Transfer pricing, customs valuations, and trying to understand the ways in which they impact one another can be an arduous process, especially when determining the effects they may have on a multinational enterprise’s (MNE) tariff liability. With the recent implementation of high-impact tariffs, such as Section 232’s tariff on steel and aluminum imports, and §301’s tariffs on a wide variety of imports from China, MNEs with U.S. operations that engage in significant cross-border activities may see an increase in the cost of doing business.
While both transfer pricing and customs look to assign value to goods and services that take place across multiple tax jurisdictions, they are overseen by separate authorities. In the U.S., transfer pricing is enforced by the IRS and is governed by Internal Revenue Code (IRC) §482 and the Treasury Regulations promulgated thereunder. Customs is enforced by the U.S. Customs and Border Protection (CBP) and is governed by Title 19 of the United States Code and the underlying regulations. Another difference between transfer pricing and customs is that transfer pricing seeks to assign appropriate values to transactions involving related parties for tax and accounting purposes, while custom valuations impact imports and/or exports regardless of the relationship between the buyer and seller. Despite their differences, they both aim to make sure that related parties are interacting in a way that is deemed consistent with how unrelated parties would act in the open market.
This concept is codified in IRC §1059A, which states transfer pricing values and customs values should align. Section 1059A states:
“In general. If any property is imported into the United States in a transaction (directly or indirectly) between related persons (within the meaning of [IRC] Section 482), the amount of any costs–
- Which are taken into account in computing the basis or inventory cost of such property by the purchase, and
- Which are also taken into account in computing the customs value of such property,
Shall not, for purposes of computing such basis or inventory cost for purposes of this chapter, be greater than the amount of such costs taken into account in computing such customs value.”
Pursuant to IRC §1059A, tax authorities’ transfer pricing economists may be more likely to question the arm’s-length nature of an MNE’s related party transaction(s) if there is evidence that may indicate the goods were priced differently for customs purposes. Because of the relationship between customs valuation and tax valuation and considering the enactment of §6103(l)(14) that allows for the sharing of confidential tax return information, and the advent of joint examinations by the IRS and CBP, tax and customs determinations and related examinations will become an area of increased scrutiny. This is especially likely in the current tariff environment and with the possibility of additional tariffs in the future.
Therefore, now is an opportune time for MNEs to gauge existing transfer pricing policies and customs strategies, and understand and model their interactions. Such analysis can help develop more efficient and cost-effective transfer pricing and customs results.
If you have any questions or need assistance, please contact a professional at Forvis Mazars.