Customs Duty Refunds on Transfer-Pricing Adjustments

The following article, Customs duty refunds on transfer-pricing adjustments, originally appeared in the May 2022 issue of The Tax Adviser.

Foreign Income & Taxpayers

Multinational companies (MNCs) often make periodic (including year-end) transfer-price adjustments to address target profit margins and other considerations pursuant to intercompany agreements and to comply with global income tax requirements. But whether claimed transfer-pricing adjustments involving tangible goods can be supported under the World Trade Organization Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (the “WTO Agreement,” based on the 1979 GATT Valuation Agreement) is an important consideration for the C-suite, particularly given the increasing jolt of customs duties on companies’ financial statements (e.g., cash and profits).

While many reasons exist to make transfer-pricing adjustments, some of the more common ones include adjusting profits to compensate for unexpected economic events like the COVID-19 pandemic, addressing specific market competitiveness factors, and/or reconciling expenses when transaction billing is based on budgeted costs for goods and services rather than actual costs. Still, one important issue often overlooked by MNCs is that customs value requirements differ from those of the income tax authorities and thus may sometimes produce different results or require additional planning and analysis. This is particularly noticeable when comparing documentation used for tax planning to the more granular criterion used by customs authorities to assess and collect duties. This discussion explores key considerations to keep in mind for claiming customs duty refunds on transfer-pricing adjustments.