The interrelation of transfer pricing and customs

I came across an interesting topic the other day and thought I would write my next blog post on it. This topic has been a discussion point between many authoritative bodies, professional service firms and tax jurisdictions. I thought I would try and shed some light on the topic. As you are well aware there is more to a cross border transaction than just transfer pricing. Especially when structuring certain transactions, there are many different aspects that should be taken into account. One of the factors that must be taken into account when looking at cross border transactions (be it related or independent) is customs.

Customs are the duties levied by a government on imported goods which are payable by the importer of a product. Should the imported product be in relation to a cross border related party transaction, both customs and transfer pricing are applicable. Important to note here is that customs only looks at goods and not at services. Further, customs duties are usually a big part of the total cost in selling a product to a foreign market and as such it is important to comply with the different customs regulation to ensure certainty for total taxes payable on the transaction.

Both disciplines try to create an arms length price/transaction. Therefore the topic that is often discussed in relation to both disciplines is whether both can be complied with by deriving the one from the other. For example, would a MNE be able to determine its customs duties from a detail transfer pricing analysis?

In order to analyse the topic it may be beneficial to look at the similarities and differences of both disciplines first.

What transfer pricing is and how it is dealt with has been discussed previously, but for this blog post it is important to understand that in practice, from a transfer pricing perspective an arms length price is rarely determined for an individual product or service between related parties but it is rather determined on an overall return such as an operating margin. On the other hand, customs is concerned with the valuation of each individual product that is imported (sometimes exported).

In the table below are other important similarities and differences in relation to transfer pricing and customs:



Transfer Pricing


Arms  length

Both disciplines try to ascertain an arm’s length  price/remuneration for the transaction under review (arm’s length connotes  fair value or market value)


The transaction value method from a customs perspective is  similar to the comparable uncontrolled price method from a transfer pricing  perspective


Type of Discipline

Indirect Tax

Direct Tax


Limited window of opportunity (usually at the moment of  invoice or sale)

Usually audited after the tax return is filed

When applicable

Customs duties are applicable at the moment of importation

Forms part of corporate tax which is applied based on taxable  income reported for the year

From the above it seems that transfer pricing and customs are indeed very different but do have a similar goal of trying to ascertain a market value/arms length return for the transaction under review. The big difference between transfer pricing and customs lies in how an arms length price/remuneration (or market value of a unit) is determined. Except for the comparable uncontrolled price (“CUP”) method, transfer pricing methods use a margin to ensure a cross border related party transaction is at arms length (i.e. the party receives a fair remuneration for functions performed, assets used and risks assumed) whereas customs is only looking at a unit price. Even though many courts are arguing in favour of using a CUP method when performing a transfer pricing study, in practice the CUP method is rarely used.

The problem that a taxpayer may face within a normal tax jurisdiction is that both disciplines try to pull the cost per unit in different directions. In other words, a low cost price of an imported good will result in low customs duty but a low cost price will inversely increase the taxpayers profitability resulting in a higher corporate tax payable and vice versa. In practice the customs department of a tax authority will try to increase the price per unit, whereas, the transfer pricing department of the same tax authority will try to decrease overall cost by decreasing the cost per unit. Both departments try to achieve the highest return for the fiscus possible by increasing or decreasing the same cost price respectively.

Depending on how a tax jurisdiction determines an arms length price/remuneration for both disciplines, there may be some room for tax planning due to the different rates applicable. I.e. if customs duties are higher than corporate taxes a taxpayer may be able to lower its cost price through certain structuring exercises as long as he is still within an arms length price/remuneration for both disciplines. On the other hand, because both disciplines do not necessarily use similar methods to determine an arms length price/remuneration it may happen that for each discipline the arms length price/remuneration is different. This may result in double tax for a taxpayer (or if lucky – savings) and therefore it is important to compare the outcome of both disciplines.

Even though transfer pricing and customs can rarely leverage an arms length price from each other it is still important to analyse both disciplines when looking at cross border related party transactions. Tax authorities should (and do) use information collected from customs for transfer pricing audits and vice versa to ensure compliance with both disciplines.

Lastly, from the above one can see that a joint process for the two disciplines could benefit both tax authorities and taxpayers through simplification and cost/time savings.