Southfield, Mich.—October 18, 2018—Although trade deficits, unfair trading practices and national security considerations have all been referenced as a rationale for recent tariff policies and higher duties, Clayton & McKervey, an international certified public accounting and business advisory firm located in metro Detroit, finds that many companies fear substantial cost increases in their well-planned supply chains as a result. At the same time, multinational companies have an urgent need to manage their transfer pricing tax audit risk in the United States and elsewhere.
According to Alex Martin, a principal at Clayton & McKervey who leads the firm’s transfer pricing practice, U.S. Customs and Border Patrol (customs) and the IRS, along with other tax authorities, have clashing incentives when assessing the transfer prices of goods—creating an import/export dilemma for companies in managing cross-border pricing.
“Unfortunately, tax authorities and customs may not have a consistent auditing valuation practices for goods, and companies can be whipsawed in the process,” Martin said. “In other words, a customs audit could result in an increase in dutiable value, while a transfer pricing auditor would lower inter-company Cost of Goods Sold (COGS) to reach a higher taxable income result.”
In the U.S., taxpayers may not use an inventory cost that is higher than the cost charged for customs purposes under §1059A, so one seemingly straightforward answer to lowering the customs dutiable value would be to reduce the dutiable value of imported goods while increasing royalties or charging higher service fees. However, U.S. Customs Regulations require that importers include the cost of royalties or license fees that are a condition of a sale when calculating the dutiable value, among other specified costs.
“The legal form of a royalty transaction and inter-company pricing policies in place may be an important consideration when calculating dutiable values,” Martin said. “For instance, a customs ruling issued in 2014 (HQ H242894) established that the amounts paid by an automotive importer to be the exclusive distributor of branded automobile parts in the U.S. market are excluded from the dutiable value of imported goods.”
Even though customs rulings are subject to change and can be highly facts-and-circumstances driven, Martin says that there are opportunities for companies to save, and advises multinationals to assess and address the form, valuation approach and the results of inter-company transactions from both a customs and income tax perspective. Increasing customs duty rates have driven the need for more sophisticated transfer pricing and customs planning. Some companies have benefited from:
- Revisiting Harmonized (Classification) Codes for imported merchandise
- Reviewing intercompany pricing goods and royalty policies for transfer pricing purposes
- Revisiting intercompany pricing agreements from a customs perspective
- Assessing whether the customs dutiable value of the merchandise is overstated based upon
- customs principles
- Assessing a company’s cross-border service charge policy
“Uncertainties over trade policies have the potential to wreak havoc on the global economy, and multinational companies face significant disruptions in their well-established supply chains,” Martin said. “Since customs has not necessarily been at the top of the agenda while duty rates have fallen globally, revisiting both customs and transfer pricing strategies could lead to tangible savings for companies adapting to new cost structures.”
About Clayton & McKervey
Clayton & McKervey is a full-service certified public accounting and business advisory firm helping closely held businesses compete in the global marketplace. The firm is headquartered in metro Detroit and services clients throughout the world. To learn more, visit claytonmckervey.com.