RELATED PARTY PRICING / TRANSFER PRICING: Customs vs. IRS - PowerPoint PPT Presentation

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RELATED PARTY PRICING / TRANSFER PRICING: Customs vs. IRS

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Title: RELATED PARTY PRICING / TRANSFER PRICING: Customs vs. IRS


1
RELATED PARTY PRICING / TRANSFER PRICINGCustoms
vs. IRS
  • Presented to the NYSSCPA
  • International Taxation Committee
  • June 17, 2008

2
Alan Goggins
  • Barnes, Richardson Colburn475 Park Avenue
    South
  • New York, NY 10016
  • 212-725-0200 Ext 118
  • agoggins_at_barnesrichardson.com

3
Both Customs (or CBP) and the IRS can scrutinize
related party prices to determine if such prices
are arms length
  • The tests are similar in theory but drastically
    different in the details

4
Why is this important?
  • Any sale from an overseas exporter to a related
    U.S. importer implicates both the CBP and the
    IRS.
  • An overseas version of the IRS in the country of
    exportation may also be involved

5
Why is this important?
  • CBP has recently announced its intention to step
    up enforcement in this area
  • Having an APA in place is no longer sufficient to
    convince CBP

6
Goals for today
  • Compare methods employed by CBP and IRS
  • Determine what types of documentation can satisfy
    both

7
Relationship Test
  • Control 5 of voting stock threshold
  • Parent subsidiary and subsidiaries of
    subsidiaries
  • Sister companies under common control of a parent
    company

8
CBP Valuation Issues
  • Value for CBP purposes is almost always
    determined under the transaction value method
    19 U.S.C. 1401a
  • Statute requires use of transaction value if
    applicable
  • Transaction value price paid or payable when
    sold for export to the U.S.

9
If parties are related, CBP can question
acceptability of prices
  • Circumstances of sales test 3 variations
  • Test values test 3 variations
  • Only need 1 to pass, and any 1 will do
  • Pass / Fail unlike IRS, CBP cannot adjust
    prices must accept or reject
  • If rejected must use alternative valuation
    method

10
First Sale Appraisement
  • Method of avoiding CBP inquiry (and saving duty)
  • If unrelated factory sells to exporter, may be
    able to use factory or first sale prices instead
    of prices from exporter to related importer
  • No duty paid on exporters margin

11
First Sale Appraisement
  • Transaction between factory and exporter must be
    a sale
  • Must be for exportation to the U.S. factory
    must know the goods are destined to the U.S.
  • Labeling, shipping instructions, separate P.O.
    for U.S. market goods

12
Circumstances of Sale Test
  • The analysis reveals that the relationship
    between the buyer and the seller did not
    influence the prices paid

13
Circumstance of Sales Test Variation 1
  • Related party prices settled in a manner
    consistent with the normal prices practices in
    the industry
  • Example commodities prices tied to public
    market quotations
  • Documentation public market quotes

14
Circumstance of Sales Test Variation 2
  • Related party prices settled consistent with the
    way the seller settles prices to unrelated buyers
  • Example exporter sells same merchandise to
    unrelated buyers in U.S. (preferred) or in third
    countries at similar prices
  • Same pricing formula - related unrelated

15
Circumstance of Sales Test Variation 2
(Continued)
  • Same level of trade
  • compare sales to related and unrelated
    distributors
  • OR related and unrelated wholesalers
  • OR related and unrelated retailers
  • Otherwise, make a level of trade adjustment
  • Documentation Comparative analysis converting
    prices to a common currency plus the invoices

16
Circumstance of Sales Test Variation 3
  • Related party price adequate to ensure recovery
    of all the exporters costs plus a profit
    overall profit in sales of the same class or kind
    of merchandise
  • Cost of production analysis
  • Business segment or product line profit rather
    than overall profit

17
Circumstance of Sales Test Variation 3
(Continued)
  • Cost of production analysis required for every
    product imported
  • Documentation a mountain of paper required
    invoices, ledgers, journals, cost accounting
    records, etc.

18
Test Values
  • Related party prices are acceptable to CBP if
    such prices closely approximate a test value or
    an appraised value if one of the secondary bases
    of valuation were used
  • Transaction value of identical or similar
    merchandise, deductive value, computed value

19
Test Values Transaction Value Identical or
Similar Goods
  • Transaction value identical goods same exporter
    sells same goods to unrelated buyers in U.S. (?
    how is this different from COS Variation 2?)
  • Transaction value similar goods ask your
    competitor what he pays for imported goods and
    ask for his customs entries (do not hold your
    breath)

20
Test Values Deductive Value
  • Start with importers most common U.S. resale
    price and work your way back to a proxy for the
    purchase (import) price
  • Deduct NDCs
  • Deduct importers SGA
  • Deduct importers profits in U.S.
  • Try to narrow focus to product line costs

21
Test Values Computed Value
  • This is also an exporters cost of production
    analysis
  • ? How is this different from COS Variation 3?

22
Test Values Roadblock
  • CBP policy will not accept any test values
    unless the secondary appraisement method was
    actually used in a previous importation

23
Test Values Roadblock
  • Statute requires use of transaction value first
    only get to secondary methods if transaction
    value rejected
  • By then, per CBP, too late to use test values
  • CBP policy erases test values from the statute

24
IRS Transfer Pricing Tests
  • Unlike CBP, IRS can propose adjustments to prices
  • IRS also requires taxpayer to establish that the
    method used provides best and most reliable
    measure
  • Profit-based methods
  • Transaction-based methods

25
IRS Transfer Pricing Tests Profit-Based Methods
  • Comparable profits
  • Comparable profit split
  • Residual profit split
  • Profit comparisons between related parties or
    between related parties and competitors
  • None acceptable to CBP because must have a
    customs value for each imported article

26
IRS Transfer Pricing Tests Transaction-Based
Methods
  • Comparable uncontrolled price (CUP)
  • Compares related party prices to prices in sales
    to unrelated parties
  • Similar to COS Variation 2 and can be met with
    the same type of documentation (comparative
    analysis with invoices and prices converted to a
    common currency)
  • Here, CBP would likely accept the APA if given an
    explanation

27
IRS Transfer Pricing Tests Transaction-Based
Methods
  • Resale price method used for a reseller
  • Compares gross margin in related party sales to
    gross margin in unrelated party sales
  • Exporter must have sales to related and unrelated
    parties
  • Would need substantial explanation to demonstrate
    an APA here also meets CBP possibly COS
    Variation 2

28
IRS Transfer Pricing Tests Transaction-Based
Methods
  • Cost plus method used for a manufacturer and
    compares gross margins in sales to related and
    unrelated parties
  • Somewhat similar to COS variation 3 or computed
    value mountain of documents
  • Would again require substantial explanation to
    demonstrate APA here also met CBP

29
CBP vs. IRS
  • APA or transfer pricing study alone will not
    satisfy CBP
  • Must also demonstrate how a CBP method is met
  • Like an APA, importer can apply for a CBP ruling
    in advance

30
CBP vs. IRS
  • The only method that appears to readily satisfy
    both CBP and IRS is Circumstances of Sales
    Variation 2 / CUP test

31
CBP vs. IRS
  • 26 U.S.C. 1059A
  • Inventory costs of imported merchandise for a
    related party importer taken into account for IRS
    purposes must not exceed value declared to CBP
  • Does not apply to first sale method
  • Example failure to declare an assist results in
    double penalty CBP underpaid duty and IRS
    disallows expense deduction

32
Concluding Thoughts
  • Companies spend significant time and resources
    preparing for the day the IRS knocks on the door
  • Comparable effort not made in preparing for the
    day CBP questions related prices
  • CBP has served notice be prepared!

33
Questions?
  • Alan Goggins, Esq.
  • Barnes, Richardson Colburn
  • 475 Park Avenue South
  • New York, NY 10016
  • 212-725-0200 Ext 118
  • agoggins_at_barnesrichardson.com
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