Page 8 - The South China Business Journal

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