Transfer Pricing - Customs matters

With the year-end fast approaching, it is timely to remind Australian importers who purchase goods from overseas related parties that they may have customs obligations where they make transfer pricing adjustments.

Recent Australian Border Force (ABF) commentary on its website has reinforced the ABF position that where importers are impacted by transfer pricing adjustments (either debits or credits), those adjustments are required to be disclosed to the ABF as they directly affect the price of the goods originally disclosed at the time of importation.

With increased scrutiny by the ABF in this area, it is important to understand the customs obligations concerning transfer pricing adjustments.

Common transfer pricing methods, such as the Transactional Net Margin Method, which typically targets a certain EBIT margin for an Australian entity, very often give rise to transfer pricing adjustments at the end of the financial year or throughout the year on a retrospective basis.

These adjustments can lead to both customs opportunity and risk.

A credit adjustment, for example, where the Australian entity does not reach the targeted margin, may be translated into a price decrease of the imported goods. This means that there may be an opportunity for customs duty refunds.

A debit adjustment, where the Australian entity’s margins are over the target, often leads to a price increase – meaning additional customs duties and GST on the taxable importations are owed to the ABF.

 Suppose the importer’s goods are not dutiable. In that case, both credit and debit adjustments must be disclosed, as the customs value of the imported goods was incorrectly declared at the time of importation.

The dollar value risk of not disclosing is considerable. The Customs Act 1901 (Cth) allows the ABF to penalise non-disclosure of transfer pricing adjustments regardless of the customs duty outcomes. Penalties of up to 100% of the customs duty short paid and/or 60 penalty units (currently $18,780) per import declaration can be incurred – meaning, as an example, that an importer with 50 duty-free importations in a year can be subject to a penalty of over $900,000 for non-disclosure.

The voluntary disclosure of adjustments to the customs value before the ABF exercises monitoring or verification activities protects the importer from customs penalty action relevant to the matter disclosed.

In addition to voluntarily disclosing transfer pricing adjustments, the ABF strongly recommends that the importer applies for an Advanced Ruling (Valuation) in relation to its related party pricing arrangements. While not a legal requirement, from a practical perspective, once a ruling is obtained, fewer administrative requirements are associated with the annual disclosure of transfer pricing adjustments.

A ruling also provides the importer with certainty on the customs valuation treatment of its related party dealings, protects from penalties should the ABF form a view that the transfer-associated prices and adjustments cannot be used as the basis for the customs value and is valid for five years (unless the facts and circumstances presented in the ruling change).

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For comprehensive support on related party customs obligations and broader customs and transfer pricing matters, get in touch with us: Customs, International Trade and Excise, and Transfer Pricing.