Tax, Transfer Pricing and Customs
Issues Facing the Industry
2012 Luxury & Fashion Industry Group Conference
Harvard Club | New York, NY
September 28, 2012
Marc M. Levey (New York) & panel
Panel
– Marc Levey (New York) – chair
– Scott Vogel, Vice President of Finance, David Yurman
– Phil Carmichael (New York)
– Robert Eisen (New York)
– Mirko Marinc (Amsterdam)
2
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– Fashion and Luxury Businesses Facing Aggressive Tax
Audits Globally
– Tax and Transfer Pricing Issues Seen to Repeat
themselves Globally. Prominent issues include:
– Marketing Intangibles:
– Various Concerns Surrounding the Concept of Marketing Intangibles
– What are Marketing Intangibles? General Definition and OECD View?
– What is the tax relevance of Advertising Marketing and Promotion Expenses
(“APM”)?
– How should Marketing Intangibles be documented?
– What is the Global view?
3
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– Flagship Stores:
– How does the IRS (and other tax authorities view flagship
stores?
– How are Flagship stores defined?
– What is the relationship between Flagship stores and
Marketing Intangibles?
4
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– Market Penetration Period:
– What do regulations say?
– What is the IRS attitude toward the Fashion and Luxury
Industry?
– What is the Impact on Net Operating Loss Carryovers?
5
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– Transfer Pricing is Equally Critical to the Fashion and
Luxury Industry.
– There are differences between a Transfer Pricing Policy and
Transfer Pricing Documentation
– Selecting the Transfer Pricing Method
– Identifying Comparable Transactions and/or Companies can be
Challenging. Why?
– Transfer Pricing Adjustments to make the Analysis Practical and
Commercial
– Transfer Pricing for Services and Financial Transactions
– Do’s and Don’ts for Transfer Pricing Documentation
6
First – Sale Rule for Customs – Duty Savings
& Compliance
– First Sale Rule
– A manufacturer’s price to a middleman can establish the
customs value for goods destined for export where the
manufacturer and the middleman deal at arm’s length. See
Nissho Iwai American Corp. v. U.S., 982 F .2d 505 (Fed.Cir.
1992); CCA 201043028.
– Three Part Test:
– A bona fide sale from the manufacturer to the middleman;
– That the merchandise be clearly destined for export to the US at the
time of the first sale; and
– That the first sale price be at arm’s length.
7
First Sale Rule – Simple Application to
Maintain Customs Value Post –Tax Planning
Before
After Tax Restructuring
Changes
Related/Unrelated Factories
Related/Unrelated Factories
$100
Importer/Distributor
$100
Principal/Contract
Manufacturer set up
for tax/business
purposes
First Sale rule is used to maintain $100
Customs value instead of $150 paid by
importer. Otherwise, tax planning would result
in higher value for Customs.
$150
Import/Distributor
8
First Sale Rule – Duty Savings Application
Related/Unrelated Factories
$100
Commission
$5 (not dutiable)
Related/Unrelated
Royalty
$10 (not dutiable)
Principal/Contract
Manufacturer
$150
Design Fee
$10 (dutiable)
Import/Distributor
First Sale rule is used to achieve $100 Customs value instead of $150 and insulate royalties
and service fees from duty where paid to party unrelated to factories. Importer/distributor may
also pay commissions, royalties, design fees in which case these payments may not be
dutiable even if paid to related parties.
9
Luxury Goods Imports – Best Practices
1. Coordinate Customs and TP functions and training. (Transfer price
adjustments have Customs consequences!)
2. Perform Customs Pricing Study as part of or in addition to TP Study.
(Support for related party pricing for Customs purposes)
3. Joint Customs/Tax APA?
4. When drafting agreements covering royalties, service fees or any other
payments to seller or party related to seller, consider Customs impact. Often,
boilerplate language destroys Customs defensive position.
5. Handle all communications from Customs with care, especially those
pertaining to valuation.
6. Periodic review of Customs Operations.
7. Consider how “First-Sale” structure may help a) reduce duties or b) insulate
indirect payments from dutiable value or §1059A issues.
8. Analyze benefits of reconciliation program.
10
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– VAT Considerations in general
– Never forget VAT – there is a clear relation between
Customs, TP and VAT
– 27 European Union Member States and many more
jurisdictions with VAT system
– VAT rates are increasing
– Authorities aim for more revenue through levying of VAT
– VAT is levied in each individual transaction of the supply
chain
11
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– VAT Opportunities
– Lower customs value is lower VAT due (on importation)
– Central point of importation – no need to prefinance VAT
– Online sales and applying the VAT distance sales regime
– ERP system
– Special regimes
12
Tax, Transfer Pricing and Customs Issues
Facing the Industry
– VAT Challenges
– TP and Customs value adjustments have VAT impact
– Correct documentation / invoices; what are the risks of not
having them in place
– Free supplies and supplies under warranty do have VAT
implications
– ERP system
– Each individual transaction of the supply chain is also a risk
13
Tax, Transfer Pricing and Customs
Issues Facing the Industry
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