Transfer Price Versus Customs Dutiable Price

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Related companies trading internationally with one another must take care not to allow presumption to take hold internally that the transfer price used invariably equates to the correct transaction price for customs valuation purposes.

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The changed trade tariff environment brought about by the global impact of the USA upending its settled trade policy, in 2025, has led companies to take much more interest in how they trade across borders, and in the possibilities open to them to minimise the tax(s) and duty(s) exacted on these operations.

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Those companies trading internationally with other companies related / affiliated to them, for example within the same international group of companies, or multinational corporation (MNC), have taken a particular interest in how the pricing of these transactions can be used to help mitigate adverse tariff changes and to legitimately minimise their tax / duty bills.

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Revenue authorities for their part take a particular interest in the international trade transactions of such companies, precisely because of their affiliation to many of those they trade with, given the scope that this affords them to vary prices and costs inter-company cross-border. Which is seen as a revenue risk to one or other of the national exchequers concerned.

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However, arriving at pricing acceptable to the authorities, for customs and tax purposes, can be complicated. Fortunately there are certain internationally recognised principles, standards and ‘rules of the game’ available to guide and inform you in your decision-making.

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• The arms-length principle – the principle that commercial transactions between related / associated companies should be demonstrably conducted ‘at arm’s length’. That is, that the conditions (prices, profit, margins etc.) in transactions between them should be the same as those that would have prevailed in a similar transaction and under similar conditions were they unrelated companies. This principle applies to both transfer pricing and the actual  price paid or payable for imported goods for customs valuation purposes. In short, the relationship must not be permitted to influence the agreed price.

• Organisation for Economic Co-operation and Development (OECD) guidance on transfer pricing OECD Transfer Pricing Guidelines , the Model Tax Convention (see here: The 2025 Update to the OECD Model Tax Convention | OECD , Part 4 of the UK’s Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) Taxation (International and Other Provisions) Act 2010 , and INTM421030 - Transfer pricing: Methodologies: OECD Guidelines: Comparable uncontrolled price - HMRC internal manual - GOV.UK).

• World Customs Organisation (WCO) Guide to Customs Valuation and Transfer Pricing WCO Guidance.

• The World Trade Organisation - WTO Valuation Agreement (more formally known as the Agreement on the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 GATT 1994).

• His Majesty’s Revenue & Customs (HMRC) Guidance on customs valuation: Customs valuation - Guidance - GOV.UK.

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As the content of the above references elaborate on, whilst the considerations involved in arriving at a defensible transfer price for direct tax (and possibly other) purposes, and at an accurate transaction price for customs duty purposes, respectively, can have similarities, for example, the arm’s length principle; and therefore may inform one another, they are rarely the same. Each price type being calculated for a different purpose.

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Difficulties arise because transactions between related parties are subject to both customs and fiscal scrutiny, based on different rules and regulatory motivations.

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Not all of the cost elements required to calculate the dutiable value for customs at import may have been included in the transfer price used for a transaction. It is also likely that some elements included in the latter are not dutiable. Therefore, using the transfer price for customs valuation purposes is generally inadvisable, unless a conscious effort has be made to align the two, or thorough checks and adjustments have been made, as appropriate, for customs valuation purposes.

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The Detail Matters

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For customs purposes it is crucial that duty is applied to the correct customs value. Generally, this is unlikely to be the transfer price in related party transactions (unless the two have been purposely aligned). Yet there is a degree of natural entwinement and overlap.

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For example, the restructuring of international supply-chains to respond to challenging tariff conditions and other trade policy measures can also necessitate the reshaping of corporate operational structures, and consequently the calculation of transfer pricing for transactions within an international group of companies, which in turn can inform goods’ value for customs duty.

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Customs authorities have therefore been encouraged to take more account of inter-company transfer pricing when checking related party customs values, in order to test the credibility of both. And in particular, to review their consistency with the arm’s length principle of applicable internationally recognised transfer pricing standards (see above), and related party customs valuation rules.

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Customs is concerned about the actual invoice value of goods at the time of import +/- specified adjustments and therefore the risk of possible under-valuation. A lower declared value for duty reduces the amount of duty (and import VAT, as applicable) payable. Fiscal authorities in contrast, pull in the opposite direction. They are primarily concerned about profit allocation and therefore over-statement of the transfer price. The risk being the under-statement of taxable profit.

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If your transfer pricing arrangements do not meet a recognised international standard, your transaction price for customs duty purposes is inaccurate, and/or the arm’s length test cannot be met in one or other case, significant compliance issues around tax and duty are likely to rear their head. In the UK, failure to comply with transfer pricing rules can lead to significant tax assessments, fines / penalties, and the imposition of interest charges.

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The main risk of using a transfer price for customs valuation purposes lies in what it consists of.  It may be comprised of costs  which need not be included, on which duty/import tax risks being paid and/or, on the other hand, certain required cost elements may be absent which risks underpayment of duty/import tax.

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Minimising The Risk

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To minimise the risk of customs non-compliance companies involved in international inter-company trade should consider the following pointers:

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• Have clear cross organisation policies with supporting standard operating procedures and internal guidance on transfer pricing and customs valuation designed by the finance, tax and trade teams collaboratively, for the disciplined adherence of all.

• Where achievable, seek to more closely align the approaches to determining the transfer price and the value for customs purposes. Where there are perceived inconsistencies between them, you must be prepared to justify these to the authorities with documented rationales.

• Maintain a fully documented data file per transaction for audit purposes. This should, among other things, clearly show how any transfer price and price for customs purposes has been determined in accordance with the arm’s length principle to a recognised international standard (see above).

• Consider separately detailing the value cost elements that make up the price on relevant documentation, so that the dutiable and non-dutiable costs and how they are calculated can be identified.

• Have internal controls and checks in place to identify issues early and to correct them promptly.

• Seek to mitigate your risk through

• advance pricing arrangements / agreements (APA). This is an agreement, in advance, between a taxpayer and a tax authority that establishes an appropriate set of criteria for the transfer pricing treatment of a specific transaction or group of transactions over an agreed  period of time.

• Customs valuation rulings. For example a HMRC Advance Valuation Ruling (AVR) Apply for an Advance Valuation Ruling - GOV.UK. This provides you with legal confirmation of the correct method to use when valuing your goods and making an import customs declaration.

• Be aware of the implications of any post importation transfer price adjustment (where jurisdictions permit it) for import duty / tax liability. Is the invoice amount at import the final selling price or will the transfer price used be adjusted.

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How BKR Can Support

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If you are able to evidence valid arm’s length value build-up approaches to both transfer pricing and customs valuation in your inter-company international trade transactions, you are  more likely to be paying the right duty / tax at the right time, to your competitive advantage, avoiding sleeping liability, penalties, and costly disputes with the authorities in relation to non-compliances.