Today we talk about pricing adjustments, and Transfer Pricing (TP) adjustments and how to ensure that the crossover of customs and TP doesn’t get you in a pickle.
TP adjustments often happen during a tax audit when revenue authorities argue that transfer prices do not adhere to the arm’s length principle and so amend the prices to the “correct” amount. Such adjustments usually occur in a later financial period than the transactions occurred and can attract pretty hairy penalties and interest.
On the other hand, the taxpayer itself may make pricing adjustments, often in the financial year in which they occurred so that the goods imported during the year reflect the arm’s length price of the goods (i.e reflect the economic substance of related-party transactions or goods are charged at market related prices). These type of pricing adjustments, if done correctly typically do not attract wider TP adjustments, penalties and additional taxes as the tax position is corrected within the tax period.
Pricing and TP adjustments can have implications for customs valuations, particularly when the prices declared for customs purposes differ from the prices used for TP purposes. In such cases, tax authorities may scrutinise the declared values and adjust to ensure that they reflect the arm’s length principle. Likewise, tax authorities could look at customs valuations when assessing TP compliance and query any differences between the two. Basically, one needs to look at Customs and TP together and ensure that they are in alignment, as it’s difficult to argue too different outcomes for two different tax purposes.
The South African Revenue Services (SARS) recently published new draft amendments covering the procedures to be followed when traders make price adjustments at year-end. This brings welcome clarity as, prior to these changes, there were no official procedures outlined in the customs legislation on how to deal with such price adjustments.
In the amendments, SARS proposes that the customs value be adjusted on the bill of entry (SAD 500) and a Voucher of Corrections (VOC) needs to be passed for each customs value entry amended. This will create an additional administrative burden for traders that have multiple entries that need to be adjusted, as well as additional costs to pass VOCs.
The new draft rules specified that SARS needs to be informed by email or hand delivery to a customs office of debit or credit notes received for a specific accounting period within one month of the debit/credit note date. If a debit note is passed, it will lead to the increase of the customs values declared on the SAD 500, resulting in an additional customs duty and import VAT to be paid to SARS. If a credit note is passed, the trader might be in a customs duty refund position. The import VAT will be neutral.
The draft amendments specified that specific documentation must accompany the communication to SARS, including a spreadsheet indicating the impact of the adjustment on the customs duty and import VAT for the adjustment period in question, signed financial statements, relevant purchase and sales agreements and a summary of the VAT 201 returns submitted to SARS, amongst others.
Our takeaway
Pricing and TP adjustments can have direct implications for customs valuations on imported goods, and also tax authorities may consider customs valuations when assessing TP compliance. Basically, one needs to look at Customs and TP together and ensure that they are in alignment.
Thus, it is essential for MNEs to carefully document TP adjustments and ensure that they are supported by appropriate economic analysis and documentation from both a TP and customs valuation perspective. Failure to make timely and accurate pricing or TP adjustments can lead to tax controversies, penalties, and reputational risks for the business.
Meet the Authors
Today’s article was written by Wian de Bryn who is our Customs specialist and based in Johannesburg, he can be contacted at wdebruyn@reganvanrooy.org and Sihle Mapolisa who is part of our Transfer Pricing team at Regan van Rooy. Sihle is based in Pretoria and can be contacted at smapolisa@reganvanrooy.com
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