The Interaction Between Transfer Pricing and Customs Value
To avoid imposition of a transfer pricing penalty a report addressing pertinent transfer pricing considerations must be prepared, consistent with the criteria of the Internal Revenue Code and its underlying Treasury Regulations. The report must be duly finalized and in existence by the due date of the required income tax return for the relevant taxable year to which the transfer pricing report is directed.
Curiously, the Regulations do not address the substantive criteria of I.R.C. §1059A for purposes of the transfer pricing report. Even so, to claim the exception to imposition of the penalty for a reportable transaction understatement, the existence of reasonable cause and good faith must be established. A corresponding showing of compliance with the requirements of I.R.C. §1059A would be expected not only to enhance the position that such requirements have been satisfied but in addition that the I.R.C. §482 transfer prices as utilized are indeed arm’s length. The effect may likewise forestall or even conclude an otherwise ongoing I.R.S. audit.
As a result, it is recommended that the criteria of I.R.C. §1059A be duly addressed in conjunction with preparation of the transfer pricing report. The intended objective is not only to be fully prepared for the potential of an audit by the I.R.S. but most importantly to keep the client fully informed of the associated risks in the event of a divergence, especially a substantial one, between the basis of the imported inventory and its customs value.