BLOG SERIES: Transfer Pricing, Import Savings, and COVID-19
Multinational enterprises (MNEs) are facing a growing list of issues and challenges during the crisis and transfer pricing is on that list. For MNEs with structures comprised of a principal and one or more routine entities, performing limited risk functions whereby the routine entity is compensated at a certain guaranteed profit level, this may be a good time to revisit the existing transfer pricing policy and identify opportunities to improve its cash position.
The MNE may be able to decrease the tax liability in those taxing jurisdictions where the routine entity operates by analyzing and re-evaluating the arm’s length range of profit level that the routine entity should earn, given the economic environment. There may be certain adjustments that may be performed to support the lower arm’s length range (potentially break-even, or even losses) of profits that the routine entity should earn. This will be especially beneficial if the credit for tax payments made in a foreign jurisdiction cannot be utilized in the principal’s taxing jurisdiction due to various limitations. A word of caution when performing such modifications: supporting analysis and documentation are absolute necessities.
Another opportunity for cash flow improvement is customs duty refunds. If the projected sales for the foreseeable future have decreased significantly, but there is no correlative decrease in operating costs, e.g., fixed costs, the routine entity could face significant losses, which is most likely not acceptable from a transfer pricing perspective. To avoid such a predicament, the principal may need to modify the future price of goods sold to the routine entity or perform an adjustment on the price of goods already sold to the routine entity. In order to claim a customs duty refund for the reduction in transfer price of goods, there are certain procedures that must be followed.
The most commonly used procedure an importer (routine entity) can utilize is U.S. Customs and Border Protection’s (CBP) reconciliation program. Reconciliation allows the importer to flag entries at the time of importation, declare the transfer price at the time of entry, and complete, or reconcile, the transfer price (upwards or downwards) no later than 21 months after importation. Note that the importer (routine entity) must also have a pre-existing transfer price policy that it adheres to for determining the value of any transfer price adjustments and satisfy the arm’s length pricing requirements set forth in the Customs Regulations (19 CFR Part 152) prior to import.
Participating in CBP’s reconciliation program provides the importer (routine entity) with a mechanism for reporting transfer price adjustments to CBP that impact the customs value of imported goods. Failure to report increases to the customs value could expose the importer to customs penalties under 19 USC Section 1592. However, in situations where the transfer price adjustments decrease the customs value of imported goods, and thus the customs duties owed, reconciliation can be used as a mechanism for seeking customs duty refunds.
Transfer Pricing Partner
Citrin Cooperman & Company, LLP