Workshop on Advance Ruling for Customs Valuation and...

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.


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)


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.


• 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.


• 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”).


• 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 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!).


• 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.


• 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

[email protected]

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