Customs Valuation and Transfer Pricing : Two Sides of the Same Coin

Abstract: The purpose of this master’s thesis is to examine and analyse how a transfer pricing adjustment is made and how related parties should handle price adjustments from a customs perspective in Sweden. The examination includes describing the valuation methods available for transfer pricing and customs valuation with regards to related parties. In addition, the differences in connection to the valuation are described and analysed. Goods imported to Sweden must be cleared through customs: the importer presents a customs declaration to the Swedish Customs and pays customs duty. The customs duty is calculated using a customs value and customs valuation is the system that enables the importer to establish correct customs values on imported goods. Transfer pricing is the determination of prices on transactions taken place between companies belonging to the same group and has a direct effect on the income tax payable. There are six customs valuation methods that are hierarchically applied and six transfer pricing methods that are applied somewhat differently. There are similarities between the methods and most of the customs valuation methods have a corresponding transfer pricing method, or vice versa. Even if there are similarities, many factors make reconciliation of the methods difficult. Such factors are the different time for assessing the value and that the customs valuation methods are applied in a strictly hierarchical way with no possibility to choose the most suitable method. Customs duties and transfer pricing both share the same valuation concept, although interpreted differently, being that the value shall be based on the price that the parties would arrive at under open market conditions. However, relevant values on the same transaction differ significantly due to trying to be in accordance with respective rules. The differences in expectations and the conflicting interests on the outcome of the valuation lead to problems in the tax field. As a conclusion, customs valuation and transfer pricing can undeniably be described as “the two opposing and necessary sides of the same ‘coin’, whose respective values unavoidably affect the whole balance of a system of closely connected valuation”. In order for related parties to use the transaction value method, which is the superior customs valuation method, the price must not have been influenced due to their relationship. If one of two tests prescribed by law can prove that the relationship has not influenced the price, the related parties can use the transaction value method to establish the customs value. If the transaction value, for some reason cannot be used, the importer has to address other options on to how to establish the customs value. The conclusion of this master’s thesis is that related parties should include a price review clause in their contract or pricing policy. The company should notify the Swedish Customs about the provisional price and make an incomplete customs declaration. When information enabling the calculation of the customs value is available, the importer should file a complementary declaration. As an alternative, the importer should declare an open claim to the Swedish Customs arguing that the transaction value cannot be applied and, as a consequence thereof, explain in the customs value declaration why the applied customs value is correct. This thesis provides three recommendations concerning how to deal with the complications of customs valuation and transfer pricing. The first recommendation is that rules and recommendations surrounding transfer pricing and customs valuation should, to the extent possible, be harmonised. The second recommendation is that co-operation between the Swedish Tax Agency and the Swedish Customs must improve, for example through advance pricing arrangements for both transfer pricing and customs purposes, documentation requirements, and joint audits. The third recommendation is that related parties should take the same care and documentation approach for customs purposes as it does for transfer pricing. Importing companies should make a price review clause in their contract before the importation and present an incomplete customs declaration. This way, in case of adjustments, the related party is able to uphold an arm’s length standard on the price and has the possibility to use the preferred transaction value for customs purposes, if that is desirable.