Tax, customs agencies often at odds over valuation

Thomson Reuters global tax and trade executive pointed out that tax authorities generally want goods traded between related parties valued lower than customs authorities.    The issue of properly valuing goods for duty-collection purposes is tricky for shippers even in the best of situations.
   But it becomes trickier when goods are sent to related parties across borders, because revenue collection agencies often have different motivations for valuing goods.
   That discrepancy in thinking occurs because tax authorities’ and customs authorities’ “incentives and ways of thinking are definitely different, and can point in opposite directions,” Taneli Ruda, managing director of global trade tax and accounting for Thomson Reuters, told American Shipper last week on the sidelines of the American Association of Exports & Importers annual conference in Washington, D.C.
   For instance, it behooves a tax authority for a good shipped between related parties to be valued as low as possible. The lower the valuation of the good between parties, the larger the margin on the eventual sale of that good in the country to which it was shipped. Larger margins translate to large taxable revenues.
   On the other side of the coin, customs agencies want the same good that moves across borders to be valued as high as possible. The higher that valuation, the more duty revenues can be collected.
   This places shippers that engage in transfer pricing in a sometimes awkward situation, Ruda said. Both sets of agencies theoretically aim to reach an accurate valuation that resembles true market pricing, also known as arm’s reach pricing, when the buyer and seller have no relation to one another.
   Transfer pricing – when parties within the same enterprise transact with one another – is often used strategically by companies to lower taxable profits and potential duties in countries with higher tax and duty rates, as long as the pricing between entities with an enterprise resembles the pricing on the open market.
   But sometimes there’s a lack of cohesion between those tax and duty collecting agencies. A 2012 report by the International Chamber of Commerce said as much.
   “Tax and customs administrations, even within one country and sometimes within the same government department, have different approaches: tax administration focuses on intra-group sales’ prices that may be perceived as higher than they should be; whereas customs authorities control imported goods for which prices may be perceived as lower than the market price,” the report said. “While both administrations seek to achieve the same goal, which is arm’s length pricing, revenue interests in the transaction still remain at odds with each other.”
   The problem is largely tied to where these two sets of agencies derive their valuation measurements. Tax authorities generally use transfer pricing guidelines from the Organization for Economic Co-operation and Development (OECD), while customs authorities use World Trade Organization guidelines on valuation. Ruda said it is often difficult for shippers to reconcile the different valuing logics the two types of agencies apply.
   “This dichotomy, present in both developed and developing countries, creates a climate of uncertainty and complexity compounded by economic globalization,” the ICC report said. “It also leads to increases in compliance and implementation costs, absence of flexibility in the conduct of business operations, and furthermore creates a significant risk of penalties.”
   The issue is emblematic of the way that it is becoming nearly impossible for global shippers to isolate their trade compliance processes from their accounting processes.