Page 232 - TaxAdviser_2022

TAX CLINIC

refund and being eligible for tax treaty
benefits by, for example, timing the One important issue often overlooked is
payment of the dividends (or the claim
that customs value requirements differ from
of the shareholder’s refund) to years
in which treaty benefits may not be as
important. However, this may prove those of the income tax authorities and thus
difficult to predict and could become may sometimes produce different results or
burdensome from an administrative and
commercial perspective. Similarly, while require additional planning and analysis.
equity interests of Maltese corporations
that take advantage of the Maltese
imputation system could fall within the economic events like the COVID-19 authorities rarely question such adjust-
definition of a financing transaction, the pandemic, addressing specific market ments when they result in price increases
remaining criteria required to fall afoul competitiveness factors, and/or reconcil- and additional duty payments to the
of the anti-conduit rules may not always ing expenses when transaction billing is government.)
be met. based on budgeted costs for goods and In the United States, prices set
As is highlighted by these two services rather than actual costs. Still, according to an objective fixed formula
potential issues, businesses should care- one important issue often overlooked agreed upon prior to importation
fully assess the potential advantages by MNCs is that customs value require- satisfy this rule. But this is true only
and issues to manage before deciding ments differ from those of the income when the later adjusted price is based
whether to use Malta as part of their tax authorities and thus may sometimes on some event or occurrence over
worldwide operations. produce different results or require ad- which neither the seller nor the buyer
From Sebastian Biddlecombe, ACA, ditional planning and analysis. This is has any control. For a transfer-pricing
CTA, E.A., and Anke Krueger, LL.M., particularly noticeable when comparing policy to be considered a formula, it
E.A., New York documentation used for tax planning must be prepared under the Sec. 482
to the more granular criterion used by requirements for recognizing income
Customs duty refunds on customs authorities to assess and collect for transactions between entities
transfer-pricing adjustments duties. This discussion explores key con- that share a common ownership.
Multinational companies (MNCs) often siderations to keep in mind for claiming Furthermore, the United States and
make periodic (including year-end) customs duty refunds on transfer- most other countries require that MNCs
transfer-price adjustments to address pricing adjustments. prepare documentation supporting
target profit margins and other con- their transfer-pricing policies and the
siderations pursuant to intercompany An objective fixed formula must allocation of taxable income among
agreements and to comply with global be in place to value goods prior MNCs that results from that policy.
income tax requirements. But whether to importation On its own, however, documentation
claimed transfer-pricing adjustments in- For customs purposes, most import prepared for transfer-pricing purposes
volving tangible goods can be supported transactions globally are entered under may not always be enough to support a
under the World Trade Organization the “transaction value” method, mean- customs claim.
Agreement on Implementation of ing the price actually paid or payable In U.S. Customs and Border Protec-
Article VII of the General Agreement for goods. To use transaction value, tion (CBP) Headquarters Ruling Letter
on Tariffs and Trade 1994 (the “WTO customs rules require the formula for (HQ) H304841 (April 23, 2021), CBP
Agreement,” based on the 1979 GATT valuing goods to be fixed at the time of took issue with supplier agreement
Valuation Agreement) is an important importation. When the invoiced price language that stated the seller had the
consideration for the C-suite, particu- used to enter goods changes because of “right” to adjust the price (to achieve
larly given the increasing jolt of customs post-importation adjustment true-up the required markup), but the policy did
duties on companies’ financial state- processes, customs authorities naturally not say how the adjustments would be
ments (e.g., cash and profits). question whether the goods actually made. In that case, CBP determined that
While many reasons exist to make qualify for transaction value and whether the language gave the seller the “discre-
transfer-pricing adjustments, some of the adjustments, when they result in tion” to make adjustments but did not
the more common ones include adjust- a price reduction, may be applied to require it. Additionally, the agreement
ing profits to compensate for unexpected recover duties paid. (Naturally, customs did not detail how adjustments would

14 May 2022 The Tax Adviser