How Transfer Pricing and Customs Valuation Can Make or Break Your Global Empire

Andy 0:00
Hey, folks, we’re in for a simply trade podcast show, and we’re ready for a good discussion. Today, we’re gonna have something that’s gonna be a little bit more advanced than your basic topic, but this is gonna be something that everybody needs to learn. Hopefully we’re gonna stimulate you with some thought on checking out, on valuation. Lalo, this is one of those topics that I guess I look at. It’s like, okay, let’s watch paint dry on the wall. It’s like, you know, it’s, it’s not the most exciting. So how do you make valuation sexy to talk about?

Lalo 0:36
Yeah, well, then again, everything in our business, right? Anything in trade is like watching paint, right? It’s okay, yeah, there you go. Yeah. Until recently, I guess we have all these disruptions, like with the with the strikes, and then they and the hurricanes and all the weather and all that good stuff. And all of a sudden is, like, everybody’s talking about supply chain and and shortages, and how are we going to import and how are we going to get things into them, into the US? And, you know, all of a sudden people are, you know, I shouldn’t say all of a sudden, it’s been, I think it’s been that way for the last maybe seven, eight years, since, I would think since Trump came into office, he’s the one that put it all in the spotlight. Don’t you think with with the China tariffs and all that kind of good stuff, well, and then

Andy 1:20
again, we’ve talked about getting a seat at the C suite table and or at least talking to the senior executives and doing strategic planning and discussions and valuation is a key factor of that. That’s one of those that you know, again, it’s, it’s the devil’s in the details. And when you start looking at this, you and I both are big proponents that when you’re sourcing products, you’ve got to look at your cost holistically, and part of that is identifying the actual cost of the widget that you’re buying or selling, and then you can start adding the ancillary services and other things with it. Anyway, with that, Lyle, Won’t you introduce our guest on this one?

Lalo 2:10
Sure. So we had some people reach out to us. We normally do anyway, on LinkedIn or by email or even at conferences. But this one, and it’s usually because it’s a friend of a friend or something, but this one, I was really happy to hear from, because, I mean, Carl just reached out. I mean, he, I, he was not in my, in my, in my LinkedIn, and he is now, but he, you know, and he, he’s a, he heard our show. He liked the premise of it, and he said, hey, what if I go and, you know, explain or talk to you, to your to your team, or not your team, your audience, about what we do. And I was like, Yeah, we got to talking. And so him and Jay, so we have on the show. We have Carl, and Carl, if I mess this up, I’m sorry. But then ski and then Jay Cho, okay, cool, okay, and Jay Cho, and they’re both from Aprio again, I hope I didn’t mess that one up and so, but anyway. But thank you guys for joining and for reaching out, and that’s a lesson also for everyone else that’s listening. If you feel like you want to share something with our audience. Don’t be afraid. Just reach out and do it, you know, and and let us know, because we’ll be more than glad to entertain just about anything having to do with international trade, logistics, customs, etc, you know, as long as it’s not something wacky, you know, way out there, you know. But even that may even make it into the show, but anyway, but thank you guys for for coming on the show. Andy, yeah,

Andy 3:44
well, I was just gonna say for anybody that has some ideas and they want to reach out to us, like say, you know, reach out, but Lalo doesn’t bite very hard. Anyway, yeah,

Lalo 3:55
it’s not too bad. And then the Andy’s hat doesn’t mean he always carries a sidearm, so don’t worry. Yeah,

Andy 4:03
you’re right. I’ve got it up over on the shelf over here. So anyway, oh my gosh. Okay, so let’s talk about what. How do we want to start this? Let’s, let’s

Lalo 4:14
have them introduce themselves. Yeah, let’s help introduce themselves, what they’ve done, and, you know, their company and all that. And we’ll go into the the actual topic itself. So Carl Jay, go ahead,

Carl Budenski 4:25
yeah, yeah. Thank you so much again for having us. You know, I stumbled upon the show because, you know, I’ve been doing transfer pricing a really long time, and I always thought customs, it kind of applied right, customs, duties, tariffs. But until I met Jay, I didn’t realize that we are inseparable, and so I was, I needed to educate myself to learn more, and Jay does a great job of that, but I had to listen to the show to kind of get more, you know, in depth, into the weeds, and some of these concepts, right? And transfer pricing is, is, you know, a very unique area. Area. I can’t say I think it makes paint dry, but I, but I do think that, you know, they’re so embedded, and so many folks just don’t realize that, that there’s this kind of inverse relationship between the two that you know, Jay and I keep, you know, bumping into these concepts and helping clients do that, you know. So, you know, I’ve been, I’m just strictly a transfer pricing director. That’s all we do. But it cannot go, you know, one foot without the other. So, Jay, why don’t you introduce yourself?

Speaker 1 5:33
That’s great. Yeah, I’m a customs and tariff director. I i speak your languages and the I met Carl through our after I joined appreo, but yeah, we, I’ve been working on a customs valuation for long time, and the there’s had, there’s really interesting intersection between transfer pricing and the customs validation. In fact, we were currently not we, I were just on a call with the company exactly on the same issue. The company is multinational company, moving products or consumables or anything, and all around the world, they’re transacting with the even inter inter companies like related party transactions, the CEO or CFO, they’re saying, Oh, I mean, is there a tax issue? I mean, there’s a transfer pricing issue. And then, you know, they but the thing is, they don’t really think about the two sides of a coin. Transfer pricing is used as a customs valuation when it when goods are imported into us or any other jurisdictions. So a lot of there’s a lot of disconnections between tax and in customs, and then really the valuation is the one that kind of connects it. So that’s that’s we’ve been all doing. Make sure transfer price is aligned with the customs valuation rules us custom. It’s two different agencies, IRS, customs, CBP, so we always find a way to kind of align those two together.

Andy 7:07
So with the you’re bringing in an aspect, I guess, of it with the IRS. I mean, most of us are thinking about the customs valuation, and more specifically, as you’re getting in to the transaction costs. But when you’re talking about transfer pricing, are you talking transfer predominantly like a related parties type transfer, or are using that just in general, a transfer price from one party to another. So it

Carl Budenski 7:36
only applies for the related party transactions. So if you have a contract manufacturer somewhere, or distribution center that you know is importing the goods in, doesn’t matter if it’s us or wherever, right? That’s when this concept of transfer pricing applies. And the good thing about it is the rules for transfer pricing, the methodologies, are pretty much universal around the world. So there’s some nuance, of course, but what most you know supply chain people, or, you know, custom people, or CFOs or whomever they don’t really understand or realize, is that their import price coming into that to XYZ country is actually their transfer price. And so there’s this inverse relationship. I call it, where if we send our goods in at a high price, we’re lower lowering the profit margin of that if that country paying less income tax, great, right? But we’re sending them at a high price, we’re paying higher customs and higher duties, right? So there’s this inverse relationship, where if you’re tweaking one and not the other, or you’re tweaking one, it affects the other one, and so it’s about finding that balance. And if you are doing tweaks, are you notifying the correct authorities of the other one, because each one cares so much and is going to, you know, impute penalties on top of that. So that’s really what we come to do, is making sure, you know, we’re doing the correct procedures to compute and optimize, but also documenting that so you don’t fall into the wrong hands.

Lalo 9:06
And that’s also, I guess the reverse is also true, because we see that a lot here on the border. Carl, before we went on the air, we talked about how you’re in Dallas and I’m here in El Paso, so here on the border, with all the cross border traffic, and we have the the ImEx or Maquila or twin plant, call it what you want manufacturers in Mexico that actually is a big concern or issue as well, right? I mean coming things that get transferred, not transferred, but items or raw materials that get shipped to Mexico under your parent company, even though it’s a Mexican company, it’s related to you, and the way they value it, and bringing it back into the US, correct? I mean is that, is that also like something you’ve all worked on, or that has been like a flag in any of your clients, or anything that you’ve done in the past?

Jay Cho 9:59
Yeah? Yeah. There’s, there’s a lot, yeah, we deal with the companies have a near shoring making facility and facilities in the in Mexico, you know, they may be us. Company may provide certain raw materials, incentive or intermediate products, ship it to Mexico and then produce the finished goods and then returning to the US. You know all that, it’s really a related party transactions. Really, the definition of a relationship is actually under regulation. It’s, I think it’s a 5% either direct or indirect ownership, but any anyway, and then also it’s at the other side as well. You know, you’re bringing raw materials into Mexico, finished products, or do the final finishings there, and then ship it to the US, and then you’re transacting with the parent company or sister company in the US. That’s all relate related party transactions

Andy 10:54
well. And to to your point, as you’re going through that, and like you said, you related parties and all that, to make an assessment, just like what I had opened up with was that you’ve got to look at your cost holistically, on on, you know, moving some goods and whatnot. Part of that holistic approach sounds like to me, there are times that you need to take and review a scenario here of getting people to the table to talk through what is the implication and the liability. More specifically, you’re going to need to get your tax accounting side of the House involved, which is not normally that is an area that’s not normally involved when you’re talking about usually planning out as far as the movement of goods and all of that, so your tax accountant, along with your import export compliance, then you start talking about your logistics, your transportation, your it and all that. But to the point being is, is it least or less expensive to bring in the goods, maybe at a higher value, and you shorten your your margin, obviously, for your profit, and so your taxes, are, you know, lower as a corporate tax, or is it better to bring it in at a lower price and then just pay the the Tax So, and you have things you can justify different ways there. But have I got that right? As far as the parties involved? Is there anybody I’ve left out here? Oh, you

Speaker 1 12:30
did a great summer, yes, Yep,

Carl Budenski 12:34
that’s right. It’s the table becomes so crowded these days. You were talking about giving everyone a thread table. You know, it’s becoming so ridiculous complex, ridiculously complex and crowded. You have supply chain people, you know, customs people, CFOs, trans pricing or tax people. And they’re all trying to optimize, right? Everyone wants to optimize. And they’re trying to, you know, fall out, fall off the radar of any of these various authorities, because it’s not just when you know, when you’re dealing with cross border, it’s always multiples of two. So it’s you have to satisfy one side and not the other. And it’s all you know, very, very technical, very, very product specific, industry specific, you know, even if you know, if you have products that are duty free, a lot of people think, people think that, you know, it’s all smooth sailing. You know, we don’t have to worry about it, right? Because you just, you just manipulate the transfer price and just deal with the tax. Well, custom still has plenty of reporting requirements, as you know, for duty free goods.

Andy 13:36
Well, then you also have back to the IRS situation, there are taxes that, like a warehouse tax that the IRS assesses, and different things. So part of your supply chain in this is in your design. Do you want the goods to come in and bulk? You put them into a warehouse, you do the break bulk, and you go from there. Or is it better to have them come out from the factory or distribution center offshore, and then when it comes in, it’s, it’s going directly to your end client and and you’re dealing with things that way. So there’s a lot of things that need to come into play. I would say that one of the things that as an, ex, I guess a suggestion, I mean, the role I’m playing today is I’m in a basically, it’s like the equivalent of the Chief Financial Officer. I’m a finance director for the city here in Searcy, Arkansas, and all the different issues that we’re dealing with. One of the things I will say, you can have a lot of people involved, as you’re talking through, in this case, in your your scenario there, there’s so many people that need to be at the table, but they don’t need to be there all at the same time. So once you go through and look at some things, compartmentalize the different aspects of what your. Having to do once you’ve decided to say, Okay, we know that we want to manufacture and sell this widget in the US where we’re going to manufacture that at will it be domestically or offshore, that’s when you get your person purchasing folks in, along with your logistics, compliance and all that, and to talk through that. Once that’s decided, then the issue comes in, as far as you know, and some of it could be done, some simultaneous you’re looking at the valuation and bringing in the right people, what would we do? And here’s the scenario. So that’s that’s the key. A lot of people come to the table, and it’s like a blank sheet of paper and you so you have your meetings spent in discovery. What are we here to talk about, versus? Okay, here’s some scenarios. Now let’s focus our attention. What’s the implications of scenario? One, two and three? Would that be a good approach? And what you’re trying to look at here, as far as helping people identify their transfer pricing, you know, optimal process here.

Carl Budenski 16:10
Yeah, correct. So there’s a pretty large fact gathering stage with any of our kind of engagements right to understand what’s going on. And we do try to be practical and boil things down to the most simple, you know, characterizations of these companies and the solutions, you know, that they’re providing. And it, again, is super facts and circumstances specific. You know, there’s a lot of customers. They just want the good shipped to their to their facility, drop shipped that way. Sometimes there’s some kind of sub assembly that has to go on before it reaches the customer, you know, we have clients that, you know they’re they’re middleman number two, before it ends with, you know, the customer, there’s just so many different layers in knowing you know what applies. I think that maybe the easiest way to describe something like this is Jay, if you agree, just through an example, right? You know, you’ll know exactly what example I’m talking about is, you know, we had a client come to us. They were an importer from Europe, but they had a bunch of different segments, right? They were in kind of the machinery business there. There was a there was a component that was shipped in and sold. There was a lot of after sales that occurred. There was warranties, there was spare parts. And then there was a, still a manufacturing plant in Georgia that did some of the the manufacturing of these different molds and pieces, right? And so, you know, they had to license a, you know, a piece of IP from from Europe, to do that. And what they were seeing is, you know, they were, they were had a really hard time monitoring the margin of all these different lines. They also had a, you know, they were continuously making adjustments in the profit margins of the businesses or the business units. But none of the, none of the customs compliance, had been done for, I don’t know, Jay how many years, right? Like, you’ve been helping them, trying to get everything fixed and get this straightened out, right?

Speaker 1 18:05
Yeah. And then problem is, actually they, you know, it’s some companies really reviewing their pricing every quarter or every month. But some company companies just do an annual basis. At the end, they’re saying, Oh, I mean, we are off the margin. I mean, let’s say us making too much money on an imports, imported goods, sales of imported goods. And then they make an adjustments at the end, year end, and then usually, that’s when the issue, compliance issue comes up. I mean, are you making any lump sum adjustments to your cost of goods sold, or pricing of the past imports. Now your are you? Do you have to really report it and tender more duties to customs or not? So, so that’s that’s actually a common issue that we see from from all these but for for this type, for client that Carl briefly mentioned, let’s say they’re making an adjustments for their spare parts, imports from, let’s say friends, and then, you know, they make, like, I don’t know, let’s say $1 million adjustment a year. How did that really affect the customs compliance and then all the past imports that are affected by that adjustments? Right? We ended up filing a letter with customs and then 10 or more duties. But there’s a specific rules that are rounding these transfer pricing adjustments, and customs knows these companies makes all these decisions and transactions under IRS rules and transfer pricing, and then Customs has own rules under all the rulings and the regulations. So

Andy 19:46
Jay and Carl, what let me ask you this is that at the end, I mean, we’re talking through, say, All right, we’ve gotten people’s attention. Okay, I need to get a few extra parties to the table, if you will. Or departments, and talk through some things. You go through all of this, what’s been the results? I mean, bottom line is, like, if I’m going to go through all this exercise, I’ve got to now reach out and establish a relationship, if I’m in the compliance area, or if I’m a CFO, and I’m like, Are we maximizing the efficiency, or tax avoidance and duty avoidance and all, and that’s legal to do is to try and pay the minimum, and you can, and I go through all this effort. It’s going to take energy to do this. What’s been some of the results that you’ve seen here for some of your clients? Is it worth all the time. Or I’m, I’m going to go through all this just to save a penny.

Speaker 1 20:46
Yeah, I mean, I’ll for customs perspective. And then car you, you can go through a transfer pricing aspect of it. But the result is, either, really two at the high level is, is transfer pricing that you use is compliant with the customs valuation rules, and then and then it there’s maybe disconnections, or maybe it’s aligned. But really the first benefit is being compliant, obviously, and the Secondly, there are usually, if the transfer pricing is price is accepted under customs rules, is there a way we can kind of basically legally adjust them in prices and then review the skew level price and then see if there’s any really a duty saving that we can optimize, right? Let’s say we’re, I mean companies making importing hundreds of SKUs or parts numbers, but the transfer pricing is actually look at your overall profit margin. So there’s actually a lot of disconnections between the skew level margin that you get at the on the invoice level versus the overall profit of a business. So that’s where we see a discrete discrepancies. Make sure it’s aligned with the transfer pricing at the bottom level of a margin for all the imports. So and there, in that case, a week, usually may be able to find someone duty saving opportunities. So that’s, that’s basically the second one. And then third is probably the transfer pricing adjustments that I briefly mentioned. You know, companies making real end adjustments there may be lowering the customs value, and sometimes, because they are making a too low margin in the US, they wanted to bump up the margin to by reducing the cost of goods sold. So in some cases, companies can actually get a refund by adjusting the value lower to lower value well

Andy 23:00
before you go any further. And Carl, forgive me for jumping in here, but, but I want you to make comment on this. But I want our listeners to to take note of this. Is Jay with what you’re talking about for the compliance people, especially, you’re going to need a set of entries, if you will, and information to take a look at of what you’re importing internationally. I mean, you could be looking at transfer, transfer pricing on a domestic basis. That’s a whole different deal. It’s all within the domestic realm. Which entity is going to be paying, you know, taxes, if you will, from a domestic standpoint, and more of the state laws come into play. But on an international transaction, what I want you to take note of is you’re going to need to take a look at all of your imports, your entries, and isolate them to the related parties. So it’s like you’re not looking at every single thing out there. You’re you’re needing to then isolate those things from specific shippers and or exporters, and hopefully the broker has marked it as related parties. But if they haven’t, that’s an audit item that you need to be checking in that but that would be a key factor of, you know, take a month, take a quarter, take a whole year, whatever, however many you can get, and keep up with it. But that’s that gives you a working set of documents and information. Work from then Carl, then you go. From there, it’s like, okay, you’ve looked at duty assessments. Are there any programs we can take advantage of and all that at the same time? Now, what do we do on the the other side of the fence here?

Carl Budenski 24:48
Yeah, so I’m glad you clarified that that is exactly the step we like to take. Is like, Hey, what are we working with, right? And the answer kind of the first question in terms of, you know, what? Me highlight the two extremes. Maybe Okay, so on the positive side, the best scenarios that I have seen are those where the company they get, they engage us, and they get their supply chain and customs and tax house in order. In this one particular company they were in, like the aerospace, kind of government contracting sector. They were actually inbound to the US, so the parent was outside the US. Their goods were supposed to be duty free, and they had been paying them because they were always so unorganized. They needed their stuff today. They didn’t care what it costs to get in there, but the sheer margin that they were losing on that every single time was huge. So trying to recoup that while, in addition to reducing the margin of the per unit price, save them in both duties and income tax, right? So together, I would love to see the ROI on that number. In fact, I think we’re still computing it, because it’s not quite finished yet. But I mean, I really should have actually charged more for what they’re going to be saving every single year right now. On the flip side, other extreme, which frankly, you know happens probably more often, unfortunately, that we, that we want to help people avoid, is this. Are both again, they’re both screwed up, but we don’t catch it first. Someone else does, right? So it usually comes up in some kind of Federal Audit. Usually the states don’t get that granular, but a federal like IRS audit, the two agencies don’t really talk to each other. There are some code sections that say they’re, you know, supposed to reference one another. But what ends up but what ends up happening is they basically get caught. They think they don’t think they’re in. It’s usually not deliberate, never deliberate, actually, but their inner company pricing was not what we call arm’s length, or what third parties would do. That’s actually the transfer price, is the intercompany price. And what happened is the IRS adjusted it. You know, they ended up having to either disallow losses, you know, tax losses, which is a huge hit, paying the additional tax, paying the additional penalties. You know, it’s double taxed, essentially, because they already paid the tax in that in another country. So you basically got hit twice with no, you know, recourse, in addition to the fact that the customs then were not correct. And there’s also exposure there that you really need to fix, because the customs penalties, as you know, are even greater than than IRS penalties in most cases. Right? So that’s, unfortunately, the other side of the equation, and it’s all about, just like you said, communication, you know, making sure everyone’s on the same page and then documenting things, because, you know, when there is turnover or something in those C level, C suite level departments or, you know, tax departments or whatever you can’t support what you’ve done historically, you know, you’re typically in a lot of a lot of trouble.

Andy 27:57
Well, with that, let me just ask, is that for next steps, if somebody is interested in pulling some things together, and again, folks, we’re going to have Jay and Carl’s contact information with our show notes, but before they come to you to make your first meeting or first discussion more productive, what is it that I would Need to pull together to have ready or be up to speed, if you will, proficient on the latest information on, what would you ask me to do

Speaker 1 28:30
for customs? Yeah, I need an ACE data. That’s how I need it, at least. Or intercompany pricing policies, usually that’s embedded in a distribution agreements or other commercial documents, but anything related to how you price your imported products is the most important thing. And then ACE data, I want to look at how much your volume of imports and the duty spending as well. And yeah, Carl, yep.

Carl Budenski 29:01
I think of the transfer pricing side, you know, financial statements. And if you have a policy or intercompany agreements, we’d like to review those and take a look to see if they

Andy 29:11
hang on you said, financial statements of what of the company or of checking accounts or what,

Carl Budenski 29:20
sorry, financial statements of the legal entity. So, for example, most likely, in this case, us, company, right, the importer, record companies. See, you know, see what they’re shaking out. Because just a really good rule of thumb for the listeners is, you know, if you’re an importer and you’re you’re just reselling the goods they come in and you resell them to the customers, and you have been making, you know, operating losses for prolonged period of time, and you’re not able to explain that away. That’s going to be the biggest red flags. That’s going to be the biggest red flag that IRS has campaigned for for many years now, probably 10 years. They have these impound. Distributor, inbound, distributor campaigns. So those type of things are very good indicators that your inner company pricing, your transfer pricing, are not in compliance.

Speaker 1 30:09
And just so, just to add one thing, actually for customs valuation, the third, this is actually important. We actually wanted to see financials of the seller, because customs focus on the sellers. How much seller is making from this import, sales of imports or sales of goods to related parties?

Andy 30:33
Well, and to your point, let’s back up a minute. One of the other things that we need to be looking at, your tax accounting department, especially if it’s related parties, obviously, and that’s what we’re talking about here, needs to also be involved with their counterparts that has the tax accounting for the shipper or the seller. So that needs to come into play too. It’s like, okay, well, we have now made the US entity better, and here’s the price, and this is what we’re going to pay, from the IRS perspective, for us, taxes and the customs. But then we may have just hung out to dry the the exporter, and it’s like, so it’s, it’s got to be, you’re, you’re looking for a win, win, because at the ultimate this rolls up to one corporation in this scenario we’re talking about. So that’s another thing. Is if you’re looking for people to get involved, you’re counting the division, especially with a global company, you need to have those multiple entities, yep,

Speaker 1 31:37
yep. And that’s why we get involved with the people from both entities, usually, so get make sure that we are aligned together

Andy 31:46
well. And the thing too is that having somebody like yourself that is an expert in this particular area, you will help a company navigate through the issues. They can help navigate to the right parties, and together, you’re going to get through this quickly, versus somebody just trying to do it all on their own. And they’re still not 100% sure. So you know, having the confidence of, here’s the knowledge that y’all are bringing to the table, and here’s the steps they need to take, it’s always good if you’re going into a forest or somewhere to have a guide with you, you’re going to get through it quicker. So same thing here is that the forest of transfer pricing, should we say?

Unknown Speaker 32:34
I love that? Yeah.

Andy 32:37
Well, guys, listen, I appreciate your conversation here today. This has been a relatively short conversation, but it’s one that has a lot of positive implications here. One just to know what you’ve got and how it’s valued and how you calculate that, but then going into how you’re selling it and transferring it from one entity to the other, and then finally, looking at it to maximize the efficiency on, you know, lowering your tax rate, lowering your duty rate as much as possible, and doing it compliantly. So thank you so much guys.

Unknown Speaker 33:14
Thank you so much.

Carl Budenski 33:15
Yeah, thank you guys. Keep it up. We love listening.

Andy 33:18
Oh, I appreciate that, folks. Listen. We really appreciate your listenership. Hit that subscribe button. Please share us. And I’m telling you when we say that we’re it’s just not words. Folks, we you really help us out with our show, and so we greatly appreciate you doing that. Laola and I are going to get to do some public appearances. So be watching for that, and we’ll be sending out some things. Icpa is one, and we’ll be up in Detroit for AIAG for those folks, and even up in Canada, we’re going to be doing some stuff. So exciting times ahead.

Lalo 33:58
Well, thank you all. And if there is any questions or any more ideas of anybody wanting to listen more about this, let us know, and we’ll, we’ll bring Carl and Jay back up and or maybe through global Training Center, we’ll do a webinar or something, just to throw it out there to the audience, but just let us know on the comments and we’ll, we’ll, we’ll create more content like this. Well, thank you very much. And like Sandy said, Thank you for listening, and we’ll have a good day. Bye.