Identifiers, valuation, bonds and origin · Related-party prices and customs
Transfer pricing
When buyer and seller are related, the price must be arm's length for tax and defensible for customs. The two tests are not identical.
Key facts
| What it is | The price charged between related parties for goods, services or intellectual property |
|---|---|
| Tax test | The price should be what independent parties would agree, under the applicable transfer-pricing rules |
| Customs test | The transaction value must not be influenced by the relationship, or must be close to a test value |
| Documents | Intercompany agreement, invoices, margin analysis and the transfer-pricing file |
| Conflict | A tax-driven price can be challenged by customs, and a customs-driven price can be challenged by tax |
| Official source | Tax authority transfer-pricing guidance and customs valuation guidance |
Two tests, one price
A related-party price has to satisfy the tax authority and the customs authority, and the two can look at it differently. Tax may accept a range around an arm's-length margin; customs may test whether the relationship influenced the price. A price set for one purpose can create a problem for the other.
The practical answer is documentation. Show how the price was set, what comparable parties charge and how the margin is supported. A file prepared only for the tax return may not answer the customs question.
Keep the story consistent
The intercompany agreement, the invoices, the transfer-pricing study and the customs declarations should tell the same story about the goods, the parties and the price. Revisions should be documented, not silently applied.
If the volumes or the functions change, revisit both positions. A transfer-pricing policy that was right for a distribution entity may be wrong once the entity also manufactures or holds inventory.
Frequently asked questions
Is transfer pricing only for large companies?
Related-party transactions can be reviewed at any size. The documentation burden scales with the risk and the jurisdictions involved.
Can customs reject my transfer price?
Yes. Customs can challenge a related-party price if it appears influenced by the relationship and does not meet the valuation tests.
Do I need a formal study?
A study is the usual evidence for the tax position. For customs, the importer needs evidence that the relationship did not influence the price.
Which price should I use for duty?
The customs value must satisfy customs valuation rules, which may differ from the tax transfer price. Model both before setting the intercompany price.
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