https://www.engineeringnews.co.za

Customs valuation and transfer pricing

8th May 2015

By: Martin Zhuwakinyu

Creamer Media Senior Deputy Editor

  

Font size: - +

Cross-border trade between units of a multinational enterprise (MNE), also known as a multinational corporation – intrafirm transactions, if you will – is estimated to account for more than 60% of international trade.

In the US, for example, such trade accounts for 67% of imports from emerging countries. It is not certain what amount of South Africa’s merchandise trade constitutes intrafirm transactions. I am not aware of any such figure ever being made public, but one would guess that it too would be in excess of 60%.

A substantial proportion of intrafirm transactions consists of the transfer of goods, intangibles and services. As a consequence, customs valuation and transfer pricing – the latter within the confines of international taxation – should be a top priority for tax administrations and MNEs. Of particular interest should, of course, be differing customs valuation and transfer pricing policies and objectives.

According to the World Customs Organisation (WCO), the customs value of imported goods is determined mainly for the purpose of applying ad valorem (value based) rates of customs duties. (You will recall that there are also specific customs duties applicable to imported goods, but these are applied to the volume, quantity, and so on, of the imported goods, and are, thus, not subject to customs valuation.)

The customs value of goods constitutes the taxable basis for customs duties. Yes, customs duties are a tax, if an indirect tax. Customs value is also an essential element for compiling trade statistics, monitoring quantitative restrictions, applying tariff preferences and collecting national taxes. The WCO estimates that almost all the customs administrations of the WTO’s 159 members States value imported goods in terms of the provisions of the WTO agreement on customs valuation. This agreement establishes a customs valuation system that primarily bases the customs value on the transaction value of imported goods, which is the ‘price actually paid or payable’ for the goods when sold for export to the country of importation, plus certain adjustments of costs and charges.

Currently, more than 90% of world trade is valued on the basis of the transaction value method, which provides greater predictability, uniformity and transparency for business.

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

According to the WCO, in the past, transfer pricing was the subject of a few specialists: tax administrators, tax managers of large multinationals and their advisers. But politicians, economists and businesspeople, as well as nongovernmental organisations, have now started to focus on the importance of who pays tax on what in international business transactions between the different arms of the same MNE. 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 meets international standards and minimises the risk of double taxation.

The WCO and the Organisation for Economic Cooperation and Development (OECD) held two joint conferences on transfer pricing and customs valuation in Brussels in 2006 and 2007. Each of these events was attended by almost 300 participants from all over the world, representing customs administrations, revenue authorities, MNEs, international organisations, 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, held in May 2007, 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 with respect to its application to transfer pricing situations. At its thirty-first 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 a sale.

The WCO secretariat and the TCCV are currently conducting work that will further assist tax authorities in determining the customs value in transactions between related parties. The OECD and the International Chamber of Commerce are assisting in this process.

Customs Valuation Workshop
A joint WCO/OECD workshop on customs valuation and transfer pricing for customs and tax administrations in the Americas and the Caribbean was held in the OECD’s Multilateral Tax Centre, in Mexico City, from March 23 to 27. Twenty-eight participants from tax and customs administrations attended the workshop, which was facilitated by experts from the WCO, the OECD and Mexico, as well as from Canada’s customs and tax administrations.

In addition to attendees learning about the relationship between customs valuation and transfer pricing, the workshop provided a forum for customs and tax officials to meet, interact and learn from one another and how, through collaboration, the collection of revenue can be improved.

Table Olives Regulations
On April 10, the executive officer for agricultural product standards at the Department of Agri- culture, Forestry and Fisheries informed of proposed new regulations relating to the grading, packing and marking of table olives intended for sale in South Africa. Comment is due by May 29.

Pomegranate Measures
On April 17, Agriculture, Forestry and Fisheries Minister Senzeni Zokwana announced that he had received a request from the Pomegranate Association of South Africa (Pomasa) for the implementation of statutory measures in the pomegranates industry for four years from January 2016.

Pomasa requested the introduction and promulgation of the following statutory measures in the pomegranates industry: (i) Section 15 of the Marketing of Agricultural Products Act, relating to levies; Section 18 of the Act (records and returns); and Section 19 of the Act (registration).
Comment on the measures is due by May 16.

Edited by Riaan de Lange

Comments

Showroom

VEGA Controls SA (Pty) Ltd
VEGA Controls SA (Pty) Ltd

For over 60 years, VEGA has provided industry-leading products for the measurement of level, density, weight and pressure. As the inventor of the...

VISIT SHOWROOM 
Universal Storage Systems (SA)
Universal Storage Systems (SA)

South African leader in Steel -Racking, -Shelving, and -Mezzanine flooring. Universal has innovated an approach which encompasses conceptualising,...

VISIT SHOWROOM 

Latest Multimedia

sponsored by

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION







sq:0.066 0.118s - 141pq - 2rq
Subscribe Now