United States

Getting it Right with Tax and Customs "Predictive" Operational Transfer Pricing

May 27, 2018

Todd Smith, Principal in KPMG LLP’s Trade and Customs practice discusses the role of Predictive Pricing to eliminate the risk, administrative cost, and effort associated with reporting post-importation transfer price adjustments to customs authorities.


Todd Smith:  There is a new procedure or concept that -- well, you could say is trending.  It's called Predictive Pricing.  And Predictive Pricing is a concept that is used, and we're introducing it to our clients, and it's starting to be adopted by our clients.  I believe that within the next five years, most of our major clients will be doing this.

We're going into the ERP systems and we're looking at historical data at the legal entity level, and we're monitoring operating profit margin or any other profit level indicator that the company is using from a policy standpoint to manage their transfer pricing.

If on a legal-entity basis, let's say in June of the current year, that entity is operating above or below the inter-quartile range that has been set from a transfer pricing standpoint, the idea is to then look at forecasts and make a determination as to whether or not prices at the SKU level for future transactions based on forecasts could be tweaked upward or downward such that by the end of the reporting period the entity will fall within the inter-quartile range, and thereby eliminate the need for a transfer price adjustment that will have a major impact on the customs value retroactively.

Our clients are spending a significant amount of time taking a transfer price adjustment that oftentimes only takes maybe several hours or a couple of days for the tax and finance function within a company to determine and then book in their accounting system.  But that transfer price adjustment in many cases needs to be reported to the customs authority in every country that is impacted by that transfer pricing adjustment.

For the customs function, it could take anywhere from six to nine months in many cases for our clients to determine how that adjustment impacted previous imports and how it's going to be reported to the customs authorities, how much duties and interest are going to be owed on that adjustment, and whether or not there is a refund opportunity.  It's an administrative headache for a lot of companies, but nevertheless [the post importation transfer price adjustment] really must be reported to the customs authorities.

And so through predictive pricing, we're able to, again, run an analysis based on forecasts and where the actual results of the entity is at a given point in time and make minor adjustments to the prices at the SKU level going forward, again, to avoid a transfer price adjustment at the end of the year.

For more information on Predictive Pricing and Trade and Customs services, contact Todd Smith at trsmith@kpmg.com.


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