Customs and International Trade and the rules surrounding it are in a constant state of flux. In recent years, for customs valuation the focus has been on the BEPS initiatives with transfer pricing (“TP”) taking the centre stage.
There is a consistent tussle between customs valuation and transfer pricing. From a customs perspective the transaction value or Method one as provided for in the General Agreement on Tariffs and Trade is the “default” valuation method whereas transfer pricing requires the goods to be valued on an arm’s length basis.
Globally, taxpayers have ensured compliance from a TP perspective but often neglected the impact of TP when it comes to an essential element of international trade i.e. customs. Traders have often placed reliance on their clearing agents to ensure customs compliance.
However, taxpayers often forget that customs and TP are intertwined and that changes from a TP perspective should not be considered in isolation. This is often the case with multinational enterprises(“MNE”) that base the transaction value on TP.
One of the key considerations for MNE importers is the customs implications of TP and other adjustments that are processed periodically. This is done to ensure that prices charged by the Taxpayers are within “benchmarked ranges” as documented in the TP documentation.
It has been noted that MNE importers have consistently not been accounting for the Customs adjustments as required in terms of Customs and Excise Act No.91 of 1964 (“the Customs Act”).
The Customs Act places an obligation on the MNE importers to disclose any adjustments (whether due to transfer pricing including, debit and/or credit notes being issued between enterprises) to SARS Customs within 30 days of receipt thereof. This should occur irrespective of whether the previously imported goods are dutiable or not.
Failure to submit these adjustments within the required timeframes may result in SARS Customs raising assessments for penalties and interest on the value of the goods imported (including the 10% understatement VAT penalty), which is often difficult to mitigate.
Factors that confuse taxpayers relate to the timing of the TP adjustments, the finalisation of annual financial statements (“AFS”), when Corporate Income Tax returns (“ITR14”) are submitted to SARS and finally when the transfer pricing documentation is signed off.
For example, the ITR14 would be finalised only six months after the AFS are issued, with a note being processed in the ITR14 in respect of the adjustment. In practice, this usually occurs quite a while after the actual adjustment is processed, which could result in the taxpayer falling foul of its disclosure obligations.
It should be noted that SARS often uses all this documentation filed in an integrated audit work plan to assess whether Taxpayers are compliant with the tax legislation including the Act.
While the law appears to be onerous and focussed on the collection of tax revenue, the same provisions also provide opportunities for the Taxpayer to claim refunds of customs duties previously overpaid i.e. where the transfer prices resulted in higher transaction values at the time of importation.
As a point of departure, taxpayers should assess whether they have in fact disclosed the TP adjustments (whether as a result of debit or credit notes) to SARS Customs. If not, SARS Customs could be knocking on your door soon.
Should you require any assistance in this regard then contact the BDO Indirect Tax department to help you with voluntarily disclosing the TP adjustments (taking the burden out of your compliance obligations).
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