This guide concerns problems that arise in connection with the determination of customs value in transactions between independent parties.
This is not a general guide on customs value and must therefore be viewed in context with the Customs Valuation guide.
Trade between related companies is rapidly growing and is estimated to amount in value to approximately 60 per cent of global trade. The bulk of this type of trade and the challenges it generates, entails that customs value and transfer pricing is a prioritised area of focus in the World Customs Organization (WCO) and with many customs authorities. It is a complex field that places considerable demands for competence on both customs authorities and the business sector.
Transfer pricing means the determination of price for transactions between parties that are related to each other through various forms of commonalities of interest and are thereby dependent on each other. The parties can be natural or legal persons, such as e.g., parent companies and subsidiaries. The transactions can also concern e.g., goods, services and intellectual property rights.
Transfer pricing documentation means documentation that is prepared by a taxpayer and/or their advisor for the purpose of providing the tax authorities with the basis they need in order to assess risks associated with transfer pricing and whether the taxpayer’s dispositions are in accordance with the legislation concerning transfer pricing.
Advisory Opinions, Commentaries, Explanatory Notes and Case Studies are advisory statements by the Technical Committee on Customs Valuation in the WCO. The statements are published in the WCO’s Customs Valuation Compendium.
In transactions between parties that are not dependent on each other, the determination of price will largely be determined by the parties’ conflicting interests in that the seller attempts to achieve the highest possible price whereas the buyer seeks to pay as little as possible. This will generally result in the achievement of an approximate market price for the transaction so that the correct customs value is declared.
In transactions between dependent parties, however, the parties will have the same financial interests. Even if the individual country’s customs and tax authorities treat multinational groups as separate subjects in the determination of customs value and for taxation, such companies act as a single economic entity. The concern of the customs authorities has therefore traditionally been whether the price is set too low so that too little customs duty and excise taxes are calculated, whereas the tax authorities have been concerned about the price being too high so that the domestic tax base becomes correspondingly too low. There is also a risk that one can manipulate both customs declarations and tax returns to one’s advantage, e.g., in areas where there are low customs duty rates and high tax rates. In such circumstances, excessive tax value may be declared in order to reduce the taxable profits.
In cases where the customs authorities inspect transactions between independent parties, the importer will often automatically refer to transfer pricing documentation prepared for tax purposes. The claim is often that the documentation is in accordance with the Organisation for Economic Co-operation and Development’s (OECD) Transfer Pricing Guidelines in the area of tax law, and that it must therefore be approved by the customs authorities. As clarified below under point 5, however, it is not necessarily the case that such documentation is sufficient to determine the correct customs value.
In order to determine the correct customs value and assess whether the dependence between the parties has affected the price, Chapter 7 of the Customs Act is employed. The rules implement the Work Trade Organization’s (WTO) Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (Customs Valuation Agreement).
The main method for determination of customs value is Section 7-10 regarding the transaction value of the goods (transaction method). The transaction value is the price that is actually paid or payable when sold for export to Norway, adjusted in accordance with the provisions in the Customs Act, sections 7-17 and 7-18. It is the complete payment for the goods that constitutes the transaction value.
Pursuant to Section 7-10, second paragraph, the price pursuant to the first paragraph covers all payments that are a condition for the sale of the goods.
If the customs value cannot be determined pursuant to the main method in Section 7-10, it must be determined pursuant to the other methods in sections 7-11 to 7-16. The methods must be attempted in ascending order.
Use of the transaction method presumes that the buyer and the seller are not dependent on each other, or when they are dependent, that the transaction value can be accepted in accordance with Section 7-10-1 of the Customs Regulations.
What is to be considered dependence is defined in Section 7-10, first paragraph, (d), no. 1 to 7 of the Customs Act. A typical example is parent companies and subsidiaries where the parent company owns all or parts of the subsidiary. It should be noted that determining that the buyer or seller owns at least five per cent of the shares with voting rights in both of them is sufficient in order to determine that there exists dependence. Advisory Opinion 21.1 contains some statements regarding the interpretation of Section 7-10, first paragraph (d), whereas Explanatory Note 4.1 provides detailed explanations regarding the concept of dependence. See also the Customs Valuation Guide, point 3.1.5.
In accordance with the Customs Regulations, Section 7-10-1, the transaction value can be accepted as a basis for calculation of the customs value in case of dependence if the dependence has not affected the price. If the customs authorities are in doubt as to whether the transaction value can be accepted, Art. 1.2 (a) of the Customs Valuation Agreement states that the customs authorities must investigate “the circumstances surrounding the sale”. The term is not found in the Customs Regulations, Section 7-10-1, but it must be read in that the customs authorities must investigate the circumstances surrounding the sale in order to be able to determine whether the dependence has affected the price. The Interpretative Note to Art. 1 of the Customs Valuation Agreement provides guidelines for the assessment of whether the relationship of dependence has affected the price.
The transaction value shall be accepted as the basis for calculation of the customs value if the importer can document that the value is approximately equal to the customs value for identical or similar goods determined in accordance with the Customs Regulations, Section 7-10-1, second paragraph.
In order to determine whether the distribution of income and costs in transactions between multinational enterprises is in accordance with the arm's length principle, i.e., if the price is determined as if it was between independent parties, the tax authorities follow the principles in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The purpose is to achieve a correct distribution of tax income between countries and avoid moving profits from high-tax areas to low-tax areas, as well as to avoid double taxation.
In relation to Norway, the Tax Act, Section 13-1, fourth paragraph determines that considerations shall be made in relation to the OECD Guidelines. The Guidelines refer to five main methods for determining whether the conditions in business and financial relationships between related enterprises are in accordance with the arm’s length principle.
4.3 Similarities and differences between the customs valuation rules and the tax rules regarding transfer pricing
Pursuant to the customs valuation rules, the assessment is whether the dependence has affected the price, whereas according to the OECD Guidelines, one seeks to find the “arm’s length price”. However, the goal is the same, in that both methods shall ensure that the price is approximately equal to market price and is determined as if the parties were not related.
There are also similarities between some of the methods in the customs valuation rules and the methods in the OECD Guidelines. For example, the Customs Act, Section 7-14 regarding sales price in Norway, has similarities to the OECD’s resale price method. Furthermore, there are similarities between the Customs Act, Section 7-15 regarding computed customs value and the OECD’s cost plus method.
The customs authorities focus, however, is on the transaction method in the Customs Act, Section 7-10 and whether the price has been affected by the relationship of dependence. The customs authorities will therefore primarily investigate transfer pricing documentation in this context and not in relation to the other methods for the determination of customs value.
The Customs Act requires that individual goods that are imported are declared to the customs authorities, cf. the Customs Act, Section 4-10, second paragraph. In the declaration of goods, business operators are subject to an expanded declaration duty in that they must state the customs value of the goods, cf. the Customs Regulations, Section 4-20-1. The customs authorities will thereby seek to find the correct customs value for the individual goods that are imported. In comparison, the OECD Guidelines do not require that a value be determined for each of the goods in each individual transaction. Instead, there is latitude to merge transactions over a period and offset adjustments, so that the correct arm’s length price is achieved over a period. This is also in accordance with the system in the tax legislation, with periodic reporting of income and taxes/duties.
Based on the fact that the customs authorities’ goal is that the customs value for each of the imported goods is correct, a main challenge is to prepare transfer pricing documentation that is relevant in relation to the goods in question.
Whereas the customs valuation rules apply to goods, transfer pricing in tax legislation applies to goods, services, financing, intellectual property rights and real estate.
Another important difference is that transfer pricing documentation often focuses on the least complicated party in a transaction, typically the buyer instead of the seller. This entails that the focus in transfer pricing documentation is whether the importer is left with a suitable profit. The customs valuation rules, however, focus on the seller and whether said party has covered their costs and received an acceptable profit.
Enterprises that enter into agreements regarding transfer pricing should therefore also take into consideration the customs valuation rules’ transaction and product-based system in the preparation of documentation.
The customs authorities are not obligated to consider transfer pricing documentation prepared for tax purposes in the determination of the customs value.
To what extent one wishes to emphasise transfer pricing documentation in the inspection of transactions between dependent parties is up to each individual country’s customs authorities, see among other things, the WTO’s “A Handbook on the WTO Customs Valuation Agreement” (Rosenow/O´Shea 2010), p. 85. A party referring to transfer pricing documentation prepared for tax purposes as a basis for declared customs value therefore is not entitled to have this documentation emphasised by the customs authorities.
Even though the customs authorities do not have any duty to emphasise transfer pricing documentation in the determination of the customs value, such documentation can nevertheless contain useful information when investigating the circumstances surrounding the sale and whether the relationship of dependence between the parties has affected the price. This must be specifically assessed on a case-by-case basis.
This view is expressed in the WCO’s Commentary 23.1. The following is stated in points 8 and 9: “On one hand, a transfer pricing study submitted by an importer may be a good source of information, if it contains relevant information about the circumstances surrounding the sale. On the other hand, a transfer pricing study might not be relevant or adequate in examining the circumstances surrounding the sale because of the substantial and significant differences which exist between the methods in the Agreement to determine the value of the imported goods and those of the OECD Transfer Pricing Guidelines
Accordingly, the use of a transfer pricing study as a possible basis for examining the circumstances of the sale should be considered on a case by case basis. As a conclusion, any relevant information and documents provided by an importer may be utilized for examining the circumstances of the sale. A transfer pricing study could be one source of such information”.
The burden is on the importer to identify possible relevant information in the documentation that is submitted to the customs authorities.
Correspondingly, there may be circumstances where the customs authorities’ determination of the customs value may be useful for the Norwegian Tax Administration’s assessment of the arm’s length principle. In this connection, the OECD states the following in its guidelines: “Customs valuations may be useful to tax administrations in evaluating the arm’s length character of a controlled transaction transfer price and vice versa. In particular, Customs officials may have contemporaneous information regarding the transaction that could be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation which provides detailed information on the circumstances of the transaction.” (D.5 Use of Customs valuations 1.78).
As described in the Customs Valuation Guide, point 3.1.6, it is natural to divide the process into two phases and pose two questions when seeking to clarify whether the price is affected by the relationship of dependence:
1. What is the price?
2. Is the price affected by the relationship of dependence?
In order to find the answer to the first question regarding what the price is, it must be clarified what the buyer has paid for the goods. This can be problematic where payment for the goods is presented as payment for services other than the goods. However, one has to determine what the price is before it is possible to assess whether the price is affected by the dependence. This is emphasised by Borgarting Court of Appeal in the Swedish Match judgement (LB-2015-160408): “It is first when the complete price that is paid for the goods is determined, that it is relevant to assess whether the price is affected by the close relationship”.
If the price is not determined, the Section 7-10 method cannot be employed. The reason for this is not that the price is affected, but that the Section 7-10 method presumes that one knows the price.
In points 7.2 to 7.4 below, we look at three instances. Points 7.2 and 7.3 concern the question of what the price is, whereas point 7.4 concerns the questions of whether the price is affected by the relationship of dependence.
The customs authorities are often faced with situations where the buyer in Norway, in addition to goods, is also invoiced for services that are to have been provided to the buyer. In addition to an agreement regarding the purchase of goods, an agreement has often been entered into regarding the purchase of services that are e.g., designated as accounting services, IT services, marketing services, logistics services or management. However, these are services that, by their nature, the seller also needs in order to be able to produce the goods and deliver them to the buyer. The question is therefore whether the services can be considered delivered to the buyer and should therefore be excluded from the customs value, or if they cannot be considered delivered and are counted as the seller’s own costs and included in the calculation of the customs value.
The transaction value shall also encompass all payments that are a condition for the sale of the goods, cf. the Customs Act, Section 7-10, second paragraph.
It must be documented what services are delivered to the buyer and what services are consumed by the seller. In this context, it is insufficient to refer to a distribution of costs that is in accordance with the OECD Guidelines.
In accordance with the customs regulations’ transaction-based system, documentation must be specified in such a manner that it is possible to distinguish between what is payment for goods and what is payment for services, as well as what services are delivered to the buyer and what services are consumed by the seller.
The documentation duty is incumbent on the importer.
Borgarting Court of Appeal determined in the Peppercorn judgement (LB-2008-11968) that: “This case concerns paid service categories where elements that are both to be included in the customs value and elements that should not be included are interwoven. When PCN under these circumstances has not presented more detailed documentation to clarify the distribution, the Court of Appeal agrees with the District Court that PCN itself must bear the risk of the basis for taxation possibly being set too high. In this case, it is PCN that has the duty of documentation”. The Court of Appeal refers, among other things, to Rt.1995-1768 (the Butt case), which concerned discretionary recalculation of value added tax. Among other things, the following is stated in the judgement (page 1772):
“In the administration of customs and excise – in the same manner as in tax administration – the authorities must base their decisions on the information that appears in the taxable party’s statements and information otherwise. The taxable party must bear the risk for an incorrect fact if he does not provide information he is required to provide or has been encouraged to provide or provides incorrect information.
The Court of Appeal considers that the Supreme Court of Norway has in this context expressed general principles that are also of significance to the present case. There are no special circumstances that indicate exemptions from the general documentation duty that applies in cases of this nature”.
The Court of Appeal continues to apply this view in LB-2016-77476 (K-Mail/Klingel), which concerned the questions of whether service costs that were charged regularly according to an agreement with the parent company should be included in the customs value. The Court of Appeal emphasised that the costs concerned the imported goods and that no documentation had been submitted that could substantiate what services the subsidiary had possibly received from the parent company, and which did not concern the imported goods.
6.3 Transfer pricing documentation indicates that the declared customs value will be adjusted at a later date
The other instances concern transfers of funds from the buyer to the seller after importation (price adjustments). Related parties often have agreements regarding price adjustments for imported goods in order to ensure arm’s length distance in accordance with the OECD Guidelines. An example is where a buyer is ensured a profit margin in the range of 5% to 7% for the resale of products. If the buyer’s profits are in lower end of the range or below, the buyer can present a monetary claim in relation to the seller relating to previously imported goods. However, if the profits are in the upper range or above, the seller can direct a monetary claim in relation to the buyer for previously sold goods so that the profits are to fall within the established frameworks. The payment often occurs in the form of quarterly transfers.
Provided the transfers concern the imported goods, they shall be counted in the customs value pursuant to Section 7-10, which establishes that it is the price that is actually paid or payable that constitutes the transaction value. The fact that the actual calculation of the price occurs after the time of importation does not exclude the use of the Section 7-10 method, as long as sufficiently clear frameworks are established for the calculation of the price. This view is, among other things, supported in the Swedish Match judgement by Borgarting Court of Appeal (LB-2015-160408), Commentary 4.1 to the Customs Valuation Agreement and the WTO’s “A handbook on WTO Customs Valuation Agreement”, p. 30. Whether price adjustment should be considered must be based on an assessment of submitted agreements and other available documentation.
The Customs Act, Section 7-20 contains rules regarding the customs authorities’ right to grant permission for deferral of final determination of the customs value in return for the provision of security.
Once one has determined the answer to the first question regarding what the price is, one can proceed to question number two regarding whether the price is affected by the dependence between the parties. As mentioned under point 2, the transaction value is accepted if the importer can document that the value is approximately equal to the customs value for identical or similar goods determined in accordance with the Customs Regulations, Section 7-10-1, second paragraph.
However, in practice it is difficult to find customs valuations determined for identical or similar goods. This is especially the case in transactions between dependent parties, where the buyer is often the sole importer of the product. The customs authorities must then investigate the special circumstances in the sale. The customs authorities’ experience is that the importer often automatically refers to transfer pricing documentation prepared for tax purposes, which is to show that the price constitutes arm’s length distance and is prepared in accordance with the OECD Transfer Pricing Guidelines. As explained under point 5, such documentation does not apply in the determination of customs value, and there is therefore no right to have such documentation considered. Transfer pricing documentation can, however, contain useful information for the customs authorities in the investigation of whether the relationship of dependence between the parties has affected the price pursuant to the Customs Regulations, Section 7-10-1.
Case Study 14.1 illustrates an example where the customs authorities took into consideration transfer pricing documentation in the determination of customs value. In the example, XCO, which is the manufacturer in country X, is selling relays to its wholly owned subsidiary ICO, which is the distributor in country Y. ICO imports the relays and does not purchase any products from sellers that are not affiliated with the parent company. XCO does not sell relays or similar goods to independent buyers. The question is how to assess whether XCO and ICO sell and buy at a price that is not affected by the relationship of dependence.
After having assessed, among other things, ICO’s transfer pricing documentation, which compares the company’s profit margin to independent companies that conduct similar business in the country, the customs authorities determined that the sales price had not been affected by the relationship of dependence.
It is emphasised in the case that it does not entail any duty on the customs authorities to consider the OECD Transfer Pricing Guidelines, and that the use of transfer pricing documentation must be specifically assessed on a case-by-case basis.
Case Study 14.2 illustrates another example where the customs authorities assessed transfer pricing documentation in the determination of customs value. In this example, XCO in country X sells luxury handbags to ICO in country I. Both ICO and XCO are wholly owned subsidiaries of the group ACO, which is the proprietor of the brand of luxury handbags.
In connection with the customs authorities’ inspection, ICO submitted transfer pricing documentation that compared the company’s gross margins to the gross margins of eight independent companies. The documentation showed that ICO’s interquartile gross margin was far higher than the eight comparable companies. In this context and taking into consideration that ICO had not made any compensating adjustments, the customs authorities determined that the declared price was affected by the relationship of dependence. The customs value could therefore not be determined according to the main method regarding transaction value but had to be determined according to one of the other methods.
It is emphasised in this case, too, that it does not entail any duty on the customs authorities to consider the OECD Transfer Pricing Guidelines, and that the use of transfer pricing documentation must be specifically assessed on a case-by-case basis.
Whether transfer pricing documentation prepared for tax purposes should be emphasised in the determination of customs value must rest on a specific, case-by-case, assessment. Transfer pricing documentation must always be viewed in context with other documentation and the facts in the case, and the validity must be assessed in relation to the customs valuation rules.
The customs authorities encourage the business sector to review their routines carefully in order to ensure that both customs valuation rules and rules in tax legislation regarding transfer pricing are observed.
- Norwegian Customs’ Customs Valuation Guide (only available in norwegian)
(the below list does not only contain cases concerning transfer pricing, but relates to questions that are also relevant in transactions between dependent parties)
- LB-2020-10664 (New Wave)
- LB-2016-77476 (K-mail Order/ Klingel)
- LB-2015-16048 (Swedish Match)
- LB-2008-11968 (Peppercorn)
- LB-2004-67545 (Møller)
- LB-2004-9512 (Modern Kjolestoffer)
- LB-2002-1167 (Kolberg Motors)
- LB-2001-1742-1 (Hyundai)
- Advisory Opinion 21.1
- Commentary 4.1 and 23.1
- Explanatory Note 4.1
- Case Study 10.1, 14.1 and 14.2
- WTO: A Handbook on the WTO Customs Valuation Agreement (Rosenow/O´Shea)
- Customs Valuation: Commentary on the GATT Customs Valuation Code (Sherman/Glashoff)
- WCO Guide to Customs Valuation and Transfer Pricing (This is a “guide” and not a “guideline” and contains suggested approaches for customs authorities and the business sector)
- Transfer Pricing, Customs Duties and VAT Rules: Can We Bridge the Gap? (Ping/Silberztein) (www.oecd.org)