U.S. interagency information-sharing on transfer prices and customs values.

The IRS continues to increase its emphasis on intercompany pricing between related parties. As part of this effort, particular emphasis is being placed on the statutory requirement for consistency between customs and income tax values of property in related-party situations (Sec. 1059A).

In addition to the basic requirement that transfer prices between related parties be at arm's length, Sec. 1059A (entitled "Limitation on taxpayer's basis or inventory cost in property imported from related persons") provides that if any property is imported into the United States in a transaction between related parties, the transfer price for tax purposes cannot be greater than the value claimed for customs purposes on U.S. Customs Form 7501 plus allowable adjustments. The customs value is generally set on the final customs "liquidation," i.e., the determination of the customs duty due. With certain limited exceptions (which may present a window of opportunity for some taxpayers), the liquidation is considered final 90 days after notice of liquidation to the importer (unless a timely protest is filed). This final customs value binds the taxpayer under Sec. 1059A. If a company pays additional duties after the liquidation, due to matters such as undeclared value at the time of entry, use of provisional values, retroactive price increases, an arrangement with Customs to periodically submit certain value information, a Customs audit or voluntary internal review, a Sec. 1059A issue may be created if the taxpayer has based its costs of goods for income tax purposes on the higher values.

Regulations issued earlier this year heighten the need for taxpayers to address intercompany transactions that require the reconciliation of income tax and customs values. Temp. Regs. Sec. 301.6103(l)(14)-1T specifies procedures by which the Service may disclose tax return information to the U.S. Customs Service, and describes the conditions and restrictions on the use and disclosure of the information. The rules, issued under new Sec. 6103(l)(14), created by the North American Free Trade Agreement (NAFTA) Implementation Act (PL 103-182), permit the IRS to share information with Customs to assist in the enforcement of Customs transfer-price rules. The regulations also permit disclosure to the Justice Department for civil enforcement actions related to Customs collection efforts. In addition, Temp. Regs. Sec. 301.6103(l)(14)-1T(d) permits disclosure of information either relating to advance pricing agreements or tax treaties and executive agreements in which the United States is a party.

With the recent increased IRS emphasis on the consistency between customs and income tax values of property in related-party transactions, these information-sharing regulations have special importance. The change in the NAFTA legislation to permit the Service to share information with Customs only heightens the already vigorous enforcement efforts by both the IRS and Customs.

The information-sharing regulations represent just one of many technical developments in this area. Others include:

* The Service issued final Sec. 482 transfer-pricing regulations in July 1994.

* Customs issued a notice (58 FR 5445, 1/21/93) explaining its methodology for intercompany pricing.

* The IRS issued Letter Ruling (TAM) 9301002, ruling that the limitation of Sec. 1059A applies to the income tax cost basis claimed on the taxpayer's U.S. income tax return for goods imported from Mexico. This ruling also discusses the characterization of various costs and expenses for income tax and customs purposes, including comments on the declaration of (and the dutiable nature of) "assists," which are an element of dutiable value.

Here are several steps to help recognize opportunities in this area:

* Determine whether Customs or the Service is in the process of (or has recently completed) an audit resulting in a duty-liability or transfer-price adjustment.

* Determine whether any voluntary internal reviews resulting in payments of additional Customs duty have been performed.

* Compare the value of imported goods for Customs purposes with the transfer prices claimed for income tax purposes.

As the transfer price for income tax purposes may include costs that are not part of the customs value, it is unlikely the income tax value and the customs value will be the same. Taxpayers that are 25% foreign-owned and that use different values in pricing for income tax and customs reporting must report such differences on Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code). Failure to include the required disclosures and explanations on Form 5472 could result in penalties to the taxpayer and/or the return preparer. Such failure could also result in a finding that the taxpayer has not filed a "complete" return as required by the statute and as attested to by the taxpayer and preparer by signing their respective jurats. Based on the increased enforcement activity by both Customs and the IRS and the new information-sharing regulations, coordination between the two disciplines is critical.