On December 20, 2017, the Court of Justice of the European Union (CJEU) issued a judgment concerning the relationship between transfer pricing (TP) and the valuation of goods for customs purposes (Hamamatsu case C-529/16). The judgment challenges the use of TP data for customs valuation purposes and, in doing so, is inconsistent with guidance from the World Customs Organization (WCO).
Customs and tax authorities pursue different objectives in assessing the value of goods traded between related parties. For the tax authorities, the issue is whether the value of the goods is not excessive, thereby reducing taxable profit for the importer overall. For customs authorities, the issue is whether the transaction value of specific goods is under-valued such that the customs duty amount cannot be accurately assessed.
In the interest of operating global supply chains efficiently, there is a need for a compromise between TP and customs considerations. With this in mind, the WCO has called, notably in its 2015 Guide to Customs Valuation and Transfer Pricing, for better alignment between TP and customs valuation. In addition, the WCO Technical Committee on Customs Valuation (TCCV) has been discussing the relationship between customs valuation and TP over the past few years. This culminated in the adoption of Commentary 23.1, which confirms that TP documents may contain useful information for customs and may be used to determine whether the relationship between supplier and importer influenced the price of the goods for customs clearance. More recently, during its session in October 2017, the TCCV adopted Case Study 14.2 illustrating (as did earlier Case Study 14.1) cases where customs took into account TP information in the course of verifying the customs value.
Does the recent CJEU ruling challenge the WCO work in this field?
The Hamamatsu Case
Hamamatsu Photonics Deutschland GmbH (Hamamatsu) is a German subsidiary of the Japanese company Hamamatsu, and it acts as distributor of optical devices purchased from the parent company. The TP policy of the group, which is covered by an Advanced Pricing Agreement (APA) with the German Tax Authorities provides that the consideration paid by Hamamatsu to purchase the devices distributed was to be adjusted to allow the latter to realize a target operating margin.
The case referred to the CJEU relates precisely to these adjustments. Hamamatsu accounted for an operating margin below the threshold agreed upon in the APA. The Japanese parent company consequently carried out a downward adjustment to allow the achievement of the target profitability by its German subsidiary. Hamamatsu filed a refund claim for the higher customs duties paid on the price that was declared to customs at the time of importation. Customs, at that stage, did not seem to have challenged the carrying of adjustments but refused the refund claim, arguing that no allocation of the adjustment to the individual imported goods was made.
Upon appeal, the case was brought before the Munich Finance Court, which stayed the proceedings and referred the following preliminary question to the CJEU:
Can a transfer price be used to determine the customs value in case the transfer price is adjusted at the end of the year, regardless of whether the end-of-year adjustment leads to a refund or additional payment of import duties?
The CJEU Ruling
The CJEU first confirmed that the customs value for the imported goods was the Transaction Value (TV), i.e., the price paid or payable for the goods when they are sold for being exported to the European Union. According to CJEU jurisprudence, the transaction method is the primary criterion for customs valuation, and it only should be derogated if the price actually paid or payable for the goods cannot be determined (CJEU case C-116/12, Christodoulou and Others). The CJEU reiterates that the customs value must thus reflect the real economic value of an imported good and take into account all of the elements of that good that have economic value. Thus, the transaction value may have to be adjusted where necessary in order to avoid an arbitrary or fictitious customs value. However, a subsequent adjustment of transaction value is limited to specific cases such as, for instance, the presence of defected or damaged goods.
In consideration of the above, the CJEU responded as follows to the question raised by the Munich Finance Court:
“[●]…in the version in force, the Customs Code does not impose any obligation on importer companies to apply for adjustment of the transaction value where it is adjusted subsequently upwards and it does not contain any provision enabling the customs authorities to safeguard against the risk that those undertakings only apply for downward adjustments.
[●]the Customs Code, in the version in force, does not allow account to be taken of a subsequent adjustment of the transaction value, such as that at issue in the main proceedings.
Therefore, [●]Articles 28 to 31 of the Customs Code, in the version in force, 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.”
The ruling is short and does not conclusively allow the reader to determine whether it means either of the following:
- the initially reported customs value is the TV and can be used for customs valuation purposes without subsequent TP adjustment being allowed or
- the initially reported customs value should be regarded as provisional and fictitious and therefore cannot be used as the TV for the customs value, so one of the alternative methods for determining customs value should be used.
In the latter instance, the question arises whether TP data can still be taken into account to determine whether the relationship between the supplier and the importer influenced the price. And that is inconsistent with the WCO guidance mentioned above.
Impact for the Businesses
This CJEU ruling is short and can receive diverging interpretations, creating uncertainty for businesses importing into the European Union. These businesses should review their TP policy regarding year-end adjustments in order to identify potential risk areas.