by Joel Cooper
The World Customs Organization’s Technical Committee on Customs Valuation (“TCCV”), during its 42nd Session in Brussels held April 18-22, has approved a new instrument that contains a case study on the use of transfer pricing documentation in assessing customs values, taking important step toward better coordination between these two subject areas.
The new instrument is a breakthrough development as it provides an illustrative example of how, in practice, transfer pricing documentation based on the transactional net margin method may be used by Customs to determine whether the relationship of the parties to a transaction has influenced the price. The instrument is expected to be approved by the WCO Council in July 2016, after which it will be made available in the WCO Valuation Compendium.
The approval of this instrument is a timely development for the WCO, in particular given the publication of the “WCO Guide to Customs Valuation and Transfer Pricing” in June 2015 and the work that has been taking place over the last couple of years by the WCO, OECD, and World Bank Group in in furthering the understanding of this subject in customs and tax administrations. It is understood that another case study, based on the resale price method also continues to be discussed by the TCCV.
The interplay of transfer pricing and customs valuation was first included on the agenda of the TCCV in 2007 (under the heading “Related party transactions under the Agreement and Transfer Pricing”) and has been a regular agenda item since the 26th Session (Spring 2008). The first outcome of the TCCV’s work on this topic was Commentary 23.1, which acknowledges the role that transfer pricing documentation may play in examining related party transactions for customs value purposes. Since then the TCCV have been regularly discussing the subject at their meetings, with guest presentations from the OECD, World Bank Group, and others.
From a business perspective the approval of the instrument is an important and timely development. The OECD/G20 base erosion profit shifting (BEPS) project and other developments have drawn significant attention to transfer pricing and, as a result, challenges to both transfer prices and customs values by (often separate) authorities have increased. This has generated significant uncertainty and increased compliance burdens for many multinational enterprises.
This is also a timely development for those multinational enterprises that are currently in the process of revisiting their approach to transfer pricing documentation in light of the OECD/G20 BEPS project Action 13 report on Transfer Pricing Documentation and Country-by-Country Reporting, as it provides the opportunity to consider how this revised documentation can be tailored appropriately for customs purposes. The forthcoming abolition of the first sale for export rule in the EU will also result in many business having to revisit their approach to customs valuation.
A more detailed analysis will be published once the instrument is approved and made public.