Transfer Pricing and Customs Valuation: Risks in Related-Party Transactions

Executive Summary

Transfer pricing and customs asset are two regulation areas that serve different legal purposes in associated company operations but can be affected by the same commercial data.

The main risks in terms of companies are:

1. The associated company prices are not sufficiently evaluated in terms of customs value.
2. If the transfer pricing reports prove the accuracy of the customs value alone.
3. The end of the year price corrections should not be examined by the customs effect.
4. In-group service, the wrong assessment of royalty and license payments.
5. No information sharing between finance, tax and foreign trade departments.
6. The price changes associated with past import operations are not monitored.

Transfer pricing policies, commercial contracts, accounting records and customs declarations should be assessed together for management of these risks.

1. What is Transfer Pricing?

Transfer pricing is the concept for pricing applied in goods and services performed between associated people or companies.

The basic tax law framework of transfer pricing in Turkey is evaluated within the scope of earnings distribution regulations and related secondary legislation, covered by transfer pricing in Article 13 of the Institutions Tax Law No. 5520.

The starting point is to assess related-party transactions under the arm’s length principle.

The arm’s length principle involves assessing whether the price or consideration agreed between related parties is consistent with what independent parties would agree under comparable conditions.

However, the scope of transfer pricing analysis is determined according to the relevant tax legislation of methods and results used.

2. What is the customs value?

Customs clearance is the value determined by the relevant customs legislation of the imported goods.

The basic provisions for customs clearance in Turkey are regulated in the Customs Law No. 4458 and Customs Regulation.

The basic method in determining the customs asset is the price of the sale in the provision of the relevant conditions.

The actual paid or paid price for imported goods in this method is essential; the necessary corrections prescribed in the legislation are taken into account.

However, it is necessary to meet the relevant conditions for the application of the sale price method.

This method can be applied in imports between associated companies.

However, the effect of the relationship between the buyer and the seller on the price should be evaluated in the relevant legislation framework.

3. What is the Basic Problem in Imports Made from Associated Companies?

Prices may be determined within the framework of group policies in commercial transactions between associated companies.

For example, a company in Turkey can be regularly imported from the group company abroad.

The prices of these products can be created within a method of transfer pricing determined by the group.

However, this situation does not eliminate the need to evaluate the price used in the import as well as in terms of customs value.

One of the important questions in terms of customs clearance is that the buyer and the seller does not affect the sales price.

This review should be made according to the methods and conditions prescribed in the relevant customs legislation.

Trading between associated companies does not mean that the sales price method will be automatically rejected.

However, it may be necessary to evaluate the effect of the relationship on the price.

4. Differences Between Transfer Pricing and customs value

The evaluation of the same commercial operations of two systems does not mean that the results will be the same in any case.

5. Transfer Pricing Report Is Customs Restriction Proofs?

Transfer pricing reports may contain useful information in understanding the economic and commercial conditions of associated company transactions.

For example in the report;

• group pricing policy,
• functions of companies,
• risks undertaken,
• used assets,
• comparable analysis,
• applied pricing methods

You can take place.

This information may be a supporting nature in customs asset assessment.

However, the availability of the transfer pricing report does not allow the customs asset to be considered automatically.

Because in terms of customs clearance;

• sales conditions of imported goods,
• the impact of the relationship between the buyer and the seller on the price,
• actual paid or paid price,
• added value to the legislation,
• related processing and document conditions

should be evaluated.

Therefore, transfer pricing documents should be viewed as resources that support this analysis in related conditions, not in place of customs asset analysis.

6. Year End Transfer Pricing Corrections

One of the important risk areas in relational company operations is the end of the year or end price corrections.

Some international group of companies can reevaluate the prices applied in the year according to financial results at the end of the period.

For example, the importer in Turkey can be corrected in group prices in order to achieve the targeted profitability level of the company.

These fixes;

• additional invoice,
• you will receive or dekontu,
• price difference,
• end-term destruction

can be performed in different formats.

However, it does not mean how these processes are recorded in terms of accounting or corporate tax, direct to the same conclusion in terms of customs asset.

Firstly, the quality of the correction and the connection with the imported goods should be evaluated.

7. Customs Implications of Upward Price Adjustments

For example, let’s assume that a company in Turkey has been imported from the company associated with year.

At the end of the year you have determined that additional payment is required to be made to the seller outside the country within the scope of in-group pricing policy.

In this case, the following questions may be significant:

1. Is additional payment linked to imported goods?
2. Is the payment part of the actual paid or paid price for goods?
3. Can the correction be distributed to certain import operations?
4. What is the relevant contract and pricing mechanism?
5. What transaction or notice is required within the scope of the customs legislation?

The answers to these questions may vary according to concrete contract and processing.

It should not be concluded that each additional payment should be included in the customs value automatically.

However, the evaluation of additional payments that may be linked to the asset of the imported goods can also create an important risk of compliance.

8. Customs Implications of Downward Price Adjustments

In some cases, price correction can be made in favor of importer at the end of the period.

For example, by the seller outside the country, dekontu can be arranged to the company in Turkey.

A downward price adjustment does not automatically entitle the importer to reduce the customs value declared on earlier imports or to obtain a duty refund.

in such processes;

• legal nature of price correction,
• connection with related import operations,
• price mechanism in sales contract,
• provisions of customs clearance,
• Regulation on correction and reclaiming processes

should be evaluated together.

Assess upward and downward adjustments separately, as their consequences under customs law can differ.

9. Sample Application: Year End Price Fix

The following example was prepared in order to show the reasons for the end corrections of the period in associated company operations should also be evaluated.

A Company operating in Turkey imports products for years from the B Company associated with abroad.

Let’s assume that the total import invoice price within the year is 10 million euros.

At the end of the period you get an additional payment of 300 thousand euros within the scope of the group transfer pricing policy.

The conclusion that the additional payment of 300 thousand euros in this table should be included in the customs value of the entire payment is not available only with this information.

First, the nature of the payment and connection with the imported goods should be evaluated.

The additional payment should be reviewed which processes are associated with, how to organize in the contract and how to deal with the relevant asset rules.

In addition, the methods and durations to be applied should be determined according to the relevant legislation if necessary to reflect the correction to the customs clearance.

The accounting for transfer pricing correction does not mean that the customs asset assessment is completed.

10. Royalty and License Bedeller in Associated Company Transactions

In addition to goods purchases in international company groups, payments can be made on brand, patent, technology or other intellectual rights.

As these payments may be judged within the transfer pricing, it may also take importance in terms of customs clearance in the relevant conditions.

However, every royalty or license fee is not included in the customs value automatically.

in accordance with the conditions prescribed in the relevant legislation;

• relationship with imported goods,
• quality of sales condition,
• who and for whom the payment is made,
• before the price is found and there is no

matters such as should be evaluated.

For this reason, royalty analysis is one of the important areas where transfer pricing and customs asset work are cut.

11. Group Service Bedellers

Payments relating to management, marketing, technical support, information technologies or other services between associated companies can be realized.

These payments may be subject to evaluation within the scope of transfer pricing.

However, in terms of customs clearance, it is not correct to address the same way of each in-group service fee.

The nature of the payment, connection with the imported goods and the relevant provisions of the provisions of the asset should also be evaluated.

For example, specific design or development activities linked to imported product can be important in terms of customs clearance according to concrete conditions.

In turn, some service payments that are not directly connected with import can be assessed differently.

The actual content of contracts, invoices and services related to the exact result should be examined.

12. Importance of Contracts in Associated Company Imports

Pricing mechanisms between associated companies are often held in group contracts.

In these contracts;

• method of determining the price,
• periodic price changes,
• target profitability mechanisms,
• royalty and license obligations,
• additional payment terms,
• price correction methods

You can take place.

For this reason, it may not be enough to examine only commercial bills in customs asset assessment.

It is necessary to evaluate the relevant contracts and pricing policies.

It can be especially important that the end corrections of the year are based on a predetermined mechanism, or then are caused by commercial decisions.

However, every pricing provision contained in the contract does not automatically give a certain customs result.

13. Why Does Transfer Pricing and customs value Between?

Transfer pricing in companies is often managed by tax and financial departments.

Customs clearance is followed by units responsible for foreign trade or customs operations.

Important risks may occur when there are no regular information sharing between these two functions.

For example, at the end of the finance department period, it can perform in-group price correction.

However, the foreign trade department may not be aware of this correction.

Similarly, a new licensing contract can be signed, but the effect of this contract on customs value may not be noted.

Therefore, it is important that companies manage their transfer pricing and customs asset controls as completely independent processes.

14. What Risks Can Be Revealed After Control?

The associated company imports can be examined from various directions within the scope of control.

In this context;

• associated company pricing policies,
• determining method of customs clearance,
• end-end price corrections,
• royalty and license payments,
• commercial contracts,
• accounting and payment records

can carry importance.

For example, there may be differences between payments in accounting records with assets located in import declarations, explanation and evaluation may require.

However, a discrepancy does not necessarily indicate a breach of the law.

The reason for important differentity is the determination and correct evaluation of the relevant customs asset rules.

C-INSPEC Perspective

Same Commercial Transaction, Two Different Tax Perspective

Transfer pricing and customs clearance are two separate systems that evaluate the same commercial process for different legal purposes.

Therefore, companies do not mean that only provide compliance with a system, eliminating all risks in other systems.

For example, an international group of companies may be documented in detail under the corporate tax legislation between associated companies.

However, economic analysis used in this study should not be excluded if import processes contain all the necessary evaluations in terms of customs value.

The correct declaration of the commercial invoice price in the customs declarations similarly may eliminate the need to evaluate the customs effect of the price corrections performed at the end of the period.

For this reason, transfer pricing and customs asset in C-INSPEC approach should be addressed as two compliance areas that must be coordinated, not as independent reporting activities from each other.

Sustainable compliance in associated company transactions requires not only how the price is determined, but how this price is assessed in different legislation systems.

This approach is especially important in companies that import high volume in group.

15. Six Stage Control Program for Companies

Phase 1 — Associated Company Trading Inventory

Import transactions, related products and pricing policies performed from associated companies are determined.

Step 2 — Contract and Pricing Analysis

In-group contracts, price detection methods and periodic correction mechanisms are reviewed.

Phase 3 — customs value Review

The associated company processes are evaluated in terms of the relevant customs asset rules.

Step 4 — Accounting and Customs Mutabakir

Import declarations are compared to trade bills, payment records and end fixes.

Step 5 — Fix and Compliance Processes

The legal and financial effects of the identified differences are evaluated; the necessary processes are determined within the relevant legislation.

Step 6 — Continuous Monitoring

Regular control mechanisms are created for new contracts, pricing changes and end-end corrections.

This program is an example corporate control approach that can be adapted according to the company’s operating structure.

16. Control Indicators For Top Management

These indicators are recommended for internal risk management; there is no mandatory reporting format for all companies in the legislation.

17. Frequencies

Important control deficiencies encountered in associated company imports may be:

1. A sufficient acceptance of the transfer pricing report in terms of customs value.
2. Not to evaluate whether the price is affected and affected in relational company operations.
3. The end of the year price corrections are not reported to the foreign trade department.
4. Royalty and license payments are not reviewed in terms of customs value.
5. In-group contracts are not associated with customs clearance.
6. No consensus between accounting records and customs declarations.
7. Assuming that upward and downward price adjustments automatically have the same legal consequences.
8. No regular monitoring of relevant legislation changes.

Removal of these deficiencies can contribute to more effective management of the company’s associated company imports.

Frequently Asked Questions

Conclusion

Transfer pricing and customs clearance are two important compliance areas linked to each other in related company operations but based on different legal rules.

Reviews made in terms of transfer pricing can support customs asset analysis.

However, these assessments should not be excluded from the customs legislation.

In particular year-end price corrections, royalty payments, in-group service costs and associated company contracts should be carefully examined in terms of customs value.

In order to manage the risks in these areas of companies in order to create regular information sharing and control mechanisms between finance, tax and foreign trade functions.

Reliable compliance in associated company transactions requires not only the price’s compliance, but also the accuracy of import operations in terms of customs value.

Legislation and Official Sources

1. 4458 No Customs Law — provisions on the customs asset.
2. Customs Regulation — Customs clearance and relevant regulations.
3. Tax Law No. 5520 — Article 13
4. General Communiqué and relevant regulations on the Distribution of Earnings with Transfer Pricing Way.
5. OECD Transfer Fees for Multinational Enterprises and Tax Administrations.
6. World Trade Organization customs value Agreement.
7. World Customs Organization — Guidelines for the relationship of customs asset and transfer pricing.