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CARF uses transfer prices as a reasonable criterion for customs valuation

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The Administrative Council of Tax Appeals (“CARF”) issued an understanding that it is possible to use the criteria of transfer prices for customs valuation purposes.

The case involves a notice of violation against GKN do Brasil Ltda. due to the import of goods from their foreign subsidiaries.

In summary, customs valuation corresponds to a methodology that seeks to determine the value of imported goods for the purpose of paying taxes and contributions levied upon imports, namely the Import Tax (“II”), Tax on Industrialized Products (“IPI”) and the contribution to the Social Integration Program (“PIS”) – Import and Contribution for Social Security Financing (“COFINS”) – Import, as well as other fees.

In this case, the taxpayer had imported goods from their foreign subsidiaries using the customs valuation method known as “Method 1”, which corresponds to the “mother” rule of customs valuation, indicating the transaction value as the price actually practiced. 

According to customs valuation rules, when Method 1 cannot be applied, there is a sequence of methods that must be complied with, so that, only when it is impossible to use a certain method, the following must be observed.

For imports between related parties, if such a relationship somehow affects the practiced prices, Method 1 is discarded and the others are applicable in compliance with the sequence.

In the case in point, the taxpayer stated that the relationship would not have affected the price practiced in the importation. However, according to inspection, the amount reported by the taxpayer as of the determination of the transfer prices pointed to a cost higher than the customs value practiced on imports. Thus, it was found that the relationship between the parties affected the price.

The tax authorities disregarded Methods 2 thru 5, and applied Method 6 – the last method -, which determines the use of reasonable criteria for determining the customs value, with a true subjectivity and discretion of the public administration in its application.

Using reasonable discretion in the application of Method 6, the tax authorities considered the transfer price of the goods, which applicable method was that of Cost of Production plus Profit (“CPL”).

During the judgment, several discrepancies were entered by the directors, and it is relevant to mention the one entered by director Pedro Rinaldi de Oliveira Lima, who understood that inspection did not correctly observe the order of the customs valuation methods when concluding that there were goods identical nor similar to the imported ones, criteria which are part of Methods 2 thru 5.

Another interesting point of the judgment was the use of the transfer price as a reasonable criterion for customs valuation purposes.

As is well known, customs valuation seeks the correct payment of taxes on the importation of goods, while the transfer price seeks to protect a minimum corporate taxation in Brazil on profit (Corporate Income Tax – “IRPJ” – and Social Contribution on Net Income – “CSLL”).

This matter was raised by the taxpayer and was analyzed when the case was judged. However, six directors voted in favor of using the transfer pricing criterion in the application of customs valuation Method 6, while four voted against it.

The case is the one with number 11080.724128/2015-21


Written by Camila Cabral, Tax Consultant at Drummond