Section 1059A – A Trap for the Unwary?
Our community is near multiple major ports, including Port Manatee and the Port of Tampa. Taxpayers that import goods through these ports should be aware of U.S. tax issues that can arise from their actions. U.S. taxpayers that import goods from related parties outside the United States have several tax rules to consider in setting their transfer prices and reporting income, including the transfer pricing regimes in both the importing and exporting jurisdictions. Among the U.S. tax rules that such importers must consider is a lesser-known Internal Revenue Code section, Section 1059A.
Section 1059A provides that the maximum amount a U.S. taxpayer may claim as basis in inventory goods imported from a related party is the amount that was determined for customs purposes when the goods were imported. The statute is designed to prevent taxpayers from claiming low values for customs purposes (reducing the amount of U.S. customs duties owed) and high values for transfer pricing purposes (reducing the amount of U.S. taxable income).
A trap for the unwary can occur when related parties retroactively modify their intercompany pricing after goods are imported. For example, a U.S. company may increase the amount paid for an imported good at the end of the year in order to satisfy the arm’s length standard for transfer pricing purposes. This additional amount is generally be subject to customs duties, but reporting additional customs duties can fall through the cracks if a company’s personnel responsible for tax and customs compliance do not communicate regarding the adjustment. In addition, even where additional amounts are reported for customs purposes, the timing of an upward adjustment in the customs price could prevent taxpayers from including the adjustment in the basis of the inventory for tax purposes if the adjustment is made after the customs value has been “finally-determined” (generally, 314 days after the date of entry). These issues may frequently arise when taxpayers retroactively adjust transfer prices in accordance with Advance Pricing Agreements.
In recent years, practitioners have called for better coordination between the Internal Revenue Service and U.S. Customs and Border Protection along with reforms to eliminate the potential whipsaw of Section 1059A. It remains to be seen whether current tax reform proposals will reach this issue.
Nicholas A. Gard