Many U.S. Multinational companies import goods from foreign related companies. However, once they import those goods, they often have to deal with the following two different sets of U.S. rules:
These rules can become especially important when tariffs increase the cost of imported goods.
The IRS and U.S. Customs and Border Protection (CBP) have different rules and purposes. Transfer pricing rules determine how profits should be allocated between related companies. On the other hand, customs valuation determines the value of imported goods for calculating duties.
Companies therefore need to consider both systems when changing their intercompany pricing.
For example, a U.S. company may purchase products from its foreign parent and resell them to U.S. customers. If U.S. tariffs increase significantly, the cost of importing these products in the United States will rise. This may decrease the U.S. company’s profit.
The U.S. company may consider lowering the price it pays to its foreign affiliate to maintain an appropriate profit margin. This may be reasonable from a transfer pricing perspective.
However, a lower transfer price does not automatically mean a lower customs value.
For example, suppose a U.S. company purchases products from its foreign parent company for $1,000,000. Thereafter, it resells them to U.S. customers for $1,200,000.
Let’s assume a new U.S. tariff increases the company’s import costs by $100,000. In that case, the U.S. company is now buying the product from its foreign parent company for $1,1000. As a result, the U.S. company’s profit may fall significantly when it resells the product to U.S. customers for $1,200,000.
The U.S. company may therefore consider reducing the price it pays to its foreign parent from $1,000,000 to $900,000 to maintain an appropriate arm’s-length profit margin.
From a transfer pricing perspective, the $900,000 price may be supportable if it produces a result consistent with what independent companies would have agreed to under similar circumstances.
However, a lower transfer price does not automatically mean the customs value is $900,000.
For customs purposes, the U.S. company should separately determine whether the $900,000 price can be accepted as the customs value under the applicable CBP rules.
Therefore, a company should not assume that a price that is acceptable for U.S. income tax purposes will automatically be acceptable for customs purposes.
Next, let’s understand why companies should account for tariffs when setting the transfer price.
Tariffs are taxes imposed by a government on goods imported from another country, which can increase their cost. These tariffs increase the cost of importing goods into the United States. If a U.S. company cannot pass those additional costs on to its customers, its profit margin may fall.
This can create a transfer pricing issue.
For example, suppose a U.S. distributor normally earns a 5% operating margin when purchasing products from its foreign affiliate. A significant increase in tariffs may reduce that margin to 1%.
The company may review its transfer pricing policy to determine whether the intercompany price should be adjusted so that the U.S. company earns an arm’s-length return.
A lower transfer price can reduce the U.S. company’s cost of purchasing the goods and increase its U.S. operating profit.
However, the company should also consider the customs consequences. A lower transfer price may reduce customs duties. Now, this lower price should also meet the standards of U.S. customs valuation rules.
Next, let’s understand how U.S. Customs determines the value of imported goods.
U.S. customs duties are generally calculated based on the customs value of the imported goods.
The main method used by U.S. Customs and Border Protection (CBP) is called transaction value. This is generally the price actually paid or payable for the goods when they are sold for export to the United States, with certain required additions.
For example, the customs value may need to include certain:
If the transaction value cannot be used, U.S. customs law provides other valuation methods that should generally be applied in a specific order.
Therefore, the price shown on an intercompany invoice is important, but it may not always match the final customs value. Companies should determine whether the price qualifies as transaction value and whether any additional amounts should be included in the calculation of customs value.
Next, let’s understand how U.S. Customs treats transactions between related companies when determining whether the reported transaction value can be accepted for customs purposes.
Many U.S. multinational companies import goods from a foreign parent, subsidiary, or sister company. The fact that the buyer and seller are related does not automatically mean that U.S. Customs and Border Protection (CBP) will reject the transaction value.
Instead, CBP generally needs to determine whether the parties’ relationship affected the price.
A related-party transaction value may be accepted under the following conditions:
This means that a company should be able to explain how the intercompany price was established and why the relationship between the parties did not cause the price to be artificially high or low.
Many companies may assume that their transfer pricing documentation can be used to support a lower customs value for imported goods. However, transfer pricing rules and customs valuation rules are different. Next, let’s understand whether and when transfer pricing documentation can support the customs value reported to U.S. Customs and Border Protection (CBP).
A transfer pricing study can be useful when evaluating a customs value. However, a transfer pricing study prepared for income tax purposes does not automatically establish the customs value.
The IRS and CBP are looking at related-party pricing from different perspectives.
The IRS generally focuses on whether the related companies’ results are consistent with what independent companies would have agreed to under comparable circumstances.
CBP focuses on whether the price paid for the imported goods can be accepted as the customs transaction value under the customs valuation rules.
For example, a transfer pricing study may conclude that a U.S. distributor should pay less for imported products so that its operating margin is consistent with comparable independent distributors.
That conclusion may be useful to CBP, but the importer may need additional evidence showing that the lower price also satisfies the customs requirements.
Therefore, companies should avoid assuming the following:
Arm’s-length price for income tax = automatically acceptable customs value.
Instead, the transfer pricing analysis should be reviewed together with a separate customs valuation analysis.
The timing of a transfer pricing adjustment can be important for U.S. customs purposes.
Some companies set their intercompany prices before goods are imported and adjust them during the year as necessary. Other companies wait until the end of the year to determine whether the U.S. company earned an appropriate profit margin and then make a transfer pricing adjustment.
The second approach can create customs issues because the final price of the imported goods may not be known when the goods enter the United States.
Therefore, companies should consider the customs impact before changing their transfer pricing policy or making adjustments. Having a clear pricing formula established and documented before importation can make it easier to explain how the price was determined and how any later adjustment was calculated.
A company may discover at year-end that its actual profit margin is outside its target arm’s-length range.
It may then make a transfer pricing adjustment to increase or decrease the price paid to its foreign affiliate.
For income tax purposes, such adjustments may be permitted when properly supported under the transfer pricing rules.
For customs purposes, however, the treatment is more complicated.
CBP may accept certain post-importation transfer pricing adjustments when the importer has an established pricing policy and satisfies the applicable customs requirements.
In particular, CBP looks at factors such as whether:
The important point is that not every year-end transfer pricing adjustment automatically changes the customs value.
Companies should establish the appropriate customs procedures before relying on post-importation adjustments.
The CBP Reconciliation Program can help importers when certain information needed to determine the final customs value is not available when the goods enter the United States.
For example, a company may use a transfer pricing formula under which the final price of imported goods depends on the U.S. company’s annual profitability.
At the time of importation, the company may not yet know the final transfer price.
Under the Reconciliation Program, an importer can identify entries that require later adjustments and subsequently report the final values to CBP.
The final reconciliation may result in:
This can provide a practical way to manage customs reporting when transfer pricing adjustments are expected.
However, companies should determine whether they qualify for and properly use the Reconciliation Program before relying on it for their import transactions.
Transfer pricing is not the only area that can affect the customs value of imported goods.
Companies should also review the structure of their transactions and supply chains.
Not every payment associated with an import transaction is necessarily included in customs value.
Depending on the facts, certain costs may be excluded from customs value if they are separately identified and meet the applicable requirements.
For example, certain post-importation transportation or installation costs may be treated differently from the price of the imported merchandise.
At the same time, some payments that appear separate from the purchase price may actually need to be added to customs value.
For example, certain royalties, license fees, assists, and other amounts may be dutiable.
Companies should therefore analyze each component of an intercompany payment rather than simply separating amounts on an invoice and assuming that they are not subject to duty.
Some supply chains involve multiple sales before goods reach the United States.
For example:
Foreign Manufacturer → Foreign Related Company → U.S. Importer
Under certain circumstances, the importer may be able to use the price from the earlier sale as the customs value instead of the price from the later sale to the U.S. importer.
This is commonly referred to as the First Sale Rule.
The requirements are strict. The earlier transaction generally must be a bona fide sale for export to the United States, and the importer must satisfy CBP’s requirements for using the first-sale price.
When the parties are related, the importer must also address whether the relationship influenced the price.
Therefore, first-sale planning requires a detailed customs analysis and should not be based solely on a transfer pricing study.
Companies may also consider changing how their global supply chain operates.
Possible changes include:
These changes can affect both transfer pricing and customs duties.
However, restructuring solely to reduce tariffs can create other tax consequences. Companies should consider the broader implications, including transfer pricing, intellectual property, withholding taxes, Section 367, and other international tax rules.
Although both systems deal with related-party transactions, their objectives are different.
Transfer Pricing | Customs Valuation |
Determines how income and expenses should be allocated between related companies | Determines the value of imported goods for customs purposes |
Primarily governed by Section 482 and related regulations | Primarily governed by 19 U.S.C. § 1401a and CBP regulations |
Focuses on whether related-party results are consistent with the arm’s-length principle | Focuses on whether the declared value satisfies the customs valuation rules |
Often considers functions, assets, risks, and profitability | Focuses on the price paid or payable and other statutory valuation requirements |
Primarily affects income tax | Primarily affects customs duties |
Because the objectives are different, a company may need separate analysis and documentation for tax and customs purposes, even when both analyses rely on some of the same underlying information.
Transfer pricing and customs decisions should not be made independently.
For example, a tax team may recommend lowering an intercompany price to bring the U.S. company’s profit within an arm’s-length range.
If the customs team is not involved, the company may later discover that the adjustment creates a customs reporting issue.
A better approach is to have the teams work together from the beginning.
The teams should review:
This coordinated approach can help prevent inconsistent positions before the IRS and CBP.
Companies importing goods from foreign related parties should consider the following:
For multinational companies importing goods from related foreign companies, transfer pricing and customs valuation should be considered together—but not treated as the same set of rules.
A company may have a valid transfer pricing reason to reduce the price it pays to its foreign affiliate. However, that reduced price does not automatically become the customs value.
The company must separately determine whether the revised price satisfies the U.S. customs valuation requirements.
With tariffs and supply-chain costs continuing to affect international businesses, companies can benefit from reviewing their transfer pricing policies, customs valuation methods, pricing adjustments, and supply-chain structure together.
Early coordination among tax, transfer pricing, customs, finance, and supply chain teams can help companies remain compliant while identifying opportunities to manage their overall tax and duty costs.