Customs valuation obligations in related party transactions

Author: Daniel Rae | 3-minute read

Customs Valuation Obligations in Related Party Transactions

For Australian customs purposes the value of imported goods is typically calculated by the ‘transaction value’. That is, the price actually paid or payable in the contract of sale for the importation of the goods into Australia, plus price related costs.

Transfer pricing adjustments

In circumstances where a purchaser and vendor are related parties, the importer may be required to demonstrate that the relationship did not influence the price of the goods. Practically, importers often rely on the transfer pricing (TP) arm’s length principle to satisfy this.

Where TP adjustments to the price of the goods are made throughout and/or at the end of the financial year to achieve an arm’s length profit, they must be reflected in declared customs values.

Failure to disclose the adjustments in price to the Australian Border Force (ABF) may lead to penalties, even where there is no customs duty impact. In addition to obtaining protection from penalties, the disclosure of decreasing TP adjustments may provide duty refund opportunities for importers.

Price related costs

The second component of the transaction value that importers must consider is price related costs that aren’t built into the price.

This ranges from:

logistics costs incurred in the country of export,
assists provided to the manufacture required to produce the goods, such as designs and moulds, and
payments including commissions, royalties and licence fees.

There are several ways in which royalties may be included in the customs value. This requires analysis of the supply chain, agreements and transactions to determine whether or not these must be declared.

Non-disclosure risks and penalties

The ABF conducts compliance activities to ensure that applicable customs duties and indirect tax liabilities are collected on imported goods and to ensure the accuracy of reporting.

Regarding undeclared retrospective adjustments, penalties are generally issued by the ABF under the Infringement Notice Scheme (INS), an administrative enforcement remedy. Penalties begin at AUD $14,085 for each false or misleading statement and where there is a duty shortfall, penalties can be significantly larger. Where there is a loss of duty, the INS penalty for a corporate entity, per statement, is 45 penalty units or 75% of the duty shortfall (whichever is greater).

Ensuring compliance

The ABF offers importers advance ruling and voluntary disclosure processes to streamline customs valuation compliance.

This is a two-step process:

Obtain an Advance Ruling to confirm the legislated customs valuation methodology, the basis for the price, and any price related costs. A Valuation Advice is strongly recommended by the ABF for importers purchasing from relates parties. A ruling is valid for 5 years from the date of issue and streamlines the voluntary disclosure process.
Submit a Voluntary Disclosure to the ABF to adjust declared customs values, duties and import GST, for each financial year. This provides protection from penalty and in the case of credit adjustments, the potential to amend declarations to obtain duty refunds.

It’s recommended to be proactive with Voluntary Disclosures as they cannot protect from prosecution if ABF audit activity has already commenced.

There is no fixed deadline reporting for annual voluntary disclosures, however it’s advised to complete as soon as practicable, in line with annual financial and tax reporting.

Get in touch

If you require further information or wish to discuss, please contact us. We have a multidisciplinary team of transfer pricing and customs specialists who can support with these issues.

Transfer Pricing Advisory