Dynamic Transfer Prices for Customs Value in International Trade
Leonardo Correia Lima Macedo
Counsellor, CARF (Administrative Tax and Customs Court) | PhD Int Trade Law | Lecturer Trade Law, Customs and Cross Border Trade | WCO Expert and Former Technical Officer | Former Tax and Customs Attaché
The Hamamatsu case (C-529/16) is the perfect example of international tax discussions evolving Transfer Pricing (TP) retroactive price adjustments for Customs Value (CV). The case is about the determination of the customs value in cross-border transactions between related companies.
Hamamatsu, a company established in Germany which belongs to a group whose parent company is established in Japan, had an advance pricing arrangement where the TP was composed of an amount initially invoiced and a flat-rate adjustment made after the end of the accounting period. The company imported goods from its parent company using intra-group prices that were regularly checked, and, if necessary adjusted to comply with the "arms-length" principle. Taking into consideration the TP adjustments that were done to comply with the operating margin, the company requested to modify the customs value and repay customs duties on individual goods.
"Having regard to the adjustment of the transfer pricings subsequently made, by letter of 10 December 2012, the applicant in the main proceedings applied for the repayment of the customs duties for the imported goods of EUR 42 942.14. There was no allocation of the adjustment amount to the individual imported goods."
German Customs rejected the company request and the EU Court of Justice issued a preliminary ruling confirming the decision. According to the Court of Justice ruling, Articles 28 to 31 of the EU Customs Code did not allow for subsequent price adjustments in the transaction value.
Therefore, the answer to the first question is that 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.
After the EU Court of Justice ruling in Dec. 2017, a basic question came to my mind: what would be a desirable way to proceed for a better TP - CV alignment? During 2018, I became convinced that technology is part of the solution. I am talking about the capacity of technology to provide dynamic prices to be used as CV (transaction value method).
TP - CV data asymmetry is a well known problem for both companies and governments. It is bad for tax disputes, statistics and investment. I argue, however, that advances on IT systems integration, including supply chain, trade, finance and local tax authorities systems, might be making possible for IT companies to shorter related companies international prices adjustments transforming them into dynamic data. Such dynamic TP prices are more likely to comply with the CV transaction value of individual transactions. I am referring to a dramatic reduction in the time of TP prices adjustments from months to weeks, days or hours. In German-Japan case, the TP flat-rate would be adjusted in each import operation, rather than at the end of the accounting period.
Technology is capable of presenting solutions to old problems, and the quest for TP dynamic prices was my main take away from 2018. As a conclusion, the Hamamatsu dispute helped to push discussions and to envisage that the TP-CV dialogue is moving forward.
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One of the TaxDirectors
5 年Hi Leonardo, good read! The issue of retro-active price adjustments and corresponding end of year credit and debit notes could be a thing of the past in a couple of years time. Moving toward prospective price adjustments will solve the customs aspect if the price fluctuations remain in control. Moreover, pricing becomes a dynamic process; continously steering towards the price that leads towards an arm’s length remuneration for the entity in question. Happy to share my experience in more detail #transferpricing #intercompanysoftware
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5 年This is the second case decision that I have seen referred to where customs simply refuses to refund duty where the effects of the periodic adjustment are not attributed to the transactions within that period. Good money for lawyers but customs are right, if you can't demonstrate the revised price paid paid at transaction level in a spreadsheet then on what grounds should they cough up. Whats more is they seem to have risk managed all of this yonks ago and designed the EU customs code to just pop all of these claims straight back over the net. It's a really interesting point the author makes though. With wide adoption of AEO programmes, principally by MNCs who are the ones who have the TPA worth being concerned about, perhaps they could promote an advance customs value arrangement similar to a valuation advice in line with the advance tax arrangements in force with the tax authorities in the same jurisdiction, and simplify reporting and end of period duty/tax debits/credits. Don't know how dynamic TP will work when the whole point is extending the period of time over which financial decisions can be made and move $ around strategically to minimise tax and FX loss.
Consultor estratégico Becomex
5 年Hi Leonardo thanks for sharing your thoughts. I think the case you presented is a good example on how CV and TP are opposites in many ways and therefore must be kept far from each other. Happy new year!