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Customs valuation advice relating to transfer pricing

Increased evidentiary burden for importers

Customs valuation advice relating to transfer pricingThe Australian Customs and Border Protection Service (CBP) has finalised revisions to its Practice Statement dealing with transfer pricing-related customs valuation advice applications. New Practice Statement No.B_IND08 (‘Valuation -Transfer Pricing Policy’) applies from April 2013, and is relevant to all importers who import goods into Australia from related parties.

Valuation advice and transfer pricing adjustments

A valuation advice (VA) issued by CBP provides an importer with certainty that the customs value being declared to CBP at the time of import will not be challenged by CBP for five years, provided the facts outlined in the VA application have not changed. While it is recommended that a VA should be sought by importers who import from related parties, it is a requirement that a VA be obtained in the case where there is a retrospective transfer pricing adjustment which affects the customs value of goods that have already been imported (regardless of whether there is a customs duty impact).

Furthermore, it is strongly recommended that a VA be obtained where there is a change to the transfer price which affects the customs value of future imports.

In the case of retrospective transfer pricing adjustments, depending on the direction of the adjustment, any of the following could arise:

  • A requirement to pay additional customs duty and import GST
  • An entitlement to receive a refund of customs duty
  • No customs duty impact; only an import GST impact.

Revisions to Practice Statement

The revisions in the new Practice Statement increase the evidentiary requirements on importers to demonstrate that the price is arm’s length under the customs valuation rules (i.e. that the transfer price is a valid customs value). The customs valuation methodologies are expressly stated to be not analogous to the Berry Ratio or OECD methodologies accepted by the Australian Taxation Office for transfer pricing purposes. Importantly, in order to use the Transaction Value or the Fall-back Transaction Value (i.e. the transfer price as the customs value), the importer needs to provide information to show that the relationship between the purchaser and the vendor of the goods has not influenced the price. This can be demonstrated by means of one of two tests:

  1. A ‘test values’ test - i.e. a comparison with other imports into Australia from the same exporting country of similar goods from an unrelated party
  2. A ‘circumstances surrounding the sale’ test - one of the following must be satisfied:
    1. “The price of the goods had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way the seller normally settles prices for sales to buyers who are not related to the seller”

    2. “The price is adequate to ensure recovery of all costs plus a profit which is representative of the firm’s overall profit realised over a representative period of time (e.g. on an annual basis) in sales of goods of the same class or kind”

    3. “Any other information to show that the price reflects the market price of the imported goods between unrelated parties subject to the same conditions of sales, for example, quantity, level of sales, times of sales”.

Based on Deloitte’s experience in the United States in applying the same tests, tests 1 and 2.a above are difficult to apply given that the required information is generally not available to the importer. Accordingly, test 2.b is generally the test that is applied. This is essentially a cost plus test and appears to require cost data from the foreign manufacturer, as well as profit data of the “firm” split out to cover only goods of the same class or kind. While customs authorities in the United States have issued numerous rulings about the interpretation of this test, CBP has given no indication about how it plans to interpret the test requirements in Australia.

Our Customs and Global Trade specialists are available to discuss the impact of the new Practice Statement and any issues your business may have in relation to the customs duty treatment of related-party imports.

 

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