Aligning customs valuation and transfer pricing in case of TP adjustments

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Aligning customs valuation and transfer pricing in case of TP adjustments

The latest developments

On 17 May 2022, the German Federal Fiscal Court (BFH) brought to a closure a dispute regarding retrospective transfer pricing adjustments to the declared customs value of imported goods. The BFH decision implements the preliminary ruling of the CJEU, previously delivered at the request of the Fiscal Court Munich in the same proceedings. An overview of the main findings of the BFH and their business implications are provided below.

Transfer pricing and customs valuation: what is the issue?

The relationship between transfer pricing (TP) and customs valuation has become a critical issue, not only for businesses and tax professionals, but also for tax administrations. This is the case because a major part of the transactions in global trade takes place as intra-group transfers of assets between affiliated companies of multinational corporations. As TP and customs valuation provisions have different aims and objectives, the two may not always be aligned easily. This was already confirmed by the CJEU ruling in case C-529/16 (see our alert of 22 December 2017). In that procedure the German Bundesfinanzhof (BFH), as the court of highest instance, has recently delivered the final ruling.

The CJEU ruling on TP and customs valuation in case C-529/16

As noted in our alert of 22 December 2017, in that case, the appellant requested a refund of import duties on the basis that the customs value was reduced as a consequence of retroactive TP adjustments (TPAs), which led to a reduction of the transaction value, i.e., the price actually paid or payable for the goods imported. In those circumstances, the refund could not be obtained without amending the import declaration in accordance with Article 78, of the Community Customs Code (CCC). In the situation of TPAs, this is however not possible, since the application of such TPAs does not as such lead to the conclusion that the transaction value initially declared must be considered incorrect, thus triggering a need for amending that value on the basis of the TPAs (see by contrast CJEU C-249/18). The CJEU based its ruling on the consideration that the CCC neither requires importer companies to (also) request an amendment of the transaction value where it is adjusted upwards, nor the customs authorities to anticipate the risk of downward adjustments. In our alert, we noted that it was unclear whether this relates to the fact that the adjustment was consolidated and not allocated to individual goods or whether the price adjustment system was not accepted at all.

The recent ruling of the German BFH

The ruling of the CJEU is binding for the referring national court. It is therefore no surprise that the BFH rejected the arguments of the appellant that the TPAs must be taken into account when determining the customs value, either as deductions when such value is based on the transaction price or by virtue of applying the fall-back method of customs valuation. The BFH first noted that the customs value of imported goods is determined at the time of the acceptance of the customs declaration, and on the basis of the data and information available at that time. As a result, changes in the factual or legal circumstances occurring after the payment of import duties, could not, in principle, justify a repayment of such duties. The BFH then echoed the reasoning of the CJEU that the transaction price forming the basis of the customs value could be subsequently corrected only in special circumstances, in order to prevent the determination of an arbitrary or fictitious customs value.

The BFH further pointed out that the requirement that the corrections of the customs value must be based on the objective and quantifiable information available on the date of acceptance of the customs declaration also applies when the customs value is determined on the basis of the fall-back methodology. That precludes retrospective TPAs which do not meet these criteria. If the contrary were true, the customs value thus determined (at the time of the acceptance of the customs declaration) would not be in line with Article 8.3 of the WTO Customs Valuation Agreement. The customs valuation provisions in both the CCC as well as currently in the Union Customs Code (UCC) aim to implement this agreement.

The last aspect of the ruling we would like to highlight is that the BFH considered that there were no reasons that would justify the rejection of the transaction value method in the case at hand. In particular, at the time of the acceptance of the customs declarations, there was no indication that the declared prices did not reflect the actual economic value of the imported goods or that the relationship between the German company and its Japanese counterparty influenced that price.

Business implications

Following the CJEU ruling in case C-529/16, the lingering question is whether in situations where the TP is based on a system that includes TPAs, the customs value can be based on the transaction value method. Taking a nuanced look at the issue, in our view this is indeed (still) possible. This view is supported by the consideration of the BFH that there were, in the German case, no reasons that would justify the rejection of the transaction value method. This means that the transaction value in such a case cannot be considered influenced by the fact that the parties were related and that the customs value was declared as a final value. In that case indeed the position can be taken that there is no reason or ground to amend the customs value (see also CJEU C-11/89). However, in several EU Member States, it is standing practice that where, for instance in accordance with an arrangement agreed with the competent customs authorities, a provisional value is declared and, once the TPAs have been applied, followed by a supplementary declaration. Both upward and downward adjustments are allowed under such an arrangement, leading in the latter case to a refund of import duties.

In light of the foregoing, we further note that a rejection of the transaction value method merely on the basis that this value is determined on the basis of a system that includes TPAs would significantly reduce the number of instances in which this method can be applied. This would severely affect the observation of the CJEU that this method “is assumed to be the most appropriate and the most frequently used” (see CJEU C-116/12). Considering the impact that the CJEU ruling in case C-529/16 could have on the number of transactions in which the transaction value method can be applied, and also that this ruling is not applied in a consistent manner by the authorities of the different EU Member States, we believe that the EU Commission should provide clarity in this matter. This would safeguard both the correct implementation of the Customs Valuation Agreement and a level playing field in the different EU Member States.

How we can help

Deloitte’s Global Trade Advisory specialists are part of a global network of professionals who provide specialised assistance in global trade and customs matters, including on issues of customs valuation. Our professionals can support in carrying out reviews of customs valuation methodologies and documentation, as well as liaising with customs and tax authorities, including support during dispute procedures.

For more information about how the decision of the BFH can affect your business and our capabilities in this regard, please contact one of our experts.

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