EU: Future Restrictions in the Use of Transfer Pricing for Customs Valuation?
ECJ Judgment in Hamamatsu Photonics Deutschland, Case C-529/161
- Recent judgment by the EU's highest court on the use of "transfer prices" (TP) to value goods imported into the EU purchased from a related company where the TP will be subject to retroactive adjustments;
- Judgment is unclear. It appears to prohibit the use of a TP which may be subject to retroactive adjustments (upwards or downwards) as the basis for the customs value of goods. This would mean that importers must either altogether ignore such adjustments (whether upwards or downwards), or would instead be required to use one of the alternative (and more burdensome) valuation methods to reflect later adjustments;
- The judgment does not appear to prohibit the use by the importer of "incomplete or provisional declarations" which are supplemented at the end of the accounting period by a "supplementary declaration", if amendments are indeed at all required (which is the practice already used in a number of EU Member States such as The Netherlands, Belgium, France, Italy and Spain). For importers who file(d) such declarations in those Member States, the judgment may have minimal impact;
- The impact may be more significant in EU Member States, such as the UK and Germany, which have not traditionally used such the incomplete/ provisional declaration methodology;
- If, however, the judgement by the ECJ is interpreted to mean that retroactive price adjustments (whether upwards or downwards) are not to be considered in the determination of the customs value at all, importers in EU Member States that currently grant refunds for retroactive downwards adjustments might be at risk.
- It is recommended that companies with international supply chains to the EU which are currently using TPs with possible retroactive adjustments, should carefully assess the customs implications of this judgment;
- Baker McKenzie LLP with its unparalleled network of EU customs experts is uniquely placed to advise and assist companies with this exercise.
The customs value of imported goods is used as the basis for determining customs duty liability. Various methods can be used to determine the customs value of imported goods. Under EU customs legislation the preferred method for calculating the customs value of EU imports is the Transaction Value (TV) which consists of the price actually paid or payable in the last sale for export to the EU of the imported goods. TV can also be used in respect of EU imports in intra-group sales between related companies, provided that the fact that the companies are related, did not influence the price. The determination of transfer prices for transactions between related parties is called 'Transfer Pricing' (TP). Prices which can be considered for TP purposes 'at arms length', are usually considered not to have influenced the price, if they closely approximate the price that would have been agreed upon by unrelated parties2.
Over the years different TP methodologies have been developed to achieve 'arms' length' prices. Some of these methods comprise of a system of retroactive priced adjustments, whereby the price for which the goods were sold initially is adjusted at the end of a period (e.g. quarterly or yearly), in order to achieve the price level required to distribute profits between buyer and seller in a way which can be considered in accordance with the TP policy in place.
As already mentioned, TV for customs purposes consists of the price actually paid or payable. This means that amounts paid by the buyer after importation may have to be taken into consideration for customs valuation purposes3. In practice this is done in one of the following two ways4:
- A TV is declared in the customs declaration, while the subsequent price adjustment is treated as a correction of that value. This correction is regularized by means of a post clearance recovery of under paid duties or (as the case may be) a refund, in case the importer has overpaid duties (First Method).
- A 'provisional' or 'simplified' import declaration is filed. After the adjustment has been made, a 'supplementary' declaration is filed. Although this procedure will lead to a similar outcome, the difference is that there is no TV when a 'provisional' or 'simplified' import declaration is filed which must subsequently be corrected by the adjustment (Second Method).
Germany, however, has for some years deviated from the aforementioned methodologies. The German Customs Administration rather takes the position that upwards subsequent price adjustments lead to an influence of the price and a dismissal of the TV. Under alternative valuation methods, the German Customs Administration collects additional duties. However, the relationship between the parties does not have an influence on the price in the case of subsequent downward price adjustments, and the TV is still applicable. Duties can therefore only be refunded if the subsequent downward price adjustment can be allocated to each individual import (which in most cases is not possible). As a result, upwards and downwards price adjustments are treated differently, leading to a definite customs burden for upwards adjustments, but no refund possibility for downwards adjustments. The ECJ judgment was expected to bring some clarification as to this unequal treatment of upwards and downwards adjustments, but ultimately only confirmed that duty refunds are not possible in the specific case.
Summary of ECJ judgment in Hamamatsu
Hamamatsu purchased imported goods from its parent company which charged it for those goods intra-group prices. An initial TV was declared by Hamamatsu in the customs declaration. The total of the amounts charged to Hamamatsu by the parent company were then regularly checked and, if necessary, they were retroactively adjusted, in order to ensure the conformity of the sale price with the 'arms-length' principle.
As a result of these adjustments, Hamamatsu applied to the German Customs authority for repayment of duties previously paid. Its application was rejected and Hamamatsu appealed to the Munich Finance Court. As part of these proceeding the Munich Court referred the following question (amongst others) to the European Court of Justice (ECJ):
"Do the provisions of …[the Community Customs Code] permit an agreed transfer price, which is composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, using an allocation key, regardless of whether a subsequent debit charge or credit is made to the declarant at the end of the accounting period?".
In its judgment, the ECJ ruled that the EU customs legislation "must be interpreted as meaning that they do not permit an agreed transaction value, composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down".
Although the ECJ's comments were made in relation to the Community Customs Code (the legislation which applied until 30 April 2016) it seems reasonable to assume that its conclusions also apply to the EU customs legislation which is currently in force (the Union Customs Code).
Implications for companies
The implications for companies will depend on how the various EU Member States will apply this judgment in practice, which is unclear at this point in time.
We have contacted a number of EU customs authorities who have advised that they are still considering the impact of this judgment and that it will be discussed at the next Customs Code Committee Valuation meeting in March. Dutch Customs advised however that the judgment will have no impact on their existing practice of accepting in such cases provisional values at the time of importation which are later reconciled at the end of the accounting period (with additional payments or refunds of customs duties as appropriate). The use of "provisional values" is similarly the practice in a number of other EU Member States such as France, Italy, Spain, but not in the UK or Germany. The German position in denying duty refunds on downwards adjustments is confirmed, without bringing clarity on the unequal treatment of upwards price adjustments.
In our view, in the absence of further information at this stage from the EU customs authorities, the judgment will likely mean that:
- companies cannot use a TP which is subject to possible retroactive adjustments as the TV at the time of import (the First Method mentioned above). In this case, the importer would need to resort to one of the alternative valuation methods in the prescribed order (transaction value of identical goods; transaction value of similar goods; deductive value; computed value; and fallback method). For goods which have been imported using this First Method over the past 3 years, the declaration may need to be amended and an alternative valuation method-referred to above used. This will be a matter of negotiation with the individual EU customs authorities.
- however, there is still a potential legal basis for companies to use the TP as a basis for the customs value through the use of either:
- simplified declarations declaring provisional values which are then supplemented at the end of the accounting period by the TP adjustments through a supplementary declaration; or
- a complete waiver of the requirement to declare the value at the time of importation followed by the later declaration of the customs value in a supplementary declaration.
Companies should be aware that filing such provisional import declarations requires an authorisation from the customs authorities (see Article 166(2) of the Union Customs Code), which will specify when and how the supplementary declarations are to be filed. The authorisation will only be granted if certain compliance requirements (e.g. the absence of any serious infringement or repeated infringements of customs legislation and taxation rules; procedures for self reporting customs errors to Customs etc.) are met. Applicants with an AEO-C authorization are deemed to meet the majority of these requirements.
Based on the above, it is recommended that companies with international supply chains to the EU, which are currently using TP with possible retroactive adjustments, should carefully assess the customs implications of this judgment and how it affects them on a per country basis.
The customs value is also the taxable base for VAT on importation. If and when changing the valuation methodology or any processes or procedures, importers are well advised to also consider the possible impact on the applicable VAT compliance requirements.