704 - Aligning tax and customs pricing

From ancient cities to modern-day trade hubs, customs officials have long served as gatekeepers, meticulously assessing the declared value of imported goods. However, the rise of multinational enterprises and their adept use of transfer pricing tactics have introduced a new dimension of complexity to this task. The South African Revenue Service (SARS), on 19 January 2024, responded with targeted amendments to formalise its approach to dealing with TP adjustments and thereby its customs valuation framework. More specifically, the draft amendments to the rules under sections 40(3)(a)(i)(C), 41(4)(b), and 120 of the Customs and Excise Act, 1964 (the C&E Act) aim at addressing the potential loopholes exploited through transfer pricing manipulation.

KEY AMENDMENTS

Two new rules, 40.03 and 41A.01, are woven into the existing tapestry of customs law:

- Rule 40.03: This rule acts as a procedural bridge, requiring that original customs declarations (bills of entry) should be adjusted by the retroactive transfer pricing adjustments in terms of the processes outlined in rule 41A.01. Essentially, processing vouchers of correction to amend the original import bill of entry.
- Rule 41A.01: This rule serves as a roadmap to the documentary requirements to support the disclosure made in the submission of the amended invoices (ie, debit or credit notes). It finally provides a definition for terms like “transfer pricing adjustment” and “adjustment period” relevant to the amended framework. Furthermore, it lays out the meticulous steps for submitting the transfer pricing adjustments related to previously imported goods.

The amendments necessitate thorough documentation of transfer pricing adjustments and their impact on customs value. This requires maintaining comprehensive records of invoices, contracts, transfer pricing analyses and adjustment calculations which previously may not have been required. Multinational enterprises with complex intra-group transactions will need to carefully assess the impact of the amendments on their transfer pricing practices and ensure proper alignment with customs valuation procedures.

More importantly, SARS’ aim is to formalise this declaration process and provide clarity to traders on the documentary requirements supporting these adjustments. It should be noted that a phased approach appears to be undertaken by SARS as the above rules cover mainly debit adjustments. The existing rules are silent on credit adjustments that may result in refunds of customs duties. However, it is believed that, in order to balance the law, SARS will address this after the consultation period with stakeholders.

GUIDANCE GOING FORWARD

So, what does this all mean for taxpayers that deal with customs?

- Taxpayers should ensure seamless integration of transfer pricing documentation, including intercompany agreements, pricing methodologies and supporting economic analyses, with customs valuation data. This will facilitate seamless demonstration of the arm’s length principle applied to the transactions.
- It is advised that taxpayers formulate and maintain a well-defined transfer pricing policy that aligns with international best practices and adheres to the arm’s length principle. This policy should clearly outline the transfer pricing methodology and documentation practices.
- Taxpayers should align the employed transfer pricing methodology with the chosen customs valuation method under the C&E Act. For instance, if using the transaction value method, ensure the transfer price aligns with the arm’s length price of the imported goods under independent market conditions.
- Taxpayers should maintain comprehensive and accessible records of all transfer pricing adjustments, including justification, calculations and underlying data. This documentation will be crucial in demonstrating compliance with the arm’s length principle and ensuring accurate customs valuation to withstand a SARS audit.
- The adjustments should be disclosed within 30 business days to ensure that the taxpayer does not face understatement penalties of 25% on the assessed customs duties resulting from adjustments and VAT penalties and interest, which are often difficult to challenge.

These amendments strive to bring clarity and uniformity to the process of adjusting bills of entry in response to transfer pricing adjustments affecting customs value.

While South Africa’s new draft amendments aimed at transfer pricing adjustments in customs valuation might add to a taxpayer’s compliance costs through the additional paperwork required, they also hold promise for fairer trade. Businesses will face increased documentation and communication demands, but hopefully will gain smoother customs clearance, a level playing field, and reduced risk of under-valuation thanks to clearer rules and enhanced accuracy. Similar regulations exist in countries like the US, EU, and Canada, highlighting a global effort to ensure market-reflective customs values. Though specific requirements and enforcement differ, the goal remains the same: fairer, more predictable trade for all.

The proposed amendments represent a significant step towards solidifying a transparent and efficient framework for handling transfer pricing adjustments within the ambit of customs valuation under the C&E Act. These changes contribute to bolstering fiscal integrity and streamlining trade procedures for stakeholders involved in international transactions.

Carridine Brooks & Marcus Stelloh

BDO

Acts and Bills

· Customs and Excise Act 91 of 1964: Sections 40(3)(a)(i)(C), 41(4)(b) & 120.