Transfer pricing adjustments through a customs lens: A global view

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

Luis Abad, Alex Capri, Massimo Fabio and Martina Dubois, KPMG's Trade and Customs Group

A common issue faced by multinational enterprises (MNEs) around the globe is what to do, from a customs duty perspective, when they have to make a retroactive financial adjustment to related-party transactions involving imported goods. Financial adjustments generally occur to bring transfer prices within an arm's length range for income tax purposes, but those adjustments may have customs duty implications.

Retroactive, or post-year-end, transfer pricing adjustments (“compensating adjustments”) may potentially trigger compliance obligations for MNEs to report the financial adjustments to the local customs authorities and tender any additional duties owed. Local country customs rules regarding compensating adjustments, however, can vary considerably and, in some countries, are still evolving - as evidenced by recent policy changes in the United States. Thus, MNEs should view this issue with a global perspective.

This article provides a comparative analysis of the potential impact of compensating adjustments on customs transaction valuation and compliance in the United States, the European Union (EU), and the Asia Pacific Region (ASPAC), and includes recommendations on how to address such adjustments from a customs perspective.1

l. Background

Compensating adjustments often occur in situations in which a taxpayer finds itself outside the arm's length range for income tax purposes. The compensating adjustment is intended to reach the desired arm's length result from a tax perspective.2 Generally, the adjustment may be a lump-sum adjustment to sales or cost of goods sold, depending on the in-bound or out-bound nature of the transaction.

From a customs perspective, compensating adjustments may be considered to be part of the customs value of previously imported goods. Thus, whenever an MNE makes a compensating adjustment pursuant to tax laws, the adjustment should also be analysed from a customs perspective to determine whether the adjustment must be reported to the customs authority and whether additional customs duties should be tendered.

Consider the following example of a retroactive upward transfer price adjustment, or additional payment, between an importer and its overseas parent company/supplier:  

Importer A purchases widgets in year 1 from Supplier B, who is Importer A's overseas subsidiary. The widgets are subject to a 10 percent duty rate. During year 1, Importer A imported $500 million of widgets. At year-end, it is determined that importer A's financial results are above the acceptable arm's length range for tax purposes. To comply with the arm's length requirements under the local tax laws, Importer A makes a retrospective $10 million upward compensating adjustment, or payment, to Supplier B with respect to the value of previously imported products in year 1.



In the example, Importer A may owe the customs authority an additional $1 million in customs duty (the $10 million adjustment multiplied by the 10 percent customs duty rate). The increase in customs value may also result in an increase in other import-related fees and interest owed to the customs authority, as well as potential customs penalties and additional value added taxes (VAT). Even if the goods had been duty-free, customs penalties may still apply for mis-stated import values. For example, in the United States, if the widgets in the example were duty-free, Importer A may still be potentially liable for up to 20 percent of the customs value if the error or omission, i.e., the undeclared value adjustment, is determined to be the result of the importer's negligence (40 percent if it is the result of gross negligence).3

Most countries adhere to the common customs valuation rules contained in the World Trade Organisation's (WTO) Agreement on the Implementation of Article VII of the General Agreement on Tariff and Trade 1994 (the “GATT Valuation Agreement”).4 The GATT Valuation Agreement provides the international legal framework for determining the customs, or dutiable, value of imported goods.

Article 1 of the GATT Valuation Agreement establishes that the primary method for determining the customs value of imported goods shall be “transaction value”, defined as “the price actually paid or payable for the goods when sold for export to the country of importation” adjusted in accordance with the other pertinent provisions of the GATT Valuation Agreement.5 Annex I to the GATT Valuation Agreement (“Annex I”) provides further guidance on how to determine the “price actually paid or payable.” Annex I provides in pertinent part:  

The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller. (emphasis added)


The question of how to address compensating adjustments from a transaction value perspective may be an issue for importers all over the world, including those operating in any of the more than 150 countries that are signatories to the GATT Valuation Agreement. The potential magnitude of this issue can be understood by appreciating the high volume of international trade that flows between related parties today. The final transfer prices are generally determined on the basis of tax, not customs, rules.

ll. Comparative analysis
A. United States

In the United States, the customs and tax authorities operate as two distinct agencies charged with revenue collection: US Customs and Border Protection (CBP) and the Internal Revenue Service (IRS), respectively. Both agencies generally share the common objective to prohibit the parties' relationship from unduly influencing the transfer price, but for different concerns. The agencies thus operate under different sets of rules. CBP's concern is that the customs value may be set artificially low (thereby avoiding customs duties), whereas the IRS's concern is that the deductible customs value, or inventory costs, may be set artificially high (thereby avoiding income tax). Thus, the scope of the respective rules is understandably different, as is their treatment of compensating adjustments.

The US tax rules are generally based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines”), in which compensating adjustments may be an acceptable approach to satisfy the tax requirements. The customs rules, however, are based on the GATT Valuation Agreement.

In the United States, the most common method of valuation “transaction value” is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States”, plus certain statutory amounts. The term “price actually paid or payable” is more specifically defined in 19 U.S.C. section 1401a(b)(4)(A) as the:  

Total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller. (emphasis added)



Depending on the nature of the compensating adjustment, it may be considered to be part of the “price actually paid or payable” for previously imported goods.6 In the United States, CBP historically treated upward and downward adjustments differently, generally requiring the importer to tender additional customs duties on any retrospective price increases but denying refunds on price decreases.

Historically, it has been CBP's position to disregard rebates or other decreases to the price paid or payable that take place between the buyer and the seller after the date of importation. CBP's position is based on paragraph (b)(4)(B) of the US valuation statute, which provides:  

Any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and the seller after the date of importation of the merchandise into the United States shall be disregarded in determining [transaction value].7




CBP has denied importers duty refunds on this basis.8 In some instances, CBP has also “ruled that prices subject to an adjustment, either upward or downward, cannot represent transaction value”.9 Those rulings have been made pursuant to section 152.103(a)(1) of the CBP regulations (Title 19 of the Code of Federal Regulations), generally discussing the term “price actually paid or payable”.10 Section 152.103(a)(1) provides, in relevant part:  

In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula such as the price in effect on the date of export in the London Commodity Market. The word “payable” refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation.




CBP has interpreted section 152.103(a)(1) to mean that only those “[p]rices which require adjustment, either upward or downward, and are arrived at by the application of a formula, represent transaction value….”11 (emphasis added). More specifically, over three decades, CBP has ruled that “it is necessary for the formula to be fixed at [importation] so that a final sales price can be determined at a later time on the basis of some future event or occurrence over which neither the seller nor the buyer have any control12 (emphasis added).

Thus, when “either the buyer or seller exercises some control over whether and to what degree the price would be adjusted, the pricing methodology could not be considered a 'formula’ within the meaning of 19 C.F.R. section 152.103(a)(1)”.13 CBP has generally been more accepting of compensating adjustments when there has been a bilateral Advance Pricing Agreements (APA)14 in place, and other conditions have been present. Even in the instances when CBP had accepted an upward adjustment pursuant to an APA, it left unclear whether it would allow a duty refund for a downward adjustment.15

However, CBP has recently issued new guidance to reconcile the difference in treatment.

On May 30, 2012, CBP issued an official notice modifying its earlier treatment relating to retrospective post-importation transfer price adjustments.16 CBP has thus very recently adopted a broader interpretation of what constitutes an objective “formula” for purposes of using “transaction value” in the transfer pricing context, thereby allowing retrospective post-importation compensating adjustments.

CBP's new policy is that - even though parties may be related and certain costs may be within the control of the parties - if the transfer pricing policy is set before importation and is used by the parties, subject to certain factors, the transfer pricing policy may be considered an objective formula. To evaluate and allow compensating adjustments, CBP established the following factors:

1. A written “Intercompany Transfer Pricing Determination Policy” is in place prior to importation and the policy is prepared taking IRS code section 482 into account.

2. The US taxpayer uses its transfer pricing policy when filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return.

3. The company's transfer pricing policy specifies how the transfer pricing and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted.

4. The company maintains and provides accounting details from its books and financial statements to support the claimed adjustments in the United States.

5. No other conditions exist that may affect the acceptance of the transfer price by CBP (e.g., the adjusted price must be an arm's length from a customs perspective).


In addition to these five factors, CBP strongly encourages importers to report transfer price adjustments to CBP using its “Reconciliation Programme”. Generally, under the Reconciliation Programme, the importer may flag importation entries and declare an initial, temporary value at that time that will be completed or reconciled no later than 21 months after importation. Instead of using the Reconciliation Programme, importers may report adjustments through post-entry amendments to the customs entry documentation or by filing protests for downward price adjustments. (In addition, importers may make a “prior disclosure” of a violation to CBP.)

This new policy goes a long way to harmonise the treatment of compensating adjustments between the IRS and CBP and permits several options for duty refunds resulting from downward compensating adjustments.

B. European Union (EU)

In recent years, attention to related-party transactions in assessments performed by EU customs authorities has increased. The heightened scrutiny includes assessment of the correctness of the value declared on importation and verification of whether compensating adjustments have been correctly reported by the MNEs for customs purposes.

The rules governing the European tax and customs authorities, although similar to the United States, are slightly different. The customs rules for Europe are based on the GATT Valuation Agreement, and are intended to ascertain that the value of the imported goods could be considered “arm's length” and not set low to avoid duties upon importation.

In this scenario, it should be preliminarily pointed out that - despite the fact that EU Member States recognise a common “Customs Code” and common “Implementing Provisions” (Regulation no. 2454/93/EEC - CCCIP) - from a practical standpoint, some divergence in the treatment of specific customs issues exists between the EU Member States. Divergence may exist in the reporting of transfer pricing or “compensating” adjustments, considering that customs and tax authorities might be included in different government departments or agencies. Consequently, even the assessment approach might differ between different Member States.

The Customs Code, article 29 paragraph 1, establishes that “the customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community….” The customs value should be determined taking into account some statutory additions (e.g., royalty payments if representing a condition of sale, insurance, extra-EU freight expenses, and so on) or diminutions (e.g., buying commissions, previously agreed upon discounts, and so on).

When it comes to determining the customs value for related-party transactions, the EU legislator has specified that the “price paid or payable” should be “acceptable for customs purposes provided that the buyer and seller are not related, or, where the buyer and seller are related, that the transaction value is acceptable for customs purposes.17

The assessments performed by the customs authorities take into account a number of factors that allow the customs officers to understand whether the value declared upon importation could be considered a fair value on the basis of arm's length principles.18 In this respect, it is worthwhile noting that in October 2010, the World Customs Organisation's Technical Committee on Customs Valuation approved commentary 23.1 (Examination of the expression circumstances surrounding the sale under Article 1.2 (a) in relation to the use of transfer pricing studies). The commentary was intended to provide guidance for the use of transfer pricing studies that were prepared in accordance with the OECD Transfer Pricing Guidelines and provided by importers as a basis for examining “the circumstances surrounding the sale”.

Commentary 23.1 indicates a willingness by the customs authorities to allow the importer to use a transfer pricing study as a possible basis for examining the circumstance of the sale when the customs authorities perform an assessment of the customs value. Even though the use of a transfer pricing study as a possible basis for examining the circumstances of the sale should be considered on a case-by-case basis (ascertaining whether the transfer pricing study contains information concerning the circumstances surrounding the sale), the World Customs Organisation has clarified that any relevant information and documentation provided by an importer might be used for examining the circumstances of the sale. This means that a transfer pricing study could be one source of such information to provide to the customs authorities for the assessment of the value.

Customs examinations can be performed in different ways and, according to the Customs Code, there are a number of indicators that could be used to identify the relevant related-party transactions and perform the customs duty assessment.

First, upon importation of goods in the EU territory, the EU importers - in addition to filing the Single Administrative Document (SAD) - should file a form “DV 1”, which contains information on the value declared. If the transaction relevant for customs purposes is a related-party transaction, the importer should declare it. The DV 1 basically constitutes a preliminary screening that allows customs authorities to distinguish between third-party and related-party transactions. Consequently, the customs authorities obtain information on the nature of the transaction and may perform further examination to ascertain the fairness of the customs value declared.

As a general rule, in case of compensating adjustments pertaining to the goods previously imported, the EU importer should report the same adjustments to the customs authorities. The importer would need to amend the customs value declared in the SADs filed upon importation, declaring the correct value (i.e., the customs value plus upward adjustments or less downward adjustments).

Frequently, MNEs' import transactions are many and the customs entry filings are voluminous. Amending each SAD following a compensating adjustment might require the establishment of a burdensome procedure. From a practical point of view, some European customs authorities accept the submission of aggregate data, but others require each SAD to be amended.

The requirements for reporting upward and downward adjustments may differ. Because upward adjustments lead to an increase of the customs value upon importation and, consequently, to higher customs duties and VAT upon importation, EU Member States require the reporting of upward adjustments for customs purposes. On the other hand, the customs authorities seem to treat differently the downward adjustments requiring, in some cases, that the same should be mandatorily reported and, in other cases, that the same could not be reported (apparently because this would lead to an overpayment of customs duties). When the possibility of obtaining refunds after declaring downward adjustments exists, the European customs authorities seem to have established different sets of conditions and procedures from Member State to Member State that must be fulfilled by importers to successfully claim refunds.

Reporting compensating adjustments to the customs authorities requires, as a matter of principle, the activation of a specific procedure that should be performed for each customs declaration19 submitted to amend the customs value originally declared upon importation. As a general rule, customs legislation does not allow for the declaration of a provisional value upon importation; consequently, the value declared by the importer upon importation of the goods is considered to be the final value, and each amendment occurring post importation should be declared by amending each customs declaration submitted.

As mentioned, amending each customs declaration in connection with compensating adjustments might require the implementation of a burdensome procedure by the importer. In 2012, the International Chamber of Commerce (ICC) issued a proposal20 in which it suggests:  

It is recommended that in the case of post-transaction transfer pricing adjustments (upward or downward), companies be relieved from: the obligation to submit amended declaration for each initial customs declaration. Instead, a single recapitulative return referring to all the initial customs declarations would be lodged.




This proposal seems to stress simplification of the transfer pricing reporting procedure and also the importance of general guidance that can be followed on an international basis.

There are other simplified mechanisms that could be evaluated by MNEs. More specifically, European customs legislation allows the importer (after specific authorisation is released) to lodge an incomplete declaration when the value of the goods is not definitely known at the time of entry (e.g., the importer knows there may be year-end price adjustments pursuant to a transfer pricing study). Through the incomplete declaration regime, the customs authorities might accept a declaration that does not contain all the particulars required or is not accompanied by all the supplemental documentation required. (It should be noted that specific items are required and would also be highlighted in the authorisation released by the customs office.) Using the incomplete declaration regime might simplify the procedures to be performed by MNEs to report transfer pricing adjustments, while granting a preliminary disclosure with the customs authorities.

C. Asia Pacific region21

In the Asia Pacific region, the complexity of the transfer pricing-customs interface is magnified by the broad variation in the tax and customs profiles of countries across the region. In the same way that no two countries are the same, tax and customs authorities in two Asia Pacific countries could have entirely different perspectives and motivations for their actions. Likewise, the level of transfer pricing experience of both customs and tax authorities in these countries could vary dramatically, given that the region includes countries that have only very recently adopted OECD-based transfer pricing rules and WTO-based customs rules. It is even fair to say that in some jurisdictions, discussions around the harmonisation of the valuation principles contained in these two regimes have not yet begun.

Nonetheless, the sophistication of the authorities in relation to transfer pricing and customs in at least some developing Asia Pacific countries is rapidly evolving. This part of the article surveys the manner by which the government authorities in a cross-section of Asia Pacific countries handle situations with both transfer pricing and customs considerations, particularly how customs authorities view compensating adjustments, the mechanisms available for companies to stay compliant, and notable policy trends affecting businesses.

These include Australia and New Zealand, developed economies with rich institutional experience in managing the inner political and financial dynamics of these fields, and China and India, rapidly developing countries that have only begun to address the intricacies of the transfer pricing and customs balance. We believe that this mix of countries, albeit not entirely representative of the complex situation in the region, provides an overview of the diversity of approaches in this part of the world.

Australia and New Zealand

In Australia's and New Zealand's more developed economies, there is a relatively high level of mutual trust between the customs authorities and taxpayers when a compensating adjustment is disclosed. This may stem, at least in part, from the two countries' comparatively longer experience in dealing with these issues. Specifically, apart from being members of the OECD (1971 for Australia and 1973 for New Zealand), both are founding members of the WTO (1995) and, prior to that, Contracting Parties to the General Agreement on Tariffs and Trade (1947).

In these countries, processes and frameworks are already in place for companies to approach the customs authorities to disclose any self-assessed liabilities that may arise from a compensating adjustment. Such disclosures are not automatically viewed with suspicion, but rather as an act of good faith on the part of the company to comply and provide the information that is required by legislation and policy administration statements.

To facilitate interaction with customs authorities in relation to transfer pricing, importers have begun to work proactively with customs authorities to establish a range of transfer pricing adjustments that would be acceptable for customs purposes. In general, the importer is then able to reconcile the transfer pricing adjustment impact to its customs value and pay any shortfall of customs duty and other indirect tax. In some cases, refunds may be available for downward pricing adjustments.22

In Australia and New Zealand, customs duty collections are not a principal revenue source; therefore, the political interactions between the customs and the tax authorities focus on adherence to the process and the law, rather than each agency's allocation of collected taxes.

There are no formal connections between APAs and customs rulings in either of the countries. However, the option is available for companies to make formal disclosures or, in the case of Australia, seek a valuation advice ruling from the customs authority in relation to transactions made under the APA to facilitate the disclosure process. APAs have also been used in conjunction with other documents to support (albeit without binding effect) the customs value of imports.

In the event that the tax and customs authorities in these countries are unable to reconcile different interpretations of the products' pricing structure, it would be possible to maintain two distinct prices - one for customs purposes and another for tax purposes.

These positions are expected to remain the same in the foreseeable future. In New Zealand, dual transfer pricing documentation to cover both customs and tax requirements is expected to increase. In Australia, there have been suggestions that the Australia Tax Office (ATO) should ultimately take over revenue collection functions from the customs authority to allow the latter to concentrate on border protection.

China and India

To many developing Asia Pacific countries, the concept of transfer pricing has been introduced largely from the point of view of corporate tax. Although most developing countries are founding members of the WTO (except China, which joined in 2001), a good number of developing countries are not members of the OECD. China and India, for example, do not entirely follow the OECD Guidelines' principles and are at the stage of testing the opposing limits set between the WTO and the OECD.

Compared with the United States or EU, the education of tax authorities and importers in China and India, in relation to the customs implications of related-party trade, remains limited. Therefore, while companies may be more proactive in managing the corporate tax impact of transfer pricing rules, management of customs' requirements has been more reactive. As such, it is not unusual for taxpayers in China and India to be caught unaware as they begin to see the corporate tax benefits established through their transfer pricing polices eroded by customs-related liabilities.

In both China23 and India, the disclosure process in relation to an anticipated post-importation compensating adjustment is not very clearly defined and companies may be averse to approaching the customs authorities because they would be cynical of any price adjustments. In China, the customs authority may require the importer to explain why deficiency duties and penalties should not be assessed on retroactive price adjustments. Similarly, in India, any form of disclosure could result in the allegation of suppression of facts or misdeclaration, which could trigger penal consequences apart from the need to pay any deficiency in duties assessed owing to the compensating adjustment plus corresponding interest.

Although China already has an APA regime, there is still minimal communication between the tax and customs authorities in this regard. Each operates independently of the other and any rulings or APAs only apply within their own jurisdiction. Meanwhile, an APA regime has been introduced in India but as in the case of China, communication between the two authorities is minimal. The Special Valuation Branch (SVB), established in five India customs offices - Bangalore, Chennai, Calcutta, Delhi, and Mumbai - continues to examine related-party transactions under the supervision of Directorate General of Valuation. Currently, the process to bring an issue to the SVB is still initiated by the customs authority, either of its own volition or on representation from the taxpayer. As a consequence, a pre-emptive ruling to resolve an expected issue prior to importation is not yet available.

There is still no clear direction as to how the transfer pricing-customs interface will be more effectively managed in China and India. Notably, the customs and tax authorities are still competing for collections. Considering the relatively high corporate tax rates and customs duties in these countries, this may remain the same in the foreseeable future. In India, a “Joint Working Group” on transfer pricing and customs was established in 2007 to foster more co-operation and collaboration between the customs and tax authorities on these matters. However, discussions around transfer pricing filings still rarely take place with the customs authorities, and are even more infrequently considered.

Common themes across most of Asia

Many MNEs in Asia have been assessed deficiency duties and penalties for failing to declare to the customs authorities the excess profits remitted to their parent entity in accordance with their transfer pricing policy. Such a remittance to the parent entity may take the form of, for example, a debit note for goods purchases or a royalty or a management fee, each potentially creating outstanding customs-related liabilities for the payee.

With tax authorities increasing their focus on transfer pricing audits in Asia, more of these price adjustments are expected to be in the offing for taxpayers. These adjustments, if related to imported goods, would almost certainly have direct customs implications. In fact, retroactive price adjustments have been one of the most common areas of contention in Asia Pacific from a customs perspective.

It is relatively common for the customs authorities in Asia Pacific to monitor historical related-party prices to establish informal benchmarks for the prices of future imports. In the event that declared prices fall below these informal benchmarks, the customs authorities may require further explanations from the importers. Further, it is not uncommon to encounter customs officers that are unfamiliar with the OECD Guidelines. As such, a transfer pricing policy written solely along the lines of the OECD requirements, without consideration of the WTO methods, may not be readily considered by all customs authorities as sufficient to support an importer's declared values.

lll. Conclusion and recommendations

Companies keen on understanding the complex dynamics between tax and customs requirements would do well to consider that not all countries have a disclosure process for informing the customs authorities of compensating adjustments. It appears that the key differentiator between developed and developing countries is the presence of sufficient trust between the authorities and the business community. If the institutions are open to accepting disclosures, then compliance costs and potential penalties could be mitigated and taxpayers may be more proactive in making voluntary disclosures.

The customs authority's role as a contributor to revenue generation and its collection is also a factor that companies should consider in many developing countries. In some countries, such as China and India, it can be seen that duty rates and other taxes related to the importation of many goods still roughly equate to their respective corporate tax rates. Even in developed countries, such as the United States, high penalties may be imposed although the error or omission does not result in revenue loss (e.g., if the imported goods are duty free). Thus, generally, caution must be taken to ensure that the customs values are correctly entered in accordance with the WTO principles and, if warranted, notify the customs authorities beforehand of possible compensating adjustments.

There is some overlap in the tax and customs requirements that MNE's should consider to effectively manage the tax and customs risks inherent with respect to post-importation compensating adjustments:

• Document intercompany transfer pricing policies, prior to importation, to make sure the policies conform to the level of specificity that is contemplated by the customs rules (e.g., the transfer pricing policy should set how the transfer price is to be determined and adjusted, and specifically cover the products for which the value is to be adjusted, etc.)

• Take into account both customs and tax considerations when determining or modifying intercompany transfer pricing policies

• Enhance communication between the tax and customs functions within the organisation

• Explore and participate in administrative programmes that facilitate the timely reporting of adjustments (e.g., reconciliation or voluntary disclosure programmes)

• Integrate customs related-party pricing analysis into the transfer pricing study prepared for income tax purposes

• Include customs authorities in the APA process when appropriate

• Establish, periodically test, and document how the transfer pricing policy satisfies the “customs” arm's length rules


We believe that these suggestions, albeit not entirely representative of the complex situations throughout the world, provide an overview of the diversity of reasonable approaches. Local country customs rules regarding compensating adjustments can vary considerably and, in some countries, are still evolving - as evidenced by a recent policy shift in the United States. Thus, MNEs should keep an eye on new developments and continue to monitor this issue with a global lens.

Luis A. Abad is a managing director in the Trade and Customs Services group of KPMG LLP's Washington National Tax practice, based in the firm's New York office; Alex Capri is a managing director in the Trade & Customs Services practice of KPMG in Houston, serves as the firm's Trade and Customs Leader for the southwest region of the United States, and is the former Trade & Customs Leader for Asia Pacific, where he was located in the Hong Kong office of KPMG in China; Massimo Fabio is the head of the International Trade and Customs practice for KPMG in Italy, based in Rome; and Martina Dubois is a senior associate lawyer in the International Trade and Customs practice of KPMG in Italy, also based in Rome. The authors may be contacted by e-mail at:
Luis A. Abad:
Alex Capri:
Massimo Fabio:
Martina Dubois:

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP or KPMG International.


1 Compensating adjustment may also affect whether the transaction value is acceptable to the customs authorities from an arm's length perspective. However, this article will focus solely on whether a compensating adjustment is compatible with transaction value per se, and, if so, how such adjustments should be reported from a customs valuation standpoint. The differences between customs and tax arm's length rules are a topic for another discussion.

2 A transfer pricing adjustment generally represents an upward or downward adjustment to the prices of related-party transactions, and may be made either by the taxpayer itself or a tax authority. In the event that the transfer pricing adjustment is made by the taxpayer, it may apply prospectively (and only apply to future transactions) or retrospectively (resulting in changes to previous transactions). Alternatively, if the transfer price adjustment is initiated by a tax authority, it will only apply retrospectively. For purposes of this article, “compensating adjustments” refers to retrospective transfer price adjustments, whether made by the taxpayer or tax authority.

3 See19 U.S.C. §1592.

4 There are presently over 150 signatory WTO member countries that have assumed the obligation to implement the GATT Valuation Agreement, and other countries have voluntarily adopted it.

5 Other customs valuation methods are also available under the GATT Valuation Agreement's hierarchy of valuation methods; however, “transaction value” is the preferred method used in the majority of import transactions, and is the focus of this article.

6 SeeCBP Headquarter Rulings (“HQ”) H092448 (May 4, 2010).

7 19 U.S.C. section 1401a(b)(4)(B). Note that a similar provision concerning rebates or price decreases is not contained in the GATT Valuation Agreement.

8 SeeHQ H092448 (May 4, 2010) and HQ H022287 (December 30, 2010); see also HQ 546979 (August 30, 2000) and HQ 548233 (November 7, 2003).

9 HQ H021424 (Feb. 3 2009); HQ 544944 (May 26, 1992); and HQ 543252 (March 30, 1984).

10 Id.

11 HQ 544944 (May 26, 1992).

12 HQ 542701 (April 28, 1982); SeeHQ 543477 (May 1995).

13 HQ 053359 (September 25, 2009); See HQ 544680 (June 26, 1992), HQ 545242 (April 16, 1995) and HQ 547493 (March 14, 2002).

14 The APA process allows taxpayers to reach advance agreement regarding its transfer prices with the competent tax authority in the countries in which it conducts business. Virtually every major trading country has some form of an APA process.

15 SeeHQ 546979 (August 30, 2000) and HQ 548233 (November 7, 2003), providing that any additional duties resulting from upward adjustments must be tendered, but, notably, the ruling makes no mention of duty refunds for potential downward adjustments.

16 Customs Bulletin and Decisions, Vol 46, No. 23, dated May 30, 2012.

17 Article 29 paragraph 1 of the Customs Code. Article 29 also establishes at the following paragraph 2 a) that “In determining whether the transaction value is acceptable for the purposes of paragraph 1, the fact that the buyer and the seller are related shall not in itself be sufficient grounds for regarding the transaction value as unacceptable. Where necessary, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted provided that the relationship did not influence the price. If, in the light of information provided by the declarant or otherwise, the customs authorities have grounds for considering that the relationship influenced the price, they shall communicate their grounds to the declarant and he shall be given a reasonable opportunity to respond. If the declarant so requests, the communication of the grounds shall be in writing.”

18 Article 29 paragraph 2 b) establishes that “In a sale between related persons, the transaction value shall be accepted and the goods valued in accordance with paragraph 1 wherever the declarant demonstrates that such value closely approximates to one of the following occurring at or about the same time:(i) the transaction value in sales, between buyers and sellers who are not related in any particular case, of identical or similar goods for export to the Community;(ii) the customs value of identical or similar goods, as determined under Article 30 (2) (c);(iii) the customs value of identical or similar goods, as determined under Article 30 (2) (d).”

19 Article no. 78 of Community Customs Code established under Regulation no. 2913/92.

20 Doc no. 180/103-6-521 dated February 2012 named “Transfer pricing and customs value.”

21 Parts of this section were taken with permission from an article co-authored by Alex Capri entitled “Division amidst Diversity: The Customs-Transfer Pricing Nexus in Asia,” which appeared in the Vol.15 No. 2 Autumn/Winter 2011 issue of the Asia Pacific Journal of Taxation (APJT) published by Hong Kong Polytechnic University.

22 Refunds are not guaranteed and are granted based on the facts and circumstances of the case.

23 China Customs has implemented a post-importation declaration procedure since late 2009, and may introduce new procedures to allow proactive self-disclosure in the near future. Although the scope and methodology may not be as extensive and detailed as other countries, it is anticipated that these will lay the foundation for the effective handling of compensating adjustments in the future.


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