Related Parties and Transfer Pricing

An article for Lloyds List in July 2016

Probably one of the most common reasons that Transaction Value is rejected in an import transaction is where the importer and exporter are related to each other and this relationship has an impact on the price. This is because Customs Valuation is based upon the premise of a price in an unrelated or “arms length” transaction.

Commonly this occurs in situations such as when an overseas manufacturer has a wholly-owned subsidiary in Australia (or vice versa). As the seller controls the buyer the price may be affected by the relationship, because the owner of the parent company is indirectly also the owner of the Australian subsidiary company.

The problem becomes how to establish if this transfer price is acceptable for the determination of the Customs Value (CVAL) and requires reference to two matters:

  1. A review to examine all of the circumstances surrounding the sale; and

  2. A review to determine whether the Adjusted Price required to be determined by CA S161 (2) and any price related costs not already taken into account will closely approximate to the CVAL in other sales of identical or similar goods.

CA s.154 (3) provides that persons/businesses are deemed to be related for the purposes of the determination of the valuation provisions of the Customs Act if in summary:

  1. they are members of the same family or partnership; or

  2. one of them is an officer or director of a business controlled, directly or indirectly, by the other; or

  3. both of them control or are controlled, directly or indirectly, by a third person/business; or

  4. that person/business controls 5% or more of the voting shares of each of them.

Having first determined whether the parties are related in terms of the Act one must then determine if that relationship impacts the price so that use the Transaction Value must be rejected. It’s important to note that having made this assessment and determined that the relationship does not influence the price, then the price payable can be accepted for the purposes of determining the TV despite the relationship between the parties.

If DIBP claim they are unable to accept the TV in an import transaction, the importer is generally then given 28 days to provide detailed information about the circumstances of the sale sufficient to demonstrate that the relationship did not influence the price. The information provided should include:

  1. Details as to the way in which the buyer and seller organise their commercial relationship and the way in which the price in question was arrived at so as to provide sufficient information to determine if the price was influenced by the relationship.

  2. This could include information on prices and as to how the parties conduct business in unrelated party transactions as well as the business practices prevalent in their industry.

  3. How the price is determined. It should reflect a recovery of all costs plus a profit, perhaps commensurate with that profit percentage normal in that industry.

 Remember though that if the importer does not pay for the goods then clearly there is no sale and TV cannot be used.

If DIBP still do not accept that the relationship did not influence the price then you must have recourse to assessing the “Test Values” under CA s.161H (3).  Adjustments might however be required for commercial matters such as level of sale, quantity ordered, costs, etc.    Expert advice may be required as may reference to any ATO rulings on this issue held by the parties.  

The TV will be accepted by DIBP if it “closely approximates” any one of the values nominated, which represents a value already accepted by DIBP for identical or similar goods occurring at or about the same time and after due allowance for matters such as the nature of the goods and the industry and even seasonal differences.

Transfer pricing may have a significant impact on CVAL and can be expected to be further investigated. Any transfer pricing has a direct impact on the determination of CVAL as the lower the transfer price, the lower the CVAL and the duty and GST payable. Therefore, if your client has Transfer Pricing arrangements in place, ensure their transactions with related parties are conducted at an arm’s length basis taking into account the relevant business strategies and practices of that industry and the parties involved. Importantly, seek a Valuation Ruling to confirm.