Articles:

Realise | Customs and Transfer Pricing: Year-end Adjustments

07 December 2020

During our current economic downturn, cash recovery is a priority for all companies.  In this article of our Rethink - Transfer Pricing series, we discuss how transfer pricing and customs alignment will help companies with cash recovery.

As the December year-end approaches, it is an opportune time for many companies to consider implementing self-initiated year-end transfer pricing adjustments to their cross-border intercompany transactions.  Companies often perform year-end transfer pricing adjustments to bring their transfer prices in line within an arm's length range in accordance with their transfer pricing analyses.  Given the economic impact of the pandemic on 2020 financial results, we expect there to be more transfer pricing adjustments this December than in previous years.

Get transfer pricing ready for year-end

Here is a transfer pricing checklist for companies to follow when implementing year-end transfer pricing adjustments:

  • Using the most recently available information, prepare the necessary transfer pricing analyses and documentation to support the arm’s length nature of the pricing of the intercompany transactions. 
  • Assess if year-end adjustments are necessary by comparing each entity’s results to the arm’s length range of results (as per the transfer pricing analyses).
  • Calculate and apply the transfer pricing adjustments.  Depending on the type and inbound or outbound nature of the intercompany transaction, these adjustments may be in the form of a lump-sum adjustment to sales, cost of goods sold, or operating expenses. 
  • Determine if the profits realised by each entity in the group are aligned with the entity or group's transfer pricing policy.
  • Ensure that each entity's accounting records accurately demonstrate the correct application of the transfer pricing policy.
  • Ensure intercompany legal agreements are prepared to substantiate the transactions.  In addition, when reviewing these intercompany legal agreements, ensure the agreements accurately reflect the current state of the transactions and are consistent with the transfer pricing analyses and documentation.

Many companies implement transfer pricing adjustments, however these adjustments are most commonly only made for income tax purposes and neglect to be reflected for customs purposes.  For years, there has been a tug of war between transfer pricing and customs that has often been ignored. Often there is a lack of coordination between transfer pricing and customs groups, and this causes many companies to underachieve from a savings perspective. Companies who do not review the impact of an income tax transfer pricing adjustment to the cost of previously imported goods may not be taking advantage of refund opportunities.

The following section discusses how transfer pricing adjustments can lead to savings from a customs perspective.

Customs opportunities from transfer pricing adjustments

Many companies know that there is an obligation to report upward transfer pricing adjustments for customs purposes and to pay additional duties and taxes or face monetary penalties for failure to do so.  However, in Canada for example, what many companies may not be aware of is that there was a change in customs policy in 2015 allowing, in some cases, a refund of duties when there is a downward pricing adjustment. If a company has paid duty on a good imported into Canada and a transfer pricing adjustment is made to lower the price paid for that good, then any duty which was paid on the difference may be refundable. This could equate to a substantial savings for many companies.

At a time when all companies are looking for cash recovery, now is the time to review all transfer pricing adjustments for the past four years, to ensure any refund recovery opportunities have been captured.

With this concession from Canada Border Services Agency, however, also comes a requirement for companies to report transfer pricing adjustments which were revenue neutral (duty free goods as an example).  So while companies are on the lookout for cost savings, they also should be ensuring their compliance with all amending obligations so there are no unexpected costs in the future.

How we can help

Our BDO Transfer Pricing Specialists can assist you with preparing the requisite transfer pricing analyses and documentation to determine if transfer pricing adjustments are required for the company’s year-end.

If transfer pricing adjustments are required, our BDO Customs Specialists can help you determine if an amending declaration is required, prepare the required filings and manage customs valuations issues arising from transfer pricing adjustments.

Our BDO Transfer Pricing and Customs Teams work collaboratively to ensure we optimise the savings your company while mitigating exposure to additional duties or penalties.