Transfer pricing and customs valuation: common pitfalls and practical solutions

1. Transfer pricing and customs valuation: common pitfalls and practical solutions Marina Volkova, Customs Group Evgenia Veter, Transfer Pricing Group

2. Agenda • Context • Background • Common TP/Customs Pitfalls and Practical Solutions • D. Conclusion

3. A. Context • Globalization has led to an increase in the magnitude and types of intercompany transactions • Transfer prices charged on imported product can be subject to different sets of regulations • Multinationals can find themselves being whipsawed between Tax and Customs authorities based on conflicting arguments • This can lead to instances of significant “double-taxation”

4. A. Context • Taking a balanced approach can help mitigate the risk of “double” taxation. Tax Compliance Customs Valuation VS.

5. B. Background • Different set of rules and methodology for transfer pricing and Customs valuation • Transfer pricing study “tested party” may not be right party for Customs valuation purposes • Comparables for transfer pricing & customs may not be consistent • Customs and Tax rules have different objectives • Profits based methods are not accepted by Customs

6. C. Common Transfer Pricing/Customs Pitfalls • “Price is determined by the headquarters” / Global Transfer Pricing Policy • Tax: application of globally consistent transfer pricing policy may help taxpayers defend against an adjustment • Customs: May constitute admission that special relationship influenced import price

7. C. Common Transfer Pricing/Customs Pitfalls • Practical Solutions • Tax: understand and be prepared to explain pricing policy that transfer pricing is based on a reasonable method • Align the policy with Russian TP rules, as necessary • Ensure proper documentation is in place, i.e., transfer pricing study, intercompany agreements, etc. • Customs: understand and be prepared to explain pricing policy • Encourage greater interactions between transfer pricing and customs personnel • Ensure proper documentation supporting the fact that transfer price represents a fair market price is in place.

8. C. Common Transfer Pricing/Customs Pitfalls • Transfer Pricing Adjustments • Tax: Periodic adjustments to achieve target transfer pricing margin • Customs: May constitute an admission that the value of imported products declared to customs was incorrect

9. C. Common Transfer Pricing/Customs Pitfalls • Practical Solutions • Tax: Ensure all adjustments comply with local laws and practices • Adjustments are not easier (sometimes not possible) in Russia • Ensure proper documentation is in place • Regular price revisions vs. year-end adjustments • Consider alternative mechanisms / solutions • Customs: Understand the limits of Russian law: • TP adjustments are not easily, if at all, acceptable for customs valuation

10. C. Common Transfer Pricing/Customs Pitfalls • Practical Solutions (continued) • Upward adjustments may result in duty liability but downward adjustments in price do not result in duty refunds • Fluctuating import values may attract attention • Be prepared to link adjustments to specific imported product or groups of products, especially when different duty rates apply

11. C. Common Transfer Pricing/Customs Pitfalls • Royalty Payments • Tax: Deductible as long as arm’s length and meet general deductibility criteria • Customs: May be dutiable (added back to transaction value) under certain conditions

12. C. Common Transfer Pricing/Customs Pitfalls • Practical Solutions • Tax: Understand and be prepared to explain the nature of royalties, the royalty rate, how it was established, and tax implications • Ensure proper documentation is in place, i.e., royalty agreement, transfer pricing study, intercompany agreements, etc. • Customs: Analyze whether royalties are related to the imported goods and condition of sale exists • Structure royalty agreements to minimize risk of duty imposition • Understand potential exposures in advance

13. D. Conclusion • Increased attention to Transfer Pricing and Customs valuation by many tax jurisdictions, including Russia • A need to have an integrated and coordinated approach to transfer pricing and customs compliance • MNCs face increased responsibilities to comply with specific transfer pricing and indirect tax valuation requirements of multiple jurisdictions • An integrated structure of intercompany prices that is able to satisfy both transfer pricing and customs valuation requirements is required

14. D. Conclusion • Develop “coordinated” TP and customs valuation documentation and support files: • Do not rely solely on TP analysis alone to support customs values! • Proactively undertake simultaneous support for customs values under the applicable customs valuation methodology • Ensure a strategic focus on TP and customs together rather than manage each aspect independently

15. Thank you! Marina Volkova Customs Director marina.volkova@ru.pwc.com +7 (495) 967 6223 Evgenia Veter Transfer Pricing Director evgenia.veter@ru.pwc.com + 7 (495) 232 5438 “The information contained in this presentation is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PricewaterhouseCoopers client service team or your other tax advisers. The materials contained in this presentation were assembled on 29 October 2008 and were based on the law enforceable and information available at that time.”