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Customs valuation and transfer pricing

Considerations between related entities in the UK and the EU.

Many European parent companies with a UK subsidiary (and vice versa) or closely related entities in various jurisdictions have rightly considered the potential logistical and cost implications of the changing trading relationship between a parent and a subsidiary in the event of a ‘hard Brexit’ or ‘no deal’ and the UK becoming a ‘third country’ to the EU.

Whilst most companies have concentrated on the movement of stock transforming an intra-EU transfer of goods to a formal import and export regime and the additional documentary and costs burden those changes will bring, few have delved deeper into how this change will impact customs valuation.

After Brexit the rate at which a parent sells, or transfers stock (the so-called transfer price) will be far more intensely scrutinised than ever before.

Additionally, recent HM Revenue & Customs (HMRC”) International trade and Compliance visits have begun to focus more and more on the impact on the value for customs purposes of the trading relationship between related parties.

In essence, the related UK/EU company may become the ‘importer of record’ and must render customs entries for the importation of goods; as such the correct value for customs purposes placed on the imported goods needs to be included on the customs entry. This value is usually taken from the commercial invoice accompanying the importation. The relevant customs authority will always seek to ensure that the value upon which customs duty is calculated is a ‘fair and arm’s length transaction’ for customs valuation purposes and that the relationship has not impacted upon the price in a manner consistent with the way the seller prices goods for sale to buyers who are unrelated.

Hence, the accurate calculation of customs duty and import VAT has been declared. If this transaction is indeed deemed as fair and at arm’s length, then method one of the six customs valuation methods can be used. This method is usually entitled the ‘transaction value’ or ‘price paid or payable’. Method one is the most common valuation method and currently covers over 90% of all commercial importations. It relates to the price paid for goods by a buyer in one country from an unrelated seller in another country and at a value specified on the commercial customs invoice.  However, preferential pricings, discounts and a host advantageous other pricing policy and ‘rights’ may affect that ‘transaction value’ between related parties and sometimes rule out the use of Method one. These pricing policies, in the event of a hard Brexit or a ‘no deal’, may have to be carefully re-thought.

After considering the company’s relationship and any intercompany pricing policies, HMRC may not accept the customs value as declared on the import entry and possibly impose unfavourable and costlier alternative ‘methods of customs valuation’. These could include using values based upon ‘identical or similar goods sold to an unrelated buyer’ (Method two or three), the ‘selling price (Method four), the ‘production costs of the goods (Method five)’, to accurately value the goods and possibly forcing up the costs to the UK firm and parent.

Hence, in the event of a ‘hard Brexit’ or ‘no deal’ not only may customs duty and import VAT costs become applicable but also the value at which those costs are calculated. HMRC or any respective competent tax authority may also make an adjustment to corporation tax payable if it is deemed that the transfer price is inaccurate.

As a result, related entities should look closely at their current policies.

For more information, please contact either Simon Sutcliffe or Philip Newbold.