Over the past 20 years ‘global trade’ has come to mean trade between related entities of large, multinational corporations. These corporations often have complicated tax structures that allow them to create favourable tax positions in the markets in which they operate. To avoid being seen as engaging in ‘international profit shifting’, companies must adhere to Australia’s transfer pricing rules. Tax authorities in OECD countries around the globe, including the Australian Taxation Office (ATO) require that companies price their related party international dealings according to what truly independent parties would have done in the same situation. In order to remain compliant with the tax legislation in each of their markets, companies must demonstrate that they are trading as if they were unrelated entities and therefore paying adequate tax to revenue authorities.
How does transfer pricing affect imports?
It is common that multinationals either implement an internal transfer pricing policy or formally enter into an agreement with the tax office of a particular country (referred to as a Unilateral Advanced Pricing Agreement or unilateral APA) into which they import or an agreement with the tax authorities in both the country in which they are headquartered and the country into which they import (a Bilateral APA). This strategy allows multinationals to take advantage of favourable tax treatment while operating within the bounds of tax legislation. The APA or TP policy commonly requires that a certain percentage of taxable profit be made in one or more countries to comply with tax obligations. In Australia, and most OECD countries, an APA is sufficient to provide the tax authority (ATO) with certainty that an adequate amount of tax is being paid by the company in that tax jurisdiction. However, an APA is not sufficient to provide certainty to Customs authorities that the correct amount of Customs duty has been paid on imported goods.
The reason for this disconnect between the ATO and Customs is that transfer pricing is analysed on an aggregate basis, whereas the customs value of the good is analysed on a transaction by transaction basis. In other words, Customs does not accept that a company’s prices are at arm’s length simply based on the fact that an importer has a transfer pricing policy or APA in place. The importer must demonstrate that the prices they are charged by their related entity for a particular product in a particular transaction are at arm’s length and that an unrelated entity would be paying a very similar price. If this cannot be demonstrated, Customs may take the view that the relationship of these entities is affecting the price and therefore the invoice price is deemed not acceptable for Customs purposes.
In fact, according to the Practice Statement released by the Australian Customs and Border Protection Service in 2009 (PS2009/21), Customs will regard the invoice price as having been affected by the relationship unless the importer can demonstrate otherwise. In this Practice Statement, Customs encourages importers to apply for a Valuation Advice (VA) to confirm that the methodology used to calculate the prices on the commercial invoice is acceptable for Customs Valuation purposes, i.e. that the prices are at arm’s length. This recommendation stands even where no duties are payable as GST is also assessed on the customs value of the imported goods. A successful VA will establish that either:
1.the company’s goods are priced consistent with the normal pricing practices of the industry;
2.goods are sold to related buyers as if the parties were unrelated;
3.the prices of the goods are adequate to ensure the recovery of all costs plus an acceptable profit.
The evidence Customs may require to substantiate an arm’s length price is listed in PS2009/21 and may include:
•Transfer Pricing documentation;
•A corporate organizational structure;
•Agreements for the distribution of goods between the parties;
•Copies of debit/credit adjustment notes;
•A statement describing the relationship between the parties;
•Price lists for imported goods;
•Evidence of prices charged to unrelated buyers;
Preparing a Valuation Advice (VA) Application to Customs can be quite involved and Customs may have questions or require more detailed information. Preparing a submission that is as complete as possible with solid evidence to demonstrate the arm’s length nature of the transaction is very important, particularly where the submission is seeking Customs’ approval for past pricing practices. Once approved, a VA from Customs is valid for 5 years, so long as the facts on which the determination was made remain consistent. If significant changes to the way the imported goods are valued or the way the business operates have occurred, such as changes to the pricing policy, granting of new APAs, changes to the supply chain or operational structure of the company, the VA should be reconfirmed with Customs. Where TP adjustments are made annually, the EBIT range should also be reviewed to ensure the adjustment is being made within the parameters stated in the VA.
Where Customs determines that your company is not eligible to use the invoice price as your customs value, an alternate method of valuation may be considered. In some cases, using an alternate method of valuation can lead to cost savings for an importer. Companies wishing to use an alternate method of valuation for their imports should also have their reasoning and formula confirmed by Customs for certainty through applying for a VA.
Is your company entitled to a duty refund?
In Australia, identifying an acceptable Customs value is not only a risk management necessity; it can also translate to duty refunds.
As a result of the tax positions of the Australian entity in a corporate group, compensating adjustments may have to be made to ensure that the company is operating within the EBIT range agreed to in the internal transfer pricing policy or a formal APA. Often, the adjustment is made retrospectively and the end of the financial year. The adjustment may be for the current year, or may affect several financial years in arrears.
Where the retrospective adjustment is made against the COGS, this means that the value of the goods at the time of importation was incorrect. With the retrospective adjustment to COGS, the original import value becomes either too high or too low, and therefore duties and GST paid against those imported goods are either payable or due to be refunded. In either case, an analysis of past import transactions should be conducted and duties adjusted accordingly to remain in compliance with Customs regulations. This analysis can be done through obtaining and analysing your company’s import data to isolate the imports affected by the compensating adjustment and applying the adjustment to these imports.
In the case of an downwards adjustment (e.g. a credit note), the Australian entity may be able to obtain a refund of duty and GST paid on past imports. Note that an actual transfer of funds must have occurred. The statute of limitations for these refunds is four years. It is recommended that a VA is obtained from Customs to confirm the impact on the customs values prior to filing a request for refunds.
How are refunds processed?
Once the refund opportunity is confirmed, detailed instructions can be prepared and sent to your customs broker.
The instructions are used for amending and re-lodging past import declarations and processing the refunds through the Integrated Cargo System, a program used to declare your import transactions to Customs. The import declarations will be amended and the resulting refund remanded to your company’s bank account. You will then be responsible for adjusting the GST amount due on your next BAS. After refunds have been processed, your company’s data is then requested a second time from Customs to verify the affected declarations and refund amount, which can then be compared to your bank statement. A final report can then be generated to document the project for future reference.
Other Cost Reduction Opportunities
•Identifying savings opportunities though examining your company’s import data
•Exporting dutiable goods to the U.S. or U.K.?- Learn about how the First Sale rule can help you lower your costs.
•Importing goods not ‘made in Australia’? Learn how to ask the Australian Government for permission to import your otherwise dutiable goods duty free.
For more information, contact me at +61 421 506 095 or eva@internationaltradeadvisors.com.au
Copyright (c) 2011 International Trade Advisors Pty Ltd. All rights reserved.
It is common that multinationals either implement an internal transfer pricing policy or formally enter into an agreement with the tax office of a particular country (referred to as a Unilateral Advanced Pricing Agreement or unilateral APA) into which they import or an agreement with the tax authorities in both the country in which they are headquartered and the country into which they import (a Bilateral APA). This strategy allows multinationals to take advantage of favourable tax treatment while operating within the bounds of tax legislation. The APA or TP policy commonly requires that a certain percentage of taxable profit be made in one or more countries to comply with tax obligations. In Australia, and most OECD countries, an APA is sufficient to provide the tax authority (ATO) with certainty that an adequate amount of tax is being paid by the company in that tax jurisdiction. However, an APA is not sufficient to provide certainty to Customs authorities that the correct amount of Customs duty has been paid on imported goods.
The reason for this disconnect between the ATO and Customs is that transfer pricing is analysed on an aggregate basis, whereas the customs value of the good is analysed on a transaction by transaction basis. In other words, Customs does not accept that a company’s prices are at arm’s length simply based on the fact that an importer has a transfer pricing policy or APA in place. The importer must demonstrate that the prices they are charged by their related entity for a particular product in a particular transaction are at arm’s length and that an unrelated entity would be paying a very similar price. If this cannot be demonstrated, Customs may take the view that the relationship of these entities is affecting the price and therefore the invoice price is deemed not acceptable for Customs purposes.
In fact, according to the Practice Statement released by the Australian Customs and Border Protection Service in 2009 (PS2009/21), Customs will regard the invoice price as having been affected by the relationship unless the importer can demonstrate otherwise. In this Practice Statement, Customs encourages importers to apply for a Valuation Advice (VA) to confirm that the methodology used to calculate the prices on the commercial invoice is acceptable for Customs Valuation purposes, i.e. that the prices are at arm’s length. This recommendation stands even where no duties are payable as GST is also assessed on the customs value of the imported goods. A successful VA will establish that either:
1.the company’s goods are priced consistent with the normal pricing practices of the industry;
2.goods are sold to related buyers as if the parties were unrelated;
3.the prices of the goods are adequate to ensure the recovery of all costs plus an acceptable profit.
The evidence Customs may require to substantiate an arm’s length price is listed in PS2009/21 and may include:
Preparing a Valuation Advice (VA) Application to Customs can be quite involved and Customs may have questions or require more detailed information. Preparing a submission that is as complete as possible with solid evidence to demonstrate the arm’s length nature of the transaction is very important, particularly where the submission is seeking Customs’ approval for past pricing practices. Once approved, a VA from Customs is valid for 5 years, so long as the facts on which the determination was made remain consistent. If significant changes to the way the imported goods are valued or the way the business operates have occurred, such as changes to the pricing policy, granting of new APAs, changes to the supply chain or operational structure of the company, the VA should be reconfirmed with Customs. Where TP adjustments are made annually, the EBIT range should also be reviewed to ensure the adjustment is being made within the parameters stated in the VA.
Where Customs determines that your company is not eligible to use the invoice price as your customs value, an alternate method of valuation may be considered. In some cases, using an alternate method of valuation can lead to cost savings for an importer. Companies wishing to use an alternate method of valuation for their imports should also have their reasoning and formula confirmed by Customs for certainty through applying for a VA.
Is your company entitled to a duty refund?
In Australia, identifying an acceptable Customs value is not only a risk management necessity; it can also translate to duty refunds.
As a result of the tax positions of the Australian entity in a corporate group, compensating adjustments may have to be made to ensure that the company is operating within the EBIT range agreed to in the internal transfer pricing policy or a formal APA. Often, the adjustment is made retrospectively and the end of the financial year. The adjustment may be for the current year, or may affect several financial years in arrears.
Where the retrospective adjustment is made against the COGS, this means that the value of the goods at the time of importation was incorrect. With the retrospective adjustment to COGS, the original import value becomes either too high or too low, and therefore duties and GST paid against those imported goods are either payable or due to be refunded. In either case, an analysis of past import transactions should be conducted and duties adjusted accordingly to remain in compliance with Customs regulations. This analysis can be done through obtaining and analysing your company’s import data to isolate the imports affected by the compensating adjustment and applying the adjustment to these imports.
In the case of an downwards adjustment (e.g. a credit note), the Australian entity may be able to obtain a refund of duty and GST paid on past imports. Note that an actual transfer of funds must have occurred. The statute of limitations for these refunds is four years. It is recommended that a VA is obtained from Customs to confirm the impact on the customs values prior to filing a request for refunds.
How are refunds processed?
Once the refund opportunity is confirmed, detailed instructions can be prepared and sent to your customs broker.
The instructions are used for amending and re-lodging past import declarations and processing the refunds through the Integrated Cargo System, a program used to declare your import transactions to Customs. The import declarations will be amended and the resulting refund remanded to your company’s bank account. You will then be responsible for adjusting the GST amount due on your next BAS. After refunds have been processed, your company’s data is then requested a second time from Customs to verify the affected declarations and refund amount, which can then be compared to your bank statement. A final report can then be generated to document the project for future reference.
Other Cost Reduction Opportunities