The customs value of imported goods is a fundamental factor in determining the price at which they are bought and sold and the profit which they realise. Companies which conclude contracts with their suppliers or customers or set transfer prices without regard to customs values risk incurring either excessive duty liabilities or penalties. The key to customs-effective pricing is to ensure that the total consideration for imported goods is kept to a minimum consistent with both commercial objectives and the requirements of valuation regulations, bearing in mind that:
- Additional payments to the supplier of imported goods (such as royalties, licence fees, R&D and design, tooling and engineering costs) may attract duty if not suitably structured;
- Some other payments can be excluded or deducted from the price of imported goods, thereby reducing their duty liability; and
- In certain circumstances, the actual price will not constitute an acceptable basis for paying duty and an alternative method of valuation must, therefore, be found.
For multi-national companies, there is a potential conflict between the optimum customs and tax treatment of transfer prices. Unrealistic transfer prices can result in excessive duty liabilities and partial disallowances for tax purposes whilst prices which are acceptable to the revenue authority may not meet the minimum level for customs purposes. Injudicious year-end and other retrospective price adjustments can also create customs problems and may even invalidate the original transfer prices.
- Structure your international transactions to pay the minimum duty;
- Draw-up customs effective agreements with foreign suppliers and customers; and
- Determine the optimum transfer pricing arrangements for both customs and corporation tax purposes.