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Customs Valuation and Transfer Pricing

A large proportion of world trade is carried out by multinational enterprises (MNEs), and a substantial part consists of transfer of goods, intangibles and services within MNEs. This makes international taxation and in particular transfer pricing a top priority for tax administrations as well as MNEs.

Transfer pricing refers to the determination of the price and other conditions for the transfer of goods, services and assets between affiliated companies situated in different tax jurisdictions. Through this process profits are allocated among the various entities that are parts of a MNE group for tax purposes. Transactions between two subsidiaries of a multinational enterprise are not subject to the same market forces as transactions between independents. Over or under-pricing can affect the allocation of tax bases among the various jurisdictions in which the MNE operates. By shifting profits from one jurisdiction to another, distorted transfer pricing can deprive governments of their fair share of taxes from cross-border transactions. It can also expose MNEs to double taxation if two jurisdictions involved in a cross-border transaction claim taxing rights on the same profit.

In the past, transfer pricing was the subject of a few specialists - tax administrators, tax managers of large multinationals and their advisors. But recently, politicians, economists and business people as well as NGOs have been focusing on the importance of who pays tax on what in international business transactions between different arms of the same multinational group. Transfer pricing is no longer an issue for rich countries only – developing and emerging countries increasingly realise the importance of transfer pricing, both to protect their tax base and to provide foreign investors with a fiscal environment that follows international standards and minimises risks of double taxation.

The World Customs Organization (WCO) and the Organization for Economic Co-operation and Development (OECD) held two joint WCO/OECD Conferences on Transfer Pricing and Customs Valuation in Brussels in 2006 and 2007. Each of these events were attended by almost 300 participants from all over the world, representing customs administrations as well as revenue authorities, multinational enterprises, international organization, consulting firms and academic institutions.

A Focus Group was set up as a follow up to the recommendations of the second Joint WCO-OECD Transfer Pricing Conference of May 2007 in order to identify problems and suggest possible solutions.

As recommended by the Focus Group, the Technical Committee on Customs Valuation (TCCV) examined the phrase "circumstances surrounding the sale" in Article 1.2 of the WTO Valuation Agreement in respect of its application to transfer pricing situations.

At its 31st Session in October 2010 the TCCV approved Commentary 23.1 which recognises that a transfer pricing study may be used as a basis for examining the circumstances of the sale.

The WCO Secretariat and TCCV is currently conducting further work that will further assist members in the determination of the Customs value in transactions between related parties. The OECD and ICC are assisting in this process.

In 2015, the WCO issued the WCO Guide to Customs Valuation and Transfer Pricing. This Guide provides detailed information on the methodologies for both topics and explores the extent to which Customs administrations can utilise information derived from transfer pricing studies in the examination of related party transactions. It also provides examples of national Customs' practices and views of the private sector and encourages Customs and tax departments in governments and business to work more closely together. It is recommended reading for Customs and tax administrations, and the private sector.