Year-End Transfer Pricing Adjustments And Their Impact On Customs & VAT

• Published date: 23 April 2021
• Subject Matter: Tax, Transfer Pricing, Sales Taxes: VAT, GST
• Law Firm: Tiberghien Advocaten
• Author: Ms Tine Slaedts, Ben Plessers, Gert Vranckx and Ward Lietaert

As the end of 2020 fast approaches, we notice that many multinational companies during the coming weeks/months often perform an annual assessment of transfer prices. The key question asked is: "Has our transfer pricing policy that has been applied throughout the year resulted in an arm's length outcome?". This question is one that arises each year; but in 2020, which with the Covid-19 pandemic will go down in history as a year of exceptional events, this question is of an even greater importance for many companies. Some multinational companies perform such assessments on a more frequent basis and as a result face more limited (or even no) required adjustment at year-end. Transfer Pricing ("TP") adjustments are important to manage as they assure arm's length intercompany dealings. However, when changing intercompany pricing it is critical not to forget the impact of indirect taxes. After all, in certain situations, a TP adjustment might trigger an increase or decrease of customs duties and/or (import) VAT and could lead to some indirect tax compliance issues.

What is a TP adjustment? This is an adjustment to the pricing of intercompany dealings between two (or more) related parties of a group that are made during the financial year (often at year-end) to ensure that the transfer pricing policy applied during the year indeed results in an arm's length outcome. As, in practice, many transfer pricing policies are set on an ex ante basis based on projections (e.g. of sales, expenses, etc.), the arm's length nature should in most tax jurisdictions be tested on an annual basis by applying the annuality principle. As projections in most cases deviate from reality, a transfer pricing adjustment is needed to align the actual operating result with the arm's length principle.

How can a transfer pricing adjustment affect indirect taxes? Generally, customs duties are calculated as a percentage of the customs value. If the buyer and seller are related, then this customs value is often based on the applicable transfer pricing policy. Therefore, a TP adjustment between the importing company and the related supplier could result in a change of the customs value and therefore in an increase or decrease of customs duties.

Also, considerable thought should be given to the VAT aspects relating to TP adjustments. First, the taxable basis of import VAT always starts from the customs value. Therefore, a change in the customs value will automatically result in a change of import...