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Not only can transfer pricing policies significantly influence the levels of customs duty and indirect taxes governments collect, it can also impact on a multi-national enterprise’s (MNE) profitability. For instance, often additional duty costs cannot be passed on to customers by way of price increases. As a result, a company’s profits can suffer if the cost of goods increase (due to a rise in duty costs) and they are not able to raise prices due to the fear of losing competitiveness.
Moreover, MNE’s profitability can also decrease as they experience tax burden from increased customs duty costs rises. This is particularly so when duties and indirect taxes paid (unlike corporate tax costs) cannot give rise to foreign tax credits.
Therefore, companies should carefully plan their transfer pricing policies and documentation to minimise the cost impact of unnecessary duties. In particular, poor implementation of their transfer pricing strategy can have significant economic impacts – including operational and tax costs increments – where profitability decreases and a lack of competiveness emerges. This risk is compounded with the growing governments’ trend of increased protectionist policies and the use of supplementary tariffs.
Under the Customs acts, there is obligations for companies in Australia and New Zealand to disclose adjustments to Customs via a voluntary disclosure, or via the provisional value scheme. Failure to report the adjustments may result in penalties. If the adjustments lead to a decrease in the invoice price of goods imported, it may benefit the company and they may be entitled to a customs duty refund for which there is a four-year period of claiming refunds of customs duties.
To safeguard the disclosure and acceptance of the adjustments, companies are required to have a Valuation Advice in place, or, if in New Zealand, be registered in the Provisional Value Scheme.
The compliance requirements for disclosure of transfer pricing adjustments – which need to be supported by Valuation Advice rulings or registration in the Provisional Value Scheme as above – are highly technical. We assist clients with preparation, submission and disclosures to ensure your ongoing compliance with the respective customs authorities.
