INSIGHTS | CASE STUDY #3
US Life Sciences MNC
The company was relatively new in Asia with its on-shoring strategy of setting up its own related entities in various countries in the region in order to have better control over its operations rather than relying on third parties. This on-shoring strategy resulted in new related party transactions between its entrepreneur entity and its overseas sales, manufacturing and R&D subsidiaries through rendering of intercompany services such as marketing & sales support, technical assistance, warranty support etc. These intercompany services between related parties were covered under an overarching global transfer pricing policy with respective benchmarking reports to set the respective transfer prices.
Given the initial stage of its business operations in Asia, the intercompany transfer prices set relating to the goods imported widely fluctuated. In addition, the actual profit margins of the overseas related entities at their financial year ends for the first couple of years were significantly out of the EBIT benchmark studies. Year-end transfer pricing adjustments were therefore required in various countries in Asia to satisfy the respective tax authorities. The company however was not sure how best to manage these year-end transfer pricing adjustments with the respective customs authorities from a customs valuation perspective in the Asian countries affected, given that their historical customs values, the duties and import VAT consequently paid were technically inaccurate with both over and under payments.
Concurrently, the widely fluctuating intercompany transfer prices were also referred to as a basis for the customs values declared for the goods in question imported. That led to constant questioning from the various customs authorities in Asia, most of which do not view such transfer pricing arrangements favourably from a customs valuation perspective.
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