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TAX CLINIC

When the importer attempted to price adjustments with duty refunds and governments vying to claim a greater
recover duties paid on the adjustment, that some jurisdictions require advance share of the global tax revenue pie. Ac-
customs in Germany denied its claim, notice when policies contain price re- cording to BDO USA LLP’s 2021 Tax
stating that Article 29(1) of the EU’s view clauses. Outlook Survey (April 2021), over 70%
Customs Code refers to transaction of tax executives say their companies’
value for individual goods and not a Customs value planning total tax liability has increased and is
flat-rate adjustment across all products, considerations expected to continue to do so in the next
here, over 1,000 individual shipments. These cases highlight the importance 12 months. Further, the 2020 Global
At trial, the court ultimately found that of interdisciplinary business planning to MNC Tax Complexity Survey (June
flat-rate adjustments were incompatible fully cover total tax liability, including 2021), which surveys 635 tax consultants
with the Customs Code, which requires, indirect taxes such as customs duties, from 110 countries around the world,
in part, the “real economic value” to be excise tax, value-added taxes, etc., which shows that transfer pricing is considered
reported for imported goods. This hold- are often paid at the time of import. the most complex tax issue facing multi-
ing implies that a flat-rate adjustment Businesses can also consider other ways national companies today.
applied across all products for transfer- to legally lower the value of imported Valuations of intangibles for tax pur-
pricing purposes could artificially reduce goods through cost unbundling exercises poses are among the most heavily scru-
the economic value reported for certain that examine key cost elements for tinized transactions that multinationals
products and is not supported under the goods to determine whether they are engage in. If performed improperly,
customs rules. required to be included in customs value. these valuations can lead to significant
But, conversely, in 2012, CBP ac- Businesses may also wish to review income tax adjustments (and penalties),
cepted a transfer-pricing policy for the following areas to better understand which could, in turn, jeopardize any
customs value purposes where the the interdependencies of interna- perceived tax savings associated with an
company applied a standard discount to tional income tax, transfer-pricing, and intangible transfer and valuation.
sales of products from list price within customs-value rules to achieve posi- The transfer of intangibles between
an individual product center, based tive outcomes: related parties is often connected to a
on the normal pricing practices of the ■ Use a multidisciplinary approach broader business restructuring or busi-
industry. In that case, the company to assess current transfer-pricing ness “event.” Through its life cycle, a
organized its products into five product models to manage total tax liability company may frequently enter into a
centers sharing similar characteristics by and required adjustment processes, transaction that qualifies as a business
line. Notably, the list price was set when particularly for customs duties and combination, which is an acquisition of
products were introduced, based on re- other indirect taxes; a business or asset(s) that are capable
search of the market conditions, trends, ■ Evaluate policy and contract of being conducted or managed as a
reports, competing quotes from third documentation from a customs duty business. When this occurs, the acquirer
parties, and what the market would bear. perspective to ensure they reflect is required to prepare a purchase price
Adjustments were proportionate so that customs requirements; allocation (PPA) for financial statement
the gross margin of each product center ■ Consider using APAs or other reporting purposes that allocates the
conformed to the arm’s-length margin available transfer-pricing dispute- purchase price of the acquired company
of the benchmarking study to adequately avoidance tools; and to various assets (including identified in-
compensate the U.S. distributor for its ■ Formally prepare contemporaneous tangibles and goodwill) and liabilities for
efforts. Additionally, adjustments were documentation that fully covers the financial reporting purposes. Subsequent
booked to the cost of goods sold, affect- formula-pricing approach of the to a business event, the acquirer may
ing the value of the imported products. customs rules and comports with the then undergo certain business restruc-
(See HQ H219515 (Oct. 11, 2012).) economic analysis in any transfer- turings, such as a legal entity rationaliza-
Clearly, as exemplified in the rul- pricing studies or APAs. tion exercise, to integrate and simplify its
ings above, no single solution meets the From Anna Zajac, CPA, MBA, Chicago overall tax structure.
needs of every industry or company, What happens when the acquired
but companies should review individual Differences between transfer company intends to migrate intangibles
policies and underlying documentation pricing and financial reporting between related parties as part of its
to verify that they address all relevant valuations restructuring? Would it be appropriate
factors. Also, it should be noted that not Companies today navigate an increas- under U.S. and international transfer-
all customs regimes permit downward ingly complex global tax system, with pricing rules to use a financial statement

16 May 2022 The Tax Adviser