European Union: European Court Of Justice: Intercompany Pricing Cannot Be Used For EU Import/Customs Purposes If Subject To Adjustments

Key Points

  • A recent judgment of the European Court of Justice for bars the use of intercompany transfer prices for EU imports and EU customs duty purposes if (as is commonly the case) these are subject to retroactive adjustments.
  • This means that EU importers who buy from related vendors may have to change the basis for valuation of their EU imports.
  • The judgment increases uncertainty concerning past imports, and EU importers may want to review their customs valuation of past imports to assess their risks.

On December 20, 2017, the European Court of Justice (ECJ) issued an important decision in respect of the use of intercompany transfer pricing for customs valuation for imports in the EU. The judgment bars the use of intercompany transfer prices for EU imports if (as is commonly the case) these are subject to retroactive adjustments. This means that EU importers who buy from related vendors may have to change the basis for valuation of their EU imports, as discussed in more detail below.

Transfer Pricing and Customs Valuation

The EU Union Customs Code (UCC) implements the World Trade Organization (WTO) Valuation Agreement. As such, the preferred (and default) method of customs valuation of EU imports is based on the price actually paid or payable ("transaction value"). Transaction value can also be applied in respect of EU imports in "intra-company" sales between related companies, provided that the price (or transaction value) is not influenced by the relationship between the parties to the transaction.

For corporate taxation purposes, many groups of companies rely on transfer pricing for their intracompany sales. By means of reference to comparable sales flows between unrelated companies (as documented in transfer-pricing documentation), groups confirm that the aggregated profit margins of their group companies resulting from such intracompany sales are "at arm's length" (i.e., not influenced by the relation between the companies engaged in the transactions). Contrary to corporate income taxation of aggregated profits, customs duties are levied over each individual sale/import and the transaction value of that sale/import. Nonetheless, some EU Customs authorities accept such transfer-pricing documentation to support, for customs valuation purposes, that the intragroup transfer prices are not influenced by the fact that buyers and sellers in transactions in which EU imports are made are related, and are thus acceptable as transaction value for EU customs duties.

In practice, such transfer-pricing strategies are often implemented by periodical monitoring of profit margins of group companies. Where a margin is outside the "at arm's length" range as supported by transfer-pricing documentation, additional charges or repayments are made between group companies, so-called 'transfer-pricing adjustments." The amount of such transfer-pricing adjustments typically is determined by the desired profit margin of the group company to whom the adjustment is addressed.

For customs valuation purposes, the question is whether such transfer-pricing adjustments are part of the "price actually paid or payable" or transaction value. If so, this would require retroactive adjustment of the transaction value of goods previously imported.

Companies and customs specialists, as well as Customs authorities, struggle with the application of such retroactive adjustments in practice. EU customs rules do not offer a practical and comprehensive solution, other than reopening and amending previous individual import declarations. Where companies import frequently, this poses a massive administrative burden. In some EU countries, Customs authorities have been open to more practical solutions, such as consolidated periodical reconciliation where individual imports are made on the basis of a provisional transaction value. However, scholars and customs experts are divided about the justification of such approaches under EU customs legislation.

The Hamamatsu Judgment

The December 20, 2017 judgment of the ECJ in the Hamamatsu case confirms that, if such transfer-pricing adjustments are made (as is commonly the case), the intercompany sales price (i.e., sales price between related companies) can not be used for customs value.

Hamamatsu imported products acquired from a related supplier. In line with group transfer-pricing policies, a transfer-pricing adjustment was applied, which resulted in (retroactively) the transaction value of the imports being reduced. Hamamatsu applied to German Customs authorities for repayment of duties previously paid. The matter resulted in an appeal to a German court.

The German court considered that (par. 21 of the ECJ judgment) "The referring court considers that the final annual amount constitutes the final transfer pricing, established in accordance with the arm's-length principle provided for by the OECD Guidelines. There was thus no point in basing the transfer-pricing exclusively on the provisional pricing in the context of an advance transfer-pricing agreement concluded with the tax authorities which does not reflect the real value of the goods. Thus, the price declared to the customs authority was only a fictitious pricing and not the price payable for the imported goods pursuant to Article 29 of the Customs Code."

Based on that, the German court then raised the following question to the ECJ as the highest authority on interpretation of EU Customs regulations: "Do the provisions of (..) [the 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?"

Based on the factual decision by the referring German court, the ECJ considers (paragraph 23) "whether Articles 28 to 31 of the Customs Code must be interpreted as meaning that they permit the adoption, as the customs value, of an agreed transaction value which consists partly of an amount initially invoiced and declared and partly of a flat-rate adjustment made after the end of the accounting period, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down."

In answering the question, the ECJ emphasizes (paragraph 28), "The transaction value must reflect the real economic value of imported goods and take into account all the elements of those goods that have economic value." The ECJ then considers (in paragraphs 30 to 35) that, for customs valuation, the only permissible post-import adjustments are those in relation to hidden defects or damages to the goods imported. This is also set out in Article 145 Paragraph 2 of the (old) Implementing Regulation 2454/93 to the (old) Community Customs Code, as applied to the case decided by the ECJ.

The ECJ then concludes that:

  1. there is no obligation on importers to retroactively adjust transaction value in case of transfer pricing adjustments
  2. the applicable provisions of the Community Customs Code "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."

Consequences of the Judgment

In summary: If retroactive transfer-pricing adjustments are made, they need not be disclosed to Customs authorities for prior imports, but the fact that they are made does mean that the intercompany transfer price cannot be used as transaction value for customs purposes.

If the intercompany transfer price cannot be used as transaction value, the taxable base for customs duties must be determined by another method. These alternative methods are, in mandatory order of application:

  1. Transaction value of identical goods (sold between unrelated parties)
  2. Transaction value of similar goods (sold between unrelated parties)
  3. Deductive value ("re-sale minus")
  4. Computed value.

where Methods 4 and 5 are interchangeable.

In practice, Methods 2 and 3 will be difficult to apply, since individual transactions in which identical or similar goods are sold between unrelated parties in the same economic, commercial and factual circumstances will be difficult to find. From an audit perspective, such comparable individual transactions will be difficult to find and demonstrate to Customs authorities in a verifiable and auditable manner.

The most likely method to be applied would either be method 4 or 5. Method 4 is based on the price of sale after importation, from which elements that need not be included in the taxable base for customs duties (i.e., profits and costs incurred after importation) are deducted. Method 5 requires that an importer demonstrate that the overall cost of production, including materials, design, royalties, general sales and administration cost, adds up to the price as declared for import. In other words, the cost of all individual inputs for the products as set out in the bill of materials, as well as additional costs of transport (up to the EU border) and intangible assists related to the product must be justified on an item-by-item basis. This poses a challenge to importers, as well as to Customs authorities, since this requires extensive (internal) audit and verification.

With this judgment, the ECJ has essentially cut off the connection between transfer pricing for corporate tax purposes and the transactional taxable base for customs duties. Reliance on the transfer-pricing documentation as prepared for corporate tax purposes to justify customs valuation is, at least according to the judgment, not sufficient. Importers should consider building a separate justification of their intercompany transfer prices on a cost basis or on a resale minus basis, if only as an audit defense for future audits by Customs authorities.

Our EU international trade specialists are ready to assist and advise on the consequences of this decision for your trade flows and EU customs compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions