The State of Global Trade & - PowerPoint Presentation

1. The State of Global Trade & Strategies for Multinational CompaniesJay ChoCarl Budenski

2. Aprioat glanceClients in 50+Countries60+Languages Spoken#1Fastest growing CPA firm12Industry Specialties35+Services1,800+ Team Members25% of the firm is foreign born

3. Jay Cho is a Tax Director with Aprio's International Tax team. He helps multinational companies better navigate US import and export complexities. Jay also specializes in providing compliance risk management and strategies to help clients save on duty fees. With a decade of experience on both the consulting and legal sides of international trade, Jay is also well-positioned to offer guidance on many different customs enforcement matters, including customs inquiries, verification requests, audits, investigations and penalty cases.Today’s PresentersCarl Budenski is a Transfer Pricing Director with Aprio’s International Tax team. He advises multinational and domestic businesses on intercompany transactions of tangible goods, intangible property, services, and loans. Passionate about helping businesses grow, Carl has helped many clients, including a recent client save $1 million in US tax annually through the use of transfer pricing.

4. AgendaCurrent Status of International Trade – Hot TopicsBasics of CustomsBasics of Transfer PricingCustoms Valuation & Transfer Pricing – OverlapsCase StudyQ & A

5. 5Current Status of International Trade – “Hot Topics”

6. Section 301 “China Tariff”Throughout 2018, the Trump Administration imposed special tariffs on imports from China under the Section 301 of the Tariff Act. These tariffs, known as Section 301 “China” tariffs, consisted of four tranches of tariffs -- Lists 1, 2, 3, and 4A.The Biden Administration has to-date retained the Section 301 tariffs on over $300 billion worth of imports from China.During the Trump Administration, a product exclusion process was introduced, leading to the granting of exclusions for certain products. Currently, only a limited number of Section 301 exclusions remain in effect, specifically for select COVID-related items.The U.S. Trade Representative (USTR) is currently undergoing a 4-year sunset review of the Section 301 tariffs to determine whether to continue imposing these tariffs.

7. Section 301 “China Tariff”Section 301Ad valorem duty rateImport volumeNumber of tariff items coveredEffective dateList 125%$34 Billion818July 6, 2018List 225%$16 billion279Aug. 23, 2018List 310%, then 25%$200 billion5,74510% effective Sept. 24, 2018; increased to 25% by May 10, 2019List 4A15% , then 7.5%$120 billion3,23015% effective Sept. 1, 2019; reduced to 7.5% by Feb. 14, 2020, as a result of Phase 1 Trade DealList 4BSuspended$180 billion540Suspended as a result of Phase 1 Trade Deal

8. Section 232 “Steel and Aluminum” TariffsThe Trump Administration implemented Section 232 tariffs on steel and aluminum products in 2018 (25% additional tariff on steel imports and 10% on aluminum imports).Certain countries were exempted from the tariffs, including Canada, Mexico, South Korea, and the European Union – subject to the “tariff rate quota.”A process for requesting product exclusions was established, allowing companies to seek exemptions for specific steel and aluminum products not readily available domestically.

9. Forced LaborThe Uyghur Forced Labor Prevention Act was passed in 2021 and became effective on June 21, 2022. The Act includes provisions that require companies to demonstrate due diligence in ensuring their supply chains are free from forced labor practices related to Xinjiang Uyghur region (XUAR)CBP applies a rebuttable presumption that all products made in whole or in part in the XUAR region of China are made with forced labor. Products made outside of the XUAR region are also covered by the law if they contain inputs from the XUAR. There is NO de minimis level.CBP maintains a list of entities in XUAR that it has determined to use forced labor: https://www.dhs.gov/uflpa-entity-list.

10. Forced Labor

11. And more . . .The Inflation Reduction Act’s (IRA) electric vehicle tax credits:Final assembly of the vehicle in North AmericaSourcing restrictions on the components and critical minerals found in EV batteries of eligible vehiclesSuperfund taxes42 chemicals and approximately 100 chemical substances Importers or producers are subject to this excise tax when any taxable chemicals or substances are consumed or sold

12. 12Basics of Customs & Tariffs

13. US Customs and Border Protection (CBP)CBP is the main government agency which enforces US international trade laws. With more than 60,000 employees, CBP has operations at over 320 ports throughout the nation. It collects more than $100 billion annually in duties and fees.Divided into several enforcement groups - called Centers of Excellence and Expertise (CEE) based on the types of industry/merchandise.

14. Importer’s Responsibility The Importer of Record is principally responsible for using “Reasonable Care” to report accurate declarations for its imports and pay the correct amount of duties.“My broker did it” is not a valid defense for non-compliance.Section 492 Penalties:Revenue LossNon-Revenue LossUp to 100% of the domestic valueUp to 100% of the domestic valueThe lesser of 100% of the domestic value or 4 times the loss of duties40% of the dutiable valueThe lesser of 100% of the domestic value or 2 times the loss of duties20% of the dutiable valueFraudGross NegligenceNegligence

15. Duty Saving Strategies - “Customs Triangle”Customs TriangleTariff Classification(Duty Rate)Customs Valuation (Ad Valorem)Country of Origin(Special Tariffs)

16. Tariff ClassificationAC Motor; Output of 15 W; Unit Value of $7

17. Customs ValuationDuties are imposed on an Ad Valorem basisMost goods are valued based on the “Transaction Value” (TV) method Definition of TV = Price paid or payable by the buyer/importer (in most cases, invoice price)Additions: selling commissions, royalty/license fees, “assists,” packing costs, and proceeds of subsequent resaleDeductions: shipping costs, constructing/assembling costs, and other federal taxes for which US sellers are liable for imports

18. Customs Valuation“First Sale Rule”

19. Country of OriginFree Trade AgreementsSection 301 “China” TariffsGeneralized System of PreferenceTargeted Country-Specific MeasuresSubstantial transformation standard – Last country where the imported good underwent a fundamental change in name, character, and useRules of origin – Whether the imported product is eligible for duty-free or reduced duties under the free trade agreement (FTA) rules even though they may contain non-originating (non-FTA) components

20. 20Transfer Pricing Basics

21. What is transfer pricingTransfer pricing is an international tax requirement concerning the pricing of transactions between related business entities.A “transfer price” is the price charged for goods, services, financial transactions, and the use of intangibles between “controlled” (or related) legal entities.Transfer pricing is primarily concerned with the division of profits between legal entities and tax jurisdictions.Parent CompanyForeign SubsidiaryIndependent Third PartyMexicoU.S.Independent Third PartyArm’s Length PrincipleTransfer Price=

22. What is transfer pricing (continued)The hallmark concept associated with transfer pricing is the “arm’s length principle” and it should be followed to comply with US and global transfer pricing regulations.Per §1.482-1 of the US Internal Revenue Code, the arm’s length principle can defined as follows:To be in compliance with transfer pricing regulations, an arm’s length result can be determined by using a number of different specific methodologies. Transfer pricing regulations require the “best method” to be used, given the facts and circumstances of the transaction, and considering all of the required comparability factors.“A controlled transaction meets the arm's length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm's length result).”

23. How to use transfer pricingTransfer pricing regulations allow practitioners to use third party databases to search for comparable company information including financial data and third party agreements. Using this data, we create benchmarking analyses of compensation measures to be used in computing the transfer price in the intercompany transaction. This data is typically presented in an interquartile range of values, consistent with transfer pricing regulations, and is established using “Profit Level Indicators” associated with comparable uncontrolled taxpayers.When the company’s own results falls within this interquartile range, the company’s controlled transactions are deemed consistent with the arm’s length principle.123

24. Transfer Pricing MethodsCUSTOMS VALUATIONCup MethodComparison of prices charged to unrelated entity requires high degree of comparability of products and functions, such as quality, contractual terms, geographical market.Resale Price MethodComparison with gross profit/reseller margin. Appropriate when value addition done by enterprise is mostly relating to Selling and Distribution. Cost Plus MethodCompares profit markup on costs. It provides both compensation for the performance of manufacturing or service functions and a return on capital invested and risks assumed. Appropriate when tested enterprise is into significant value adding activities. Lack of reliable comparable data is an issue.Profit Split MethodArrive at the total profit from the transaction and splits them among parties based on their contribution. Involves unique intangibles or multiple transactions, which are so interrelated that they cannot be evaluated separately.TNM MethodCompares Net Profit in relations to an appropriate base, such as costs, sales or assets. Differences in functions between enterprises may lead to variations of gross profit margins but still earn broadly similar levels of net profit.

25. Why is transfer pricing importantTransfer pricing regulations exist in most developed countries around the world and require some type of formal documentation that supports the intercompany arrangements.This formal transfer pricing documentation is typically required to be contemporaneous with the tax return, or in some countries, filed directly with the tax authorities in conjunction with the tax return.Significant penalties can be assessed for companies lacking the appropriate documentation and exposes the company to potentially large proposed tax adjustments at the hands of the tax authorities. In the U.S., a transfer pricing documentation can protect you from penalties.Not only does transfer pricing represent a tax compliance requirement, but it also is one of the most powerful international tax planning tools. Implementing appropriate transfer pricing can be an efficient way of lowering your worldwide effective tax rate, as well as managing cash flow goals.Transfer pricing is an accepted method of managing entities’ profitability, and of adjusting related parties’ financial results based on activities being performed.In many cases, transfer pricing is used in assisting with customs, supply chain, and business model optimization.

26. 26Customs Valuation & Transfer Pricing – “Overlaps”

27. Transfer Pricing & Customs ValuationTRANSFER PRICINGCUSTOMS VALUATIONObjectiveArm’s length pricingItem to be taxedAnnual net incomeSpecific productTimeframeReturn due datesDate of importRelationshipHigh transfer price = Low income tax  High customs value = High customs duty Low transfer price = High income tax  Low customs value = Low customs duty

28. Transfer Pricing & Customs ValuationTRANSFER PRICINGCUSTOMS VALUATIONAgencyIRSCBPAgency ConcernsPossibility that the seller may manipulate them in an effort to shift profits to countries with the lowest tax ratesPossibility that the seller may charge the buyer lower prices for goods that attract duty and higher prices for duty-free goodsStandards5 methods – choose “best method” and no preference in regulation6 methods applied in sequential orderMost common methodComparable Profits Method – focus is on function and risk of the tested partyTransaction Value Method (but only if the relationship did not influence the price)

29. Transfer Pricing & Customs ValuationTransfer price is not always accepted as a valid customs value under the customs valuation rules.For related party transactions, CBP applies the “circumstances of sales” standard (COS) to determine whether the intercompany price is arm’s length.Under the COS standard, CBP examines the totality of circumstances, but typically it looks for any of the following facts:The way in which the related parties organize their commercial relations and settle the priceIntercompany pricing is consistent with normal pricing practices of the industryIntercompany price is adequate to ensure recovery of all costs plus a profit which is equivalent to the seller's overall profit realized over a representative period of time, in sales of merchandise of the same class or kind

30. Transfer Pricing & Customs ValuationCBP favors . . .Advanced Price Agreement (APA)Binding agreement between the taxpayer and the IRS regarding the arm's-length pricing for present and future intercompany transactions between a taxpayer and one or more taxing authoritiesComparable Uncontrolled Price Method (CUP)Compares the price charged for goods transferred in a controlled transaction with the price charged for goods in an uncontrolled transaction between comparable independent parties in similar circumstancesComparable Profits Method (CPM)Only if the selected companies produce or distribute similar classes or kinds of merchandise

31. Post Importation TP AdjustmentsCompanies often make annual transfer pricing adjustments to increase or decrease the Cost of Goods Sold, i.e., upward or downward adjustments of profits.For customs purposes, post-importation TP adjustments may have to be reported to CBP if the adjustment meets the requirements of the “5-factor” test enumerated in CBP’s headquarter ruling W548314 (May 16, 2012)Written “Intercompany Transfer Pricing Determination Policy” is in place prior to importationUS taxpayer uses its TP policy in filing its income tax returnTP policy specifies how the transfer price, and any adjustments are determined with respect to all products covered by the policy Importer maintains accounting details from its books and/or financial statements to support the claimed adjustments in USNo other conditions exist that may affect the acceptance of the TP by CBP

32. Benefits of Customs Valuation ReviewFuture duty-saving & Refund opportunityWell-settled intercompany pricing policyCompliance and documentation for CBP purposesProduct-level pricing & margin reviewCBP expects every importer to exercise “reasonable care” (due diligence) when declaring imported goods' values.Aprio helps client performing thorough customs valuation analysis

33. 33Case Study

34. Background: Successful aircraft parts importer earning margins well-above industry standards.Under the existing TP policy, the importer made an upward adjustment to COGS for a given year, i.e., it paid a lump sum amount to the foreign parent company.Outcome:Aprio conducted a customs valuation study covering (1) transaction value (COS) review and (2) TP adjustment (5-factor test) review.We found that the current intercompany pricing was adequate compared to industry standards; thus, it constituted a valid transaction value.The downward transfer pricing adjustment did not meet the requirements of the 5-factor test; thus, it was not part of the customs value.The study assisted the client in implementing the appropriate intercompany pricing policy for future imports and purchases.Case Study

35. Questions

36. Thank you!Carl BudenskiTransfer Pricing DirectorCarl.Budenski@aprio.comJay ChoCustoms & Tariff DirectorJay.Cho@aprio.com