Customs duties and transfer pricing – how to integrate tax strategies within an international supply chain?

Modern companies operating in international markets face the challenge of aligning customs and transfer pricing policies. A lack of consistency between these areas can lead to significant tax, operational and financial risks. For this reason, close cooperation between customs and transfer pricing departments is essential – only through collaboration can risks be effectively managed, and regulatory compliance ensured. In this article, we highlight the key issues that professionals in customs and transfer pricing should consider in practice to mitigate potential threats.

Aligning customs and transfer pricing documentation

To avoid the risk of customs authorities disputing declared customs values, companies must ensure full compliance with customs regulations, including the conditions under which the transaction value method can be applied. Alignment between customs documentation and transfer pricing policies is particularly important.

Key elements to consider include:

• Identifying relationships under customs regulations and assessing whether they influence pricing
• Ensuring the relevance and currency of benchmarking studies
• Incorporating customs duties into transfer pricing policies
• Documenting transfer pricing adjustments with consideration of customs rules and requirements

An integrated approach to these areas not only enhances risk management but also supports being compliance with applicable laws and regulations.

Challenges arising from trade wars

Changes in customs policy, such as the introduction of retaliatory tariffs, can create significant uncertainty in the future settlement of transfer pricing. This poses major challenges, particularly for international corporate groups. Companies must continuously monitor the validity of their existing benchmarking analyses and adapt their transfer pricing policies to reflect new tariff rates. It is also crucial for intercompany agreements to address customs-related matters.

Companies must carefully analyse whether changes in margins, supply routes or the location of economic functions result from market conditions or are reactions to protectionist measures introduced by governments. Trade wars may also prompt businesses to reconsider the location of operational activities or to restructure their corporate groups – which, in turn, necessitates a reassessment of functions, risks and assets in light of transfer pricing and documentation obligations.

In cases of uncertainty, it is advisable to consult experts who can help tailor strategies to the evolving regulatory landscape.

Transfer pricing adjustments and the impact of customs duties

Increases in customs tariffs – such as the US imposing a 25% duty on machines imported from Europe – can significantly affect the profitability of transactions between related parties. For instance, if the purchase cost of goods rises from USD 800 to USD 1,000 while the sales price remains at USD 1,000, the US distributor may incur a loss. In such cases, the company should consider applying a transfer pricing adjustment to bring the transaction in line with the arm’s length principle – particularly for entities with straightforward functional profiles, such as contract manufacturers.

Practical aspects of transfer pricing adjustments

Transfer pricing adjustments require particular attention. It is important to determine whether an adjustment qualifies as a genuine transfer pricing adjustment or constitutes a different type of settlement. Additionally, the company must assess whether the adjustment may be treated as tax-deductible income or cost, fulfilling the conditions set out in Article 11e of the  Polish Corporate Income Tax Act. For transactions involving goods traded outside the EU, further issues such as VAT and customs implications must also be considered.

Recommendations for practitioners

To manage risks associated with customs and transfer pricing policies effectively, companies should take the following steps:

• Policy Integration: develop a coherent strategy that covers both customs and transfer pricing aspects, allowing for better risk management and regulatory compliance.
• Documentation Updates: regularly review and update customs and transfer pricing documentation (including benchmarking studies) to ensure compliance with current legal requirements and market practices.
• Training and Awareness: educate employees responsible for customs and transfer pricing to raise awareness of potential risks and enhance responsiveness to legal changes.
• Expert Collaboration: consult specialists in customs and transfer pricing to effectively adapt strategies to an evolving regulatory environment.

Integrated approach to customs and transfer pricing

An integrated approach to customs and transfer pricing is vital for ensuring legal compliance and optimising international trade processes. Professionals in these areas, as well as company leadership, should continuously update their knowledge and adjust strategies in response to regulatory developments.