is determined accordingly.
• A price that would be agreed by independent parties is called “an
arm’s lenght price”.
What about VAT?
VAT, the third tax in the mix:
– On imports, the tax base is determined based
on the customs value of the goods.
– Tax base in other cases is the consideration
(as a general rule). But in the EU:
• Council Directive 2006/69/EC (O.J. L 221) makes
the open market value an option (“Rationalization
Directive”).
TV and CIT value
A Transaction Value (TV) might present some
differences with a value for CIT purposes (“arm’s
lenght price”), due to differences in the computed
elements, but such differences can be adjusted in order
to compare both values. Basically the concept of value is
the same.
– The same situation arises in VAT on imports, where some
adjustments are made on CV to arrive at the VAT Tax
Base.
– Warning! The connection is lost if TV is based in the price
in an earlier sale (“first sale rule”). Commentary 22.1
TCCV
TV and CIT value (2)
Differences between TV and CIT value (1).
Elements included in the tax base of VAT on imports:
– Import duties and other duties and taxes paid on
importation;
– Transport and incidental costs incurred up to the first place
of destination within the territory of the Member State of
importation; and,
– In general, other costs incurred before the goods reach
their first destination inside the Community (depending on
administrative practice, the customs agent fees and buying
commissions could be included in this paragraph).
TV and CIT value (3)
Differences between TV and CIT value (2).
Elements not included in the tax base of VAT on imports:
– Import quotas paid by the importer;
– Transport costs and incidental costs after the goods reach
their first destination in the Community;
– Charges for construction, erection, assembly, maintenance or
technical assistance, undertaken after importation on
imported goods such as industrial plant, machinery or
equipment;
– Activities undertaken by the buyer on the buyer's own
account; AND
– Payments for the right to distribute and re-sell the goods that
were not included in the customs value because they weren’t
a condition of sale.
Concept of related parties
• Both CV and CIT have similar concepts of
related parties, but:
– Some doubt that “economic control” falls in
the scope of CV rules.
– Cases of “economic control” clearly fall in the
scope of CIT rules in some countries (USA).
Valuation methods
Transaction Value (TV) Arm’s lenght price
Transaction value of identical
goods (TVI)
Transaction value of simmilar
goods (TVS)
Comparable Uncontrolled Price
(CUP)
Deductive value (DV) Resale Price (RP)
Computed value (CV) Cost Plus (C+)
Procedure of last resort Transactional profit methods:
- Transactional Net Margin (TNM)
- Transactional Profit Split (TPS)
TVI, TVS – CUP (1)
• TVI/TVS: The transaction value of identical/similar goods sold for export to the same country of importation and exported at or about the same time as the goods being valued.
• CUP: A transfer pricing method that compares the price charged for property or services transferred in a controlled transaction to the price charged for the property or services transferred in a comparable uncontrolled transaction in comparable circumstances.
TVI, TVS – CUP (2)
Differenciates identical from
similar goods (identical preferred)
No preference is expressed
Adjustments very limited –
commercial level, quantity,
transport costs
Adjustments based in function and
risks assumed analysis
Goods produced in the same
country
There is no such limitation
Preference for internal
comparables
Preference is more flexible
Comparable: goods imported in
the Customs Territory (EU)
Goods sold in the national
jurisdiction (although sales in other
jurisdictions could be considered)
TVI, TVS – CUP (3)
Exchange rate: either at the time
of export or at the time of
importation (each customs territory
chooses)
Time of the parameter transaction:
time of export
Time: sale
If more than one value, take the
lower value
There is no such rule
Parameter is a TV (maybe
between related parties)
DV – RP (1)
• DV: The unit price at which the imported goods or identical/similar imported goods are sold in the greatest aggregate quantity, at or about the same time of the importation of the goods being valued, to unrelated persons, with deductions: – for usually paid commissions/addition usually made for profits and
general expenses in sales of goods of the same class or kind;
– usual costs of transportation and associated costs within the country of importation;
– where appropiate, costs of transport and associated costs to the place of importation; customs duties and national taxes.
• RP: A transfer pricing method based on the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. The resale price is reduced by the resale price margin and adjusted for other costs associated with the purchase of the product, like customs duties.
DV – RP (2)
Margin can only be determined
from data obtained within the
country of importation
There is no such limitation
Preference for identical or similar
goods –but imported before the
expiration of 90 days after such
importation
There is no such time limit; when
the goods are resold to
independent third parties
If several parameters, the most
frequent value (statistical mode,
not an average)
Range of acceptable values,
average
Function, assets and risk analysis
CV – C+ (1)
• CV: Results from the sum of:
– Costs or value of materials and fabrication or other processing employed in producing the imported goods;
– An amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind made by producers in the country of exportation for export to the country of importation; and
– where appropiate, costs of transport and associated costs to the place of importation;
• C+: A transfer pricing method that begins with the costs incurred by the supplier of property in a controlled transaction. An appropiate cost-plus mark-up is added to this cost to make an appropiate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions.
CV – C+ (2)
Difficult to apply – resistance in
most countries (a US imposition)
Takes profit and general costs
together (this difference is not very
relevant in the importing country)
These are the most similar methods
Profit methods (1)
• CV rules do not resort to profit methods.
Instead, it directs us to apply the
aforementioned methods with reasonable
flexibility.
• CIT rules establish two profit methods:
– Profit split method
– Transactional net margin method
Profit methods (2)
Transactional net margin method
• Examines the net profit relative to an appropiate base (e.g.
costs, sales, assets) that a taxpayer realises from a
transaction.
• Transactional profit split method
• Seeks to eliminate the effect on profits of special conditions
made or imposed in a controlled transaction by determining
the division of profits that independent enterprises would
have expected to realise from engaging in the transaction.
• Both methods allow the aggregation of transactions when
appropiate, 3.9-3.12
Findings of the comparison (1)
• CV and CIT share the same concept of value.
• There are minor differences between TV and CIT value.
These differences can be overcome by means of
adjustments.
– We need reliable data to make the adjustments
– If TV is based in an earlier sale, TV and CIT value will differ
• The alternative valuation methods present two types of
differences:
– Differences for wich an adjustment can be made
– Differences for wich no adjustment can be made
In the last situation, it might not be possible to bring TV and
CIT into consistency.
Findings of the comparison (2)
• Profit-based methods use a basically different methodology
• Don’t worry about differences in general. Worry about
differences for wich an adjustment is not possible!
• As a conclusion: in the customs side, the key is to
avoid departure from TV.
Findings of the comparison (3)
• Authors have focused their interest in
techniques designed to avoid departure
from TV.
• Juan Martín Jovanovich (2007): – Transfer pricing acceptability should be regarded as
enough indication that the relationship did not influence
the price in the context of art. 1.2 CVC (the
“circumstances of sale test”).
Findings of the comparison (4)
• Richard Ainsworth (2007):
– Proposal of Information Technology-APA (“IT-APA”).
Software certified by the authorities that automates IT and
CV fulfilment and adjustments, based on an agreement
between taxpayer and Tax Administration.
• TCCV:
– Commentary 23.1 – Directs Customs to take into
account transfer pricing studies as a source of information
to decide on the “circumstances of sale” test (but recognizes
that it could be inappropiate information)
The US normative approach
• Section 1.059A IRC.
– Limits the value for Income Tax purposes;
– in respect to elements computed in CV;
– to the amount taken into account for CV purposes.
• It is a limit for the taxpayer (sets a ceiling value); not for
the Administration.
– Applies only to related party transactions
The need for certainty (1)
• Both Customs and traders need certainty.
– Customs needs consistency:
• To ensure equality and fairness (that encourage
compliance!).
• To ensure adequate collection of duties.
• To avoid temptations of corruption.
• To avoid litigation (both nationally and internationally).
– Traders need consistency
• Duties are an element of cost. Post-entry audits mean
unrecoverable costs.
• Everybody hates penalties.
• Investment is prudent: if confronted with uncertainties, it will
take into account the worst case scenario.
The need for certainty (2)
• The people at large benefit from certainty!
– Economic efficiency requires a level playing field.
– Investments should be encouraged, not obstacled.
• Certainty is the opposite or arbitrarieness.
– It does not mean renouncing authority. It
means exercising it in the same way in front
of essentially equal circumstances.
– It does not mean renouncing resources (Quite
the contrary, indeed!).
The need for certainty (3)
• Advance rulings: a key element for certainty!
– Advance rulings allow traders to know in advance
what Customs expects from them.
• Non-compliance will result more difficult to excuse!
– They bring all the benefits of certainty.
• For Customs: equality, adequate collection, avoidance of
corruption and litigation.
• For traders: adequate calculation of costs, avoidance of
penalties, encouragment of investments.
• For the general public: level playing field, efficiency,
investments.
The need for certainty (4)
• Advance rulings: certainty in valuation
– In the specific area of valuation, advance rulings
avoid departure from TV.
• Avoid complex examinations with irreconciliable data
• Encourage compliance and avoid conflict
• Allow faster clearance and saves costs of securities
• Customs should take part in transfer pricing APAs
• Customs should make public their policy on transfer pricing
issues
– Thus helps increase trade and investment
– It is a win-win game
Potential benefits of advance rulings and challenges with transfer pricing
Thanks for your attention!
Prof. Santiago Ibáñez Marsilla University of Valencia (SPAIN)
http://www.uv.es/ibanezs
santiago.ibanez@uv.es