WCO issued the Use of Transfer Pricing Documentation When Examining Related Party Transactions under Article 1.2 (a) of the Agreement (hereinafter referred to as Case Study 14.2) end of October 2017. Following the issue of Case Study 14.1 in April 2016, this is the second case study on transfer pricing and customs valuation issued by WCO, which draws extensive attention from the public. It is worth noting that this is the first time WCO has adopted a case from the PRC Customs and this particular “China Solution” has thus become part of the global customs valuation guidelines. It is a milestone which shows the PRC Customs’ active participation in formulating global customs valuation guidelines.
Case Study 14.2 is significant to global customs valuation because it proposes to use transfer pricing documentation as the basis of customs valuation by comparing the gross margins of comparable companies to determine if the value of transactions with related parties is at arm’s length. In addition to the point raised in Case Study 14.1 of using Advance Pricing Agreement (APA) transfer pricing analysis report as the basis to examine whether the transactions with related parties are at arm’s length through study and analysis on Transactional Net Margin Method (TNMM) and operation expenses, Case Study 14.2 further enhances the reference value of transfer pricing documentation in customs valuation.
Case Study 14.2, ICO, located in country I, is the distributor of XCO of country X. ICO is the sole agency of the luxury bags sold by XCO in country I. XCO does not sell identical or similar luxury bags to unrelated buyers in country I. Thus, all luxury bags imported into country I by ICOare purchased from XCO. According to ICO’s transfer pricing policy, the import price of all luxury bags was determined using Resale Price Method. ICO calculated the import price of luxury bags based on the resale price in country I and the targeted gross margin for the next year recommended by XCO, with the deduction of customs duties. The transfer pricing report indicated that the inter-quartile range of gross margins earned by the 8 selected comparable companies in 2012 was between 35% and 46%, with a median of 43 %. Therefore, gross margin at 64% earned by ICO did not fall within the inter-quartile range. When Customs of country I conducted valuation audit, they regarded that the import prices of ICO have been affected by special relationships and do not meet arm’s length requirements.
Main facts of Case Study 14.2 leading to the above conclusion:
In recent years, transfer pricing of multinational companies has become a new challenge for customs authorities in many countries. It also becomes a hot topic when WCO conducts technical research on valuation matters. WCO issued the WCO Guide to Customs Valuation and Transfer Pricing in June 2015, followed by Case Study 14.1 in April 2016 and Case Study 14.2 in October 2017. The issuance of the documents reflects the attention of WCO Technical Committee on transfer pricing and indicates that related party transactions have drawn the attention of all countries (especially emerging countries such as China).
This Case study, conducted and drafted by the PRC Technical Committee on Customs Valuation (international team), aims to explain how the Customs applies transfer pricing documentation and other relevant information to ascertain whether the prices paid or payable of imported goods have been influenced by any special relationship between the buyers and the sellers (based on Article 1.2(a) of the Agreement).
With the Customs paying increasing attention to transfer pricing arrangements, we suggested that enterprises should consider doing the following: