Page 8 - The South China Business Journal
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D EPTH

             importer may report lower margins, which could    to comply with tax regulations will require
             cause tax authorities to suspect that the company is   corresponding updates to customs declarations.
             seeking to shift pro昀椀ts by undervaluing its products.    However, customs authorities may not accept
                                                               these new valuations, as they often focus strictly
             The tariffs may also skew overall TP results, leading   on the declared transaction price and have
             to misalignment between reported pro昀椀t and actual   different valuation methods. This can result in
             economic activity. This could further expose the   double adjustments – one for tax purposes and
             company to scrutiny from tax authorities, as they   another for customs duties – leading to potential
             may question whether the low pro昀椀t margins are   penalties or delays if the adjustments are not
             due to non-arm’s length pricing or inappropriate   properly documented or justi昀椀ed.
             allocation of costs, potentially triggering audits,
             requests for additional documentation, and        how can mncs address the tp
             adjustments to align the company’s transfer pricing   complIcatIons created by the tarIffs? 
             with market-based benchmarks.
                                                               To overcome the challenges presented by tariffs
             tarIff rIsk allocatIon                            on TP, MNCs must should have both a short-term
                                                               strategy and a medium- to long-term strategy.
             When tariffs are introduced, companies must evaluate
             how the burden of the tariff is allocated between   In the short-term, MNCs should carefully consider
             entities, particularly whether the importer or the   tariff risks when determining transfer prices. These
             exporter will bear the cost. This decision has signi昀椀cant   prices must re昀氀ect the true economic substance
             transfer pricing implications, as a company choosing to   of the transaction, including the real functions and
             push the tariff burden onto the exporter by reducing   decision-making processes of the entities involved.
             the transfer price could raise questions about the   This means that the company must assess not
             substance of the arrangement.                     only the tariffs themselves but also the broader
                                                               operational functions and responsibilities of the
             If the tariff risk is allocated to the exporter, but it is   subsidiaries affected by the tariffs. For example, if
             the importer that controls all pricing and sourcing   the importer controls key decisions such as pricing,
             decisions, say, the tax authorities could seek to   sourcing, or marketing, it is more appropriate
             recharacterize the arrangement. This might result   for the importing entity to bear the tariff costs,
             in the reallocation of pro昀椀ts or other adjustments   ensuring that the risk allocation aligns with the
             to ensure that the functional capacity (decision-  actual functions and decision-making authority.
             making, assets, personnel, and so on) aligns with a
             party that is responsible for bearing the risks related   Moreover, MNCs must ensure that any adjustments
             to intercompany transactions and that pro昀椀ts are   to transfer prices comply with both transfer
             allocated according to the economic substance of   pricing and customs regulations. This requires
             the transaction.                                  robust documentation to justify pricing decisions,
                                                               particularly in the face of scrutiny from both tax
             dIscrepancIes between customs and                 and customs authorities. MNCs should be prepared
                                                               to demonstrate that their pricing is consistent
             tax authorItIes 
                                                               with the arm’s length principle, supported by clear
                                                               economic rationale and documented analyses.
             Discrepancies between the priorities and
             approaches of tax and customs authorities when    To overcome dif昀椀culties in comparability analysis
             it comes to intercompany transactions can also    and TP results due to rising tariffs, MNCs can
             cause headaches for multinationals seeking to     focus on adjusting their analysis to re昀氀ect the
             reduce the impact of tariffs. As stated by analysts   impact of tariffs on pro昀椀t margins. MNCs must
             at Bloomberg Tax, “changes in tariffs can make
             transfer pricing and customs valuation compliance   also re-align the intercompany relationships and
             much more dif昀椀cult and cause procedural issues   agreements and carry out necessary negotiations
             with Customs and Border Patrol (“CBP”) and        with both suppliers and customers. Moreover, to
                                                               protect pricing power and avoid scrutiny from tax
             between the IRS and other tax authorities”.
                                                               authorities over low pro昀椀t margins, companies
                                                               need robust documentation and a clear economic
             Tax authorities focus on ensuring that TP aligns
             with the arm’s length principle, which could lead to   rationale for any pricing changes.
             adjustments to transfer prices to re昀氀ect the true
             economic functions, risks, and assets of the entities   In the medium and long-term, MNCs should
             involved (factors that customs do not consider).   re-examine their global strategic structure
             Customs authorities, on the other hand, prioritize   and transaction models. This may include re-
             correctly valuing goods to levy duties, usually relying   positioning the functional risks of various entities
                                                               within the group, re-establishing new strategic
             on the transaction price at the time of import.
                                                               partners, and re-planning transfer pricing policies
                                                               to reduce the tax burden brought about by the
             This could create complexities for the importer,
             as adjustments made to transfer prices in order   trade war and the potential risks of customs and
                                                               transfer pricing issues.

       5    AMCHAM SOUTH CHINA
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