On 5 June 2018 the World Customs Organization (WCO) published “Revenue Package Phase III” which is a package of all available tools and instruments (including, inter alia, formal instruments and conventions, guidance notes and training materials) that are relevant to revenue collection by customs authorities. This package covers a number of new initiatives relating to Origin, Valuation, Customs Laboratories, Post-Clearance Audit, as well as Customs-Tax Cooperation. As part of the new materials on Valuation, a new version of the WCO Guide to Customs Valuation and Transfer Pricing (the Guide) has been published.
Key updates to the Guide include:
- Specific references in the transfer pricing chapter to the OECD BEPS Action Items 8, 9 and 10. In particular, this new paragraph points out the need to accurately delineate transactions, beginning with the contractual terms, but emphasising the primacy of actual conduct and the substance of the arrangement, and the importance of proper fact finding.
- The reference to the United Nations Practical Manual on Transfer Pricing for Developing Countries is updated to reference the 2017 version.
- The challenges that can be faced in practice when conducting comparability analysis are highlighted and the joint IMF, OECD, World Bank Group publication “A Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses” is referenced as a source of guidance in this area.
- The list of common examples of where the CUP method may be applied in practice has been updated to specifically include “commodities transactions, particularly where information on market prices for homogenous or standardised commodities exist”, reflecting the updates to the OECD Guidelines as a result of the BEPS action items.
- The guidance on selection of the most appropriate transfer pricing method, as it relates to the use of transactional profit split methodology, has been updated to reflect the new OECD guidance on the application of the profit split method.
- The section on transfer pricing documentation has been updated to reflect the outcomes of Action 13 of the OECD BEPS project, namely, making reference to the three tiered approach to documentation (Country-by-Country report, Master File and Local File).
- Chapter 4 has been updated to specifically reference the two case studies considered by the WCO Technical Committee on Customs Valuation.Specifically, Case Study 14.1, which applies the transactional net margin method (TNMM) and has been adopted by the Committee, and Case Study 14.2, which applies the resale price method and has been approved by the Committee but was awaiting final approval by the Council at the time of publication. A discussion of Case Study 14.2 is included after the existing discussion of Case Study 14.1.Since publication of the Guide, the WCO Council has now approved Case Study 14.2 at its 132nd Session.
- Annex II: the section on “National Initiatives” has been updated to include a contribution from Korea concerning its practice on the interaction of Customs Valuation and Transfer Pricing.
The interaction of Customs Valuation and Transfer Pricing (for direct tax purposes) remains a tricky topic for multinational enterprises to navigate, particularly in light of recent developments such as the end of the sunset period for first sale for export in the European Union, the European Court of Justice’s (EUCJ’s) Hamamatsu case and the OECD’s revised guidance on the application of the transactional profit split method. Despite these various developments “muddying the waters”, the latest update of the WCO Guide, the approval of Case Study 14.1 and Case Study 14.2 by the Technical Committee on Customs Valuation (TCCV), as well as the continued activities of the WCO (for example. hosting (regional) workshops with the OECD for Customs and Tax Administrators in Colombia in March 2018, Burkina Faso in March 20171, and in Turkey in September 2016) all clearly demonstrate WCO’s commitment to finding practical solutions to the difficulties faced by administrators and multinationals and continuing the constructive dialogue that has been taking place over the last few years.
As multinationals revisit their supply chains and transfer pricing policies in light of the aforementioned developments and other business (eg digitalisation and ecommerce), economic (eg BREXIT, increasing protectionism) and tax (eg US tax reform, European initiatives) changes, it is important to keep in mind the interaction between customs valuation and transfer pricing.
Please contact the authors if you need more information.
A copy of the 2017 United Nations Practical Manual on Transfer Pricing for Developing Countries is available here.
A copy of the joint IMF, OECD, World Bank Group publication “A Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses” is available here.
Compliments of DLA Piper, a member of the EACCNY