Page 233 - TaxAdviser_2022

transfer prices are initially determined
or how adjustments are allocated. Ad-
ditionally, the comparable companies
used in the studies were distributors of
products outside the industry, so CBP
questioned whether it was actually rep-
resentative of an arm’s-length range for
the product at issue.
In scenarios where companies sell
more than one product, care should be
used to obtain company benchmarks for
each relevant product.
be handled, so the claimed adjustments of the circumstances of the sale indicates
were denied. that the relationship did not influence Transfer-pricing policies must be
In HQ H157795 (June 29, 2015), the price paid. To this end, benchmark- implemented at the product level
CBP determined that an intercompany ing studies of companies with similar Companies often focus on the bottom-
agreement based on multiple transfer- assets, risks, and functions are often line results when implementing pricing
pricing studies prepared by independent used to determine the appropriate com- agreements (especially the targeted
accounting firms did not meet the re- pensation range for the services to be profit margin) but often struggle with
quirement for a pricing formula because performed. Because customs duties are product-level nuances. One reason
neither the agreement nor the studies assessed at the product level, transfer- could be that income tax rules focus on
specified how adjustments would be pricing benchmarking studies consisting enterprise operating results and not on
made. Additionally, arm’s-length profit of companies chosen based on risk product-level profits. But when support-
benchmarks used blended company and function will not be acceptable for ing customs value (particularly with re-
comparables for services provided in customs value purposes if they do not spect to decreased values) more upfront
connection with aircraft and spare parts also include companies that manufacture planning for product profitability will be
sales but did not provide operating mar- or distribute the “same class or kind of necessary before downward price adjust-
gins for the respective services and sales. merchandise” as the importer. ments can result in duty refunds.
Customs did not find the blended mar- Moreover, the transfer-pricing policy As an example, in 2017, the Court
gins helpful because the agency could must specify how the transfer price and of Justice of the European Union ruled
not ascertain the arm’s-length margin for any adjustments are determined with against importer Hamamatsu Photonics
the imported spare parts. respect to “all products” covered for Deutschland’s claimed adjustments
Clearly, the requirement for a fixed which the value is to be adjusted. As an to customs value that were based on
formula, then, is that policies and example, tax benchmarking studies alone its intercompany agreement for goods
supporting documentation must dem- fall short of this requirement because the under an advance pricing agreement
onstrate how prices are determined at purpose of the report is to establish an (APA) concluded with the German
the product level and when and how arm’s-length profit range for all goods tax authorities (Hamamatsu Photonics
adjustments will be applied to result and services for income tax purposes, Deutschland GmbH v. Hauptzollamt
in successful customs duty refund whereas the specificity of a customs for- München, No. C-529/16 (E.C.J.
claims. Additionally, adjustments must mula requirement contemplates a busi- 12/20/17)). Pursuant to the APA, the
relate to factors over which neither the ness policy or agreement that targets a company performed regular checks to
buyer nor the seller has any control specific gross or operating profit margin verify conformity of actual profit results
after importation. for specific products (typically, for the with the arm’s-length targeted margins
manufacturer and not the distributor).
in the APA. During the period at issue,
PHOTO BY ASIANDELIGHT/ISTOCK benchmarks must target HQ H157795 (June 29, 2015), in which below the arm’s-length range in the
Arm’s-length pricing
Another example can be found in
the importer’s operating margin fell
comparable products for
CBP stated that transfer-pricing studies
APA, and a compensating credit was
customs purposes
subsequently received for €3.8 million,
serve as evidence that transfer-pricing
It should be noted that transaction value
policies are representative of arm’s-
which indirectly lowered the customs
value of the merchandise during the
length transactions, but simply compar-
for intercompany sales is an acceptable
basis of appraisement if an examination
www.thetaxadviser.com ing profit margins does not explain how period of adjustment. May 2022 15