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As expected, the judgment of December 20, 2017 of the Court of Justice of the European Union (CJEU) in the Hamamatsu case (C-529/16), is driving a change in the retroactive consideration of transfer pricing adjustments on customs value by EU customs offices.
This judgement concerned the question raised in relation to the customs duties refund claimed by a Germany entity (Hamamatsu) that imported goods from its Japanese parent company and, due to the adjustments made within the framework of a prior transfer pricing agreement at the end of the accounting period, retroactively adjusted the customs value.
In other words, given that the price of the imported goods was ultimately adjusted downward for corporate income tax purposes in compliance with transfer pricing arrangements, the German importer sought to recover the duties initially paid in excess. Intuitively, it is natural to think that the taxpayer was right, but the Court did not accept its arguments.
The CJEU concluded that customs regulations do not allow an agreed transaction value, composed of an amount initially invoiced and declared and, on the other, of a lump-sum adjustment carried out after the end of the accounting period, without the possibility of knowing beforehand if this adjustment will be upward or downward.
It is important to keep in mind that the Judgement did not seek to analyze the correlation between transfer pricing and customs value, nor was the consideration of transfer pricing valuations for customs purposes questioned. The CJEU limited itself to rejecting the consideration of a subsequent adjustment of the transaction value, outside of admitted cases of product quality defects or faulty workmanship in the goods discovered after their release for free circulation.
The World Customs Organization, in its Guide on Customs Valuation and Transfer Pricing of 2015, shed light on the lack of consistency between different national customs offices in relation to customs treatment of transfer pricing adjustments and the customs procedures required for their consideration, owing to the absence of international guidelines. In this regard, the World Customs Organization raised the question of whether it was necessary to require importers to apply provisional value procedures to be able to make customs value adjustments.
At the level of the European Union, the European Commission referred briefly to this matter in VAT Committee Working Paper 923 on transfer pricing (see the document here and our brief summary of it here). In Spain, the General Directorate of Taxation has recognized in several tax rulings prior to the CJEU Judgement and in line with the now repealed provisions of the Community Customs Code, the possibility of carrying out provisional dispatches through the incomplete declaration procedure that were later regularized under transfer pricing adjustments, empowering the customs authorities to grant longer time limits than the ones provided in customs regulations for this procedure. This allowed companies to adjust the customs value of their imports when they received the corresponding transfer pricing true-ups, usually much later than the deadlines established in the incomplete declaration procedure.
The current Union Customs Code replaces the incomplete declaration procedure by the simplified declaration procedure. This enables companies to request authorization to submit initial declarations with a provisional customs value that will later be regularized through submitting a supplementary declaration within certain deadlines. However, the adjustments made by multinational groups will not always be compatible with customs deadlines, which entails a clear risk for taxpayers that are not duly authorized.
Considering this CJEU ruling, it will not be easy to apply direct tax schemes to customs value. Consequently, for any international group facing this problem, now is a good time to review and adapt its traditional operating model so that it complies with current customs regulations.
By Teresa Urcelay
This post is also available in: Español