Importers Can't Rely on Transfer Pricing to Satisfy Customs

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Dolores W. Gregory

June 9 — Multinationals that rely on transfer pricing studies to support the prices they report on customs invoices could be making trouble for themselves, practitioners say.

Many companies are unaware that the requirements for customs valuation are very different from the rules for setting the proper transfer price, said Ted Murphy, a partner with Baker & McKenzie LLP in Washington.

“Most multinationals are using intercompany transfer pricing not only for transfer pricing purposes but also for customs valuation purposes,” he said. “So when goods are sold and shipped around the world, they're sold using the transfer price. That’s the value that’s reported on the intercompany invoice, and that’s the invoice that’s used for customs declaration purposes.”

But it is a mistake to think only about the transfer pricing rules in setting those prices, Murphy said.

Customs administrations will want to know if an importer can justify the price under the World Customs Organization's valuation rules, he said.

“If all you have is tax documentation, you'll come up short on that,” Murphy said, speaking June 9 at an international tax conference sponsored by Bloomberg BNA and Baker & McKenzie.

Ian Cremer, head of valuation with the WCO, explained that World Trade Organization members use a transaction value method for customs valuation, which is based on the price of goods paid or payable upon import as well as adjustments for commissions, shipping, licensing, insurance and other costs.

Thus, the customs valuation also involves intangibles, he noted. Where parties are related, customers look at whether the relationship has influenced the price.

Granular Approach

Damon Pike, president of the Pike Law Firm, said many multinationals fail to appreciate that customs valuation is granular and specific, whereas transfer pricing looks at the entire value chain.

“We focus on the goods only, the merchandise that is being imported,” Pike said.

Where there are intangible elements not already imbedded in the invoice price, he said, they have to be added on. “And that’s something that most companies just forget to do.”

Many times there is a lack of coordination between the tax function and the customs function within a corporation, he said. “Talk to your customs people, find out what they are doing with their declarations.”

In preparing documentation, Pike said, companies need to shift their thinking about the comparables they select. Many times, transfer pricing studies select comparables with similar functions, but not necessarily involving the same kind of good or even distributors within the same industry.

“You need to start thinking about finding companies that distribute similar merchandise as the tested party—that will go a long way towards helping you with the customs” requirements, he said.

Not So Easy

But Holly Glenn, principal economist with Baker & McKenzie, said that advice is hard to follow.

“For transfer pricing purposes, we would very much like to have companies in the same industry at the same point in the value chain,” she said. “But we are limited to data that can be found in databases. As you know, it is not that common to find companies that have as narrow a range of functions and also sell the same kind of merchandise in the same point in the value chain.”

“For transfer pricing purposes, we would not be very comfortable telling our client to rely on this one company’s profit margin” even if for customs purposes it was the best comparable, she said.

To contact the reporter on this story: Dolores W. Gregory in Washington at

To contact the editor responsible for this story: Molly Moses at

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