Unlike tax costs, customs costs are rarely obvious because they have low visibility. Customs duty planning is often neglected, unknown or unheard of.
Significant challenges arise with the application of customs law (and should be dealt with by appropriately designated company personnel). Here are some of the challenges and risks:
- Customs valuation: declarations of customs values generate the possibility of contradiction with transfer prices desirable for direct tax purposes.
- Method of valution: The majority of world trade is valued for customs purposes according to the transaction value method, that is the price paid or payable for the goods, subject to adjustments on an objective and transparent basis. The quantification of these adjustments – especially in relation to royalties and licence fees – can be difficult and complicated in practice.
- Related party transactions: Customs values in related party transactions are not necesarilly unacceptable providing the relationship did not influence the price. UK Customs review such transcations closely. The onus is on the importing company to show that there has not been influence on the price because of the relationship. How do you answer the question to UK Customs “How do you know whether or not there is price influence?”
- Royalties, R&D costs, interest charges, design and development work: UK Customs sometimes take the view that such costs and charges are wholly dutiable when proper reading of contracts and agreements indicate they should not be. Many businesses are reluctant to challenge Customs because they are unsure of their ground and believe Customs must be right.
Additionally, the customs implications of R & D cost-sharing agreements and of royalty and financing agreements are not taken into account when these agreements are being drafted. This can lead to unnecessary exposures to customs duty when more judicious drafting could avoid the imposition of duty.
