Interaction between customs and TP - Ep4

Transcript

Micheal: Welcome to TP Matters, PwC SA’s transfer pricing podcast series, where we focus on key transfer pricing developments in SA. 

Joining today’s podcast is Herman Fourie (AD) and Corneli Espost (AD).

On today’s podcast, we will be discussing the interaction between customs and TP. When we work on TP documents and formulating TP policies, there is often a cross-border flow of goods involved. When we look at the TP, it is important to also consider the customs implications of the transactions under consideration as there is a very close interaction between customs and TP from the perspective of determining the correct value for customs purposes at time of importation.

Corneli: Talk to us a bit about the valuation of goods for TP purposes.

Various TP methods. Usually not tested item by item, rather we will often test the entities aggregated financial results from a TP perspective. Let’s take a distributor example. Here you have an in-country distributor and you will test whether their RoS is within an arm’s length range. If it is a limited risk distributor where the returns need to fall within a certain range, this can also lead to adjustments (up/down) which can lead to adjustments post year-end.

Herman: When considering TP methods and determining intercompany transfer prices based on those TP methods……There are also customs valuation methods that need to be considered and how TP methods can influence the customs value of goods imported. 

The predominant customs valuation method used is …. method one ……, which is the Transaction Value Method. 

That is the total price paid or payable for the imported goods being valued. 

The total price paid or payable means in essence two things:

1. the price shown on the supplier’s import invoice for the goods imported…. which is normally the price used to establish the value for customs purposes at time of importation,
2. and equally important - post importation payments of costs and charges that  should form part of the  value for customs purposes.

Such payments are normally paid by the importer quite separate to the invoiced price of the goods imported.

A transfer pricing adjustment is one example of such a post importation payment made by the importer to its related party.  

This means the value of the TP Adjustments (up or down) will influence the price of the goods imported  and subsequently the original customs value declared at time of importation. 

If this happens, the customs value declared at time of importation must be amended accordingly.    

This means that the Customs authorities look at the price of the goods at time of import and not the margins of the company.

Micheal: So tell me how these differences can lead to anomalies in practice.

Herman: How to do this practically – what is the problem and what is the solution. 

A true down TP Adjustment (debit note) means an increase in the price of the goods imported.

Customs authorities consider a true down TP Adjustment to be a “Subsequent Proceed” and a subsequent proceed should be added to the value for customs purposes of imported goods.

However, it must be noted that the customs Act requires that all Debit and / or credit Notes be reported to SARS within one month from receiving the debit or credit note.

In the case of a debit note the original customs value declared at time of importation must be amended and the applicable import duty and VAT be brought to account in terms of the customs Act. In the case of a credit note it is also required to amend the customs value accordingly.

Client’s may apply for the refund of import duties in terms of the refund provisions of the customs Act.

Micheal: Any other examples of additional costs that need to be included for customs? - e.g. royalties, services fees. 

Herman: As mentioned, the customs value is based on the actual price paid or payable for the goods imported. 

The customs Act refers to Dutiable Costs that are payable by the importer to a related party, that are not included in the price of the imported goods declared on the suppliers import invoice, Such dutiable costs should also be added to the customs value. 

This means that any cost that may be considered as forming part of the transaction value of the imported goods must be investigated in order to determine if such a cost should be added to the customs value. 

This relates to:

• a royalty, licensing fee
• Certain Commissions
• Management and service fees just to name a few. 

Corneli: Practical examples.

Micheal: What are you seeing in practise in the customs space from a SARS perspective?

Herman: 

• IT14 return – year-end adjustment, royalty figures and start by asking for a TP document.
• SARS specifically focus on TP Adjustments and other dutiable costs such as royalties. 
• We noted that SARS Customs review tax payaers IT14 returns to see if any TP Adjustments were made and / or royalties were paid.
• We also note that SARS ask for statements from the reserve bank on foreign payments made by importers to related parties and SARS also request TP Documentation. 
• As for TP Policy documents

Micheal: "This podcast is brought to you by PwC. All rights reserved. PwC refers to the South African member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This podcast is for general information purposes only, and should not be used as a substitute for consultation with professional advisors."