Tax & Accounting Blog

Transfer Pricing and Customs Valuations: Will Your Adjustment Be Recognized?

Aumentum, Best Practices, Blog, Compliance, Global Tax Compliance, ONESOURCE, ONESOURCE Transfer Pricing, VAT Tax Rates, VAT-GST Management June 13, 2013

What do you do when you need to make a transfer pricing adjustment, but the goods were delivered to the buyer in a prior tax year?  From a financial reporting and tax return perspective, the company within the local jurisdiction may or may not respect the adjustment.  But is that the end of the issue? Many times, the answer may be no because there could be customs duties and VAT/GST tax consequences.

If the adjustment is an increase in the price of the goods, then additional customs duties and VAT/GST may be due on the value of the adjustment.  In addition to the increased tariffs and taxes, the possibility of penalties from each of these areas is also a real possibility.  And to make the situation more interesting, there exists the possibility that the adjustment may be recognized for customs and VAT/GST, but not for finance and tax purposes.  In effect, you may be whip sawed by having overstated income within that jurisdiction, without benefit from the adjustment originating jurisdiction.

The corollary is possible where there is a need for a downward adjustment to the price after the product has landed and the custom duties and VAT/GST have been filed.  At that point, the company then needs to prove to the satisfaction of the authorities that the tax has been overpaid and that a refund is due to the company.  Of course, the same possibility for being whipsawed can occur.

To properly avoid this scenario, real time monitoring of the transfer pricing activity is crucial.  When accomplished in a timely manner, these adjustments can be made prior to any over/under payment of these taxes.  ONESOURCE Operational Transfer Pricing is an effective means to obviate this issue.