Canada: Transfer Pricing And Customs Valuation

(Peter E. Kirby — Mondaq®)

Intra-company transfers of goods and services account for a substantial portion of international trade and it has long been recognized that the prices negotiated in such transfers (transfer prices) may be influenced by a variety of non-market factors, including the desire to export profits to lower tax jurisdictions. For decades, national tax authorities have scrutinized transfer pricing policies to ensure that the taxing jurisdiction receives its fair share of profits and collects its fair share of taxes. While the income tax authorities in Canada and the U.S. have spent the last twenty years developing, refining and explaining their policies for testing transfer pricing decisions, the customs authorities in those countries have been slower to come to grips with the issue.

That has now changed and the customs authorities in Canada and the U.S. have begun to look more carefully at transfer pricing. As a result of that scrutiny, two things have become clear. First, a transfer price that may be acceptable to the income tax authorities may not be acceptable to the customs authorities. Second, a transfer price study that confirms the acceptability of transfer prices for income tax purposes is, in most cases, irrelevant for the purposes of customs valuation.

Getting the customs value wrong can be enormously expensive, not simply in terms of additional duty liabilities and penalties, but in the administrative expense of being forced to determine value on a transaction by transaction basis using an alternative method in the future.

Importers must establish and declare the value of imported goods on an entry-by-entry basis and there are detailed legislative rules for establishing that value.1 The Canadian and U.S. rules for establishing customs value are based on the methodology set out in the Customs Valuation Code.2 As a result, there are broad similarities in the valuation provisions in both countries.3 Legislation in both countries provide for a hierarchy of several different methods for establishing the value for duty of goods: the transaction value of the goods imported; the transaction value of identical goods; the transaction value of similar goods; the deductive value; the computed value and a residual method when all else fails. The vast majority of imports are valued on the basis of the transaction value of the imported goods which is the price paid or payable for the goods in a sale for export4, adjusted in accordance with required additions and deductions.

…Canadian customs authorities have not issued any recently revised policy statement on transfer pricing but have given a strong indication that the issue is one that they are eager to tackle. In a recently revised Audit Manual designed to be used by its field auditors, the Valuations and Origin Division of the Canada Border Services Agency has ordered its auditors to consult with the Valuation Policy Unit “in all cases where it is suspected that the price paid or payable is influenced by relationship.”

The two agencies have also made it clear that it is the importer’s obligation to provide evidence supporting his declaration of value. …It is, therefore, recommended that all importers that declare the value for duty of imported goods on the basis of transfer prices conduct a separate transfer price study to substantiate their value declarations and document that study with supporting data. Such a study can be stand alone or as an annex to the income tax transfer price study.

While it is not uncommon for companies to complete tax transfer price studies on an ex post facto basis that practice is not to be recommended for customs. Customs requires an accurate, transaction by transaction declaration of the value for duty of the imported good and, while there are provisions to make post-importation adjustments to customs value in certain circumstances, there is no provision that permits a customs valuation declaration based on estimates or projections. Complete article here (registration required).