Is the use of a transfer price as basis for the customs value in doubt?

In view of the potential large impact of a very recent judgement of the Court of Justice for companies that use a transfer price as the basis for the customs valuation at import of their goods in the EU, we herewith would like to give you a heads up and already now share our first analysis of this case and its potential impact.

The judgement
On 20 December, the Court of Justice has ruled in the case in the case of Hamamatsu Photonica Deutschland GmbH vs Hauptzollamt München (C-529/16).

This case in essence concerns the question whether in order to establish the customs value, it is allowed to use an agreed transaction value, which consists of the amount initially invoiced and declared which after the accounting period (e.g. year-end) is adjusted upwards or downwards, depending upon the transfer pricing agreement in place.

Where this case of course looked upon the specific elements applicable in this context, the importance of the case in general is that the Court of Justice in fact has ruled that where a price is being used as the basis for the customs value while that price in the end may be subject to adjustments not knowing whether the adjustment at the end of the accounting period will be made up or down, it cannot form the basis for establishing the customs value.

One of the main considerations made is that the legislation does not provide for an obligation for companies to report adjustments upward (i.e. an assessment would be in place) nor can the customs authorities cover the risk that only downward adjustments would be reported (i.e. refund application)

The potential impact
In practice many transfer pricing agreements have been established following the pattern as described above, i.e. after the accounting period an overall adjustment is made to bring the profit margins (as agreed upon) in line with the agreement(s)/APA in place. A large number of multinationals operate in this manner and normally use the transfer prices also as the basis for their customs valuation. For the use of the transfer price as basis for the customs valuation including the way on how to deal with retrospective price adjustments, often agreements with Customs are in place.

Based upon a first analysis the conclusion may have to be that the use of a transfer price subject to adjustments as described, now no longer is possible. Question however is what the impact of this judgement of the Court of Justice in daily routine will be. This will likely depend upon the specific details and circumstances in place, the nature of the agreement with Customs and possible alternative approaches. Also the manner in which the relevant customs authorities of the Member States will deal with this creates an important element to consider on the way forward.

Please note that as far as we can see now, this judgement looks upon the base for the customs value itself (e.g. the transfer price). For companies who have agreements with Customs on specific elements that need to be added to the price that creates the basis for the customs value (so-called assists), in our view on these agreements the judgement should not have a direct impact. Also this point will be further analyzed.

Next steps
Early next year, we will come back to you with a more in depth analysis and further information on this case, its impact and the best way forward.

If you have any questions regarding the above or require any assistance with verifying what these changes mean for your company, please do not hesitate to contact Ruud Tusveld (+31 (0)88 792 3473) or Claudia Buysing Damsté (+31 (0)88 792 3811).