Many U.S. companies that import goods from foreign affiliates will have to contend with substantial tariffs in addition to continued obligations to comply with relevant U.S. transfer pricing rules for federal income tax purposes. Companies will need to adapt their transfer pricing policies to account for the additional costs in the supply chain that cannot be passed on to third parties. In certain cases, this may involve reducing inbound transfer prices; that is, reducing the price paid by the U.S. company to the foreign affiliate for the imported good. We explored these issues in this prior alert. Another question is whether the analysis that supports reduced inbound transfer prices can also support reduced values of imported goods for customs purposes, thereby reducing tariffs.

Overview of Customs Valuation Rules

The preferred basis of customs value is the transaction value, i.e., the price actually paid or payable for the good. In the context of related parties, however, it must also be demonstrated that the price is "acceptable." Transaction value is deemed acceptable where (i) an examination of the circumstances of the sale indicates that the relationship between the buyer and seller did not influence the price paid or payable, or (ii) the transaction value of the merchandise closely approximates certain test values, such as the transaction value of identical or similar merchandise or the "deductive value" or "computed value" for identical or similar merchandise.

Relevance of Transfer Pricing Analysis

The standards for determining whether transaction value is acceptable in the context of related parties are similar to the standards applied under transfer pricing rules. At first blush, it would appear that where the transfer pricing rules support a reduced transfer price paid by the importer, such reduced transaction value could also be used for customs purposes. However, despite the similarity in the rules, Customs and Border Protection (CBP) and the Internal Revenue Service (IRS) apply them differently. CBP may look to whether the price was set in a manner that is consistent with practices in the relevant industry, while the IRS commonly compares the profitability of one of the entities to the transaction to the profitability of comparable companies, with comparability determined by functions performed, risks assumed, and assets used, as opposed to similarity of the product or industry. Simply having a transfer pricing study supporting a reduced import price for tax purposes may not, in and of itself, be sufficient to pass muster under customs rules.

That is not the end of story, however. While a transfer pricing study may not be determinative, CBP has found that it may have probative value. A study coupled with other factors (including the parties' course of dealing in setting prices) may support a favorable conclusion under the circumstances of sale approach. 

Timing of Pricing Adjustments

Turning back to transfer pricing, U.S. taxpayers are required to report arm's length results for federal income tax purposes on timely filed tax returns. Although retrospective transfer pricing adjustments are permissible, under best practices, taxpayers facing new tariffs on imports from affiliates should determine today how such tariffs will affect the arm's length nature of its transfer prices and, to the extent possible, implement changes to the transfer price prospectively.

Utilization of a Reduced Transfer Price

Where the transfer pricing rules support a reduced transfer price, companies should evaluate whether that reduced transfer price can support a lower transaction value for customs purposes. As noted above, simply having a transfer pricing study for tax purposes is generally insufficient. Companies must evaluate the reduced price (and the circumstances that gave rise to the reduction) under the relevant customs rules. For efficiency and consistency, it may be best to leverage off the transfer pricing analysis to the greatest extent possible, supplementing it where required with a customs-specific analysis. A comprehensive understanding of the two sets of rules, including where they align and where they differ, is critical in this regard. Companies should also be nimble in handling further changes in tariffs and the related risks of transfer pricing adjustments, and, in this regard, CBP's Reconciliation Prototype offers flexibility in truing up (or down) customs values after importation.

Our Approach

Miller & Chevalier's Customs & Import Trade and Transfer Pricing practices help U.S. importers evaluate and mitigate costs associated with increased tariffs and address conceptual and practical transfer pricing issues arising from tariff increases and mitigation measures. We work seamlessly to analyze the rapidly changing environment and develop bespoke solutions to complex issues. 

For more information, please contact:

Brian S. Gleicher, bgleicher@milchev.com, 202-626-1589

Richard A. Mojica, rmojica@milchev.com, 202-626-1571

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.