On December 20, 2017, the Court of Justice of the European Union (CJEU) decided that a company may not use transaction value for customs valuation purposes when a transfer price consisted of both an amount initially invoiced and declared, and a flat-rate adjustment made after the end of the accounting period.
The Community Customs Code (CCC) and its related jurisprudence provides that customs value must be determined primarily according to the transaction value method, with the price actually paid or payable for the goods to be adjusted where necessary to avoid establishing an arbitrary or fictitious customs value. The CJEU found that uncertainty regarding future adjustments at the end of the accounting period made it impossible for the transfer price to be used as the transaction value for imports into the EU.
The case involved the Principal Customs Office of Munich and German company Hamamatsu Photonics Deutschland GmbH (Hamamatsu Deutschland), a subsidiary of Hamamatsu Photonics of Japan. Hamamatsu Deutschland purchased imported goods from its parent in Japan at intra-group prices subject to an advance pricing agreement concluded between the group of companies and the German tax authorities. The amounts charged by the parent to Hamamatsu Deutschland were regularly checked and adjusted as needed for the sales prices to conform with the arms-length principle.
The CJEU confirmed that a post-importation adjustment to the transaction value is limited to specific situations (e.g., quality defects or faulty workmanship in the goods discovered after their release for free circulation). In addition, it stated that the CCC “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.” Accordingly, the CJEU held that the CCC does not allow for a subsequent adjustment of the transaction value such as in this case to be taken into account for customs valuation purposes.
The fact that the judgment is based on the CCC rather than the Union Customs Code, which entered into force and replaced the CCC on May 1, 2016, is unlikely to affect the applicability of the CJEU’s conclusions. However, differences may arise in the manner in which individual EU Member States will apply the relevant provisions.
In practical terms, companies may no longer be able to rely on transaction value for EU imports if they make transfer price adjustments. While the ultimate customs value of goods is unlikely to change significantly, companies will instead have to rely on alternative valuation methods (e.g., the deductive valuation method or computed value) requiring incomplete or “simplified” declarations that must be reconciled within a fixed time period after their submission. These alternative approaches are more burdensome from a compliance perspective and may increase the risk of penalties for companies with a high volume of customs entries.
Conversely, the U.S. continues to allow importers to use the transaction value method of appraisement in instances involving downward and upward transfer pricing adjustments. Such adjustments are typically made through U.S. Customs and Border Protection’s (CBP) Reconciliation Program, which provides importers the opportunity to declare the value of imported merchandise based on the best information available at that time and later follow up with a downward or upward adjustment within the prescribed time frame. While the Program may be used for other types of adjustments (e.g., post-importation proceeds paid to foreign vendors, assists unknown at the time of importation, etc.), it is more common in the context of intercompany payments between related parties, often pursuant to advance pricing agreements. To the extent that an importer is not participating in CBP’s Reconciliation Program, or fails to make the appropriate adjustments within the available period prescribed by CBP for reconciliation, other avenues of recourse may include prior disclosures (in the case of an upward adjustment, i.e., duty owing) and protests (in case the case of downward adjustments, i.e., duty refund).
Few countries have formal programs, like CBP’s Reconciliation Program, available for importers to report such adjustments. Companies importing into multiple jurisdictions should consider reviewing the requirements of each jurisdiction from a transfer pricing adjustment perspective. In that regard, a company would want to confirm on a per country basis that the proper method of appraisement is used at the time of importation; the underlying transaction meets the related-party pricing arm’s length requirement; and any adjustments, if required, are properly managed; among other concerns.
Further, since noncompliance, depending on the country, may result in the issuance of penalties, companies may also want to consider performing an analysis as to whether dedicating more internal resources (e.g., staffing, training, etc.) and developing additional processes would be of benefit.