Companies importing goods from a foreign-related party are required to set prices for imports that meet the expectations of Customs and Border Protection (CBP) and the Internal Revenue Service (IRS). CBP rules focus on ensuring multinational enterprises (MNEs) do not set prices at a level lower than fair market value in order to avoid duties, while the IRS is focused on confirming taxpayers do not set pricing higher than an arm’s length amount to reduce profits and avoid taxes.
MNEs generally set intercompany product prices at the beginning of the year with the intention of meeting the standards of the IRS and CBP. At the end of the year, if actual results fail to meet budgeted expectations, MNEs may make transfer pricing adjustments to the price of tangible property to align year-end financial results with IRS standards. For customs purposes, a change at the end of the year to the transfer pricing value requires a taxpayer to adjust the customs valuation and therefore, necessitates a taxpayer to refile customs declarations. Often, a change to transfer pricing value will implicate thousands of elements related to individual duties, which each require a new customs declaration. In such a situation, MNEs are faced with balancing the risks associated with CBP and the IRS. On one hand, reporting non-arm’s length results leaves an MNE vulnerable for examination by the IRS, and on the other hand, the refiling of customs declarations is not ideal for taxpayers given it’s an extremely arduous task and can raise a red flag to CBP for further inspection. So, how do MNEs successfully manage transfer pricing and customs risks related to intercompany pricing?
Supply chain disruptions and market uncertainties stemming from COVID-19 as well as strained trade relationships, or trade wars, present many fact patterns where past pricing methods are producing results that do not achieve compliance with CBP and IRS rules. Now more than ever, it’s essential to understand the interdependencies of product pricing for transfer pricing and customs purposes, as well as be purposeful when setting, adjusting and documenting intercompany product pricing.
We’re Here to Help
Bennett Thrasher’s Transfer Pricing practice is well positioned to assist taxpayers in managing transfer pricing and customs risks related to intercompany pricing by:
- Proactively developing and recommending methods for calculating prices of goods purchased from related parties that meet IRS and CBP standards;
- Evaluating existing intercompany transactions to identify and manage potential risks and opportunities with respect to transfer pricing and customs;
- Performing risk assessments to understand and advise on how to best handle year-end tax adjustments, particularly by evaluating and analyzing the impact of COVID-19 on an MNE’s financial results and determining whether a year-end adjustment is necessary; and
- Preparing contemporaneous transfer pricing documentation to provide the first and best line of defense in a tax audit.