Year-end adjustments to import price based on the APA do not change customs duty: Rules Bundesfinanz (Federal Fiscal Court of Germany)

The Bundesfinanz, in its decision of 17 May 2022, confirmed a judgment of the Tax Court that the year-end reduction in the price of imported products due to APA does not result in the refund of import duties paid based on the price declared to the customs at the time of import that was accepted by the customs authorities.

Case summary

A German subsidiary (GS) of a Japanese company (JC) imported more than 1000 consignments of various goods from JC from October 2009 to September 2010. It had cleared these goods from the German Customs authorities (HZA) for distribution in the German market. GS had declared the prices invoiced to it by JC as the customs value. The HZA levied customs duties ranging between 1.4% to 6.7% through import duty notices.

In 2012, GS applied for a refund of customs duties for the imported goods. It referred to an Advance Pricing Agreement (APA) concluded for transactions with JC and stated that the adjustment to the transfer price based on the APA had not been considered when declaring the goods for customs clearance, and it was now doing so.

The APA was concluded in 2009 as part of a mutual agreement procedure under the agreement between the Federal Republic of Germany and Japan for the avoidance of double taxation with respect to taxes on income and other taxes. The Federal Central Tax Office and Bavarian State Tax Office had approved the APA. The customs authorities were not involved in the APA. The APA covered the sale of end products and components imported from JC and other business transactions related to the trade in goods.?

Transfer prices were determined for certain business transactions based on the APA. In the process, JC initially invoiced GS a certain amount for each of the goods supplied by it. At the end of the business year, the sum of these amounts was reviewed, and corrections in favour of or to the detriment of GS were made consistent with the APA. The process ensured that the transfer prices were consistent with the arm's length comparison agreed upon in the APA. In the APA, the German and Japanese authorities had agreed to apply the residual profit split method at the request of GS following paragraph 3.19 of the OECD Transfer Pricing Guidelines. According to this method, the combined profit of GS and JC from the audited intra-group transactions was split into two steps. In the first step, each party was allocated a sufficient profit to achieve a minimum return corresponding to basic functions. To calculate the routine profit to be allocated, the full cost markup was used as profit indicators for JC and the return on sales for GS. After apportioning the routine profit, in a second step, the remaining residual profit was apportioned proportionally according to the profit apportionment factors. After determining the routine and residual profit, the target range of GS's return on sales (operating margin) was set. If the GS's actual profit was outside the target range, the profit was adjusted to the upper or lower limit of the target range, and credits or debits were accordingly made to GS.

GS's return on sales was below the target range set out in the APA for the year under consideration. Based on the APA, GS and JC adjusted the transfer prices after the end of the accounting period for 2009/2010 by way of a credit note to GS. The adjustment amount had been allocated to various product groups based on an allocation key and the apportionment formula specified by JC. This resulted in a reduction in import prices. GS was not aware of the basis on which the formula was based.

GS had calculated the duty to be refunded by reducing the sum of all original customs values by the amount of the adjustment from the APA and then applying an average duty rate of 1.02% rounded up to the original or the adjusted customs value. The refund amount sought by GS resulted from the difference between the two values determined. GS did not allocate the adjustment amount to the individual imported goods.

The German Customs Authorities, in their decision of 2104, rejected the refund application because the method chosen by the applicant in the form of a global correction of the total price was not compatible with Article 29(1) of the Customs Code in conjunction with Article 144 of the Implementing Regulation (CCIP). The amount of the adjustment was not broken down by product, it was ultimately not possible to clarify and prove to which specific import goods the adjustment was strictly related and in what amount it was to be made for them.

GS filed an appeal with the Tax Court. In a judgement issued in 2019, the appeal was dismissed, and the assessment of the German Customs Authorities was upheld.

An appeal was then filed with the Bundesfinanzhof. The Court, after a detailed analysis of the provisions of the Customs Code, the principles laid down by the European Court of Justice and the provisions of GATT, dismissed the appeal of the taxpayer and upheld the decision of the Tax Court

The Court referred to Article 201(1)(a) Customs Code (CC) and noted that the customs debt on importation arises when goods liable to import duty are released for free circulation. According to Article 201(2) CC, the customs debt is incurred when the relevant customs declaration is accepted.

According to Article 214(1) CC, the amount of import or export duty levied on a good is, in principle, determined based on the taxable amounts applicable to the goods when the customs debt is incurred. These assessment bases include the goods' nature, quantity, customs value, and customs duty rate (Senate decision of 2 July 2012 - VII B 104/11, BFH/NV 2012).

In the present proceeding, only customs value is in dispute.

The determination of the customs value is based on the methods set out in Art. 29 of CC.

According to Art. 29 CC, the transaction value method is to be applied with priority. If the customs value cannot be determined using the transaction value method, the following methods described in Art. 30 CC apply (subordinate methods). If the customs value cannot be determined according to these methods, the final method must be applied according to Art. 31 CC.

According to consistent ECJ case law, the customs valuation system under EU law is intended to establish a fair, uniform and neutral system that excludes the application of arbitrary or fictitious customs values. The customs value must therefore reflect the actual economic value of an imported good and consequently consider all elements of that good that have an economic value (ECJ judgment Hamamatsu Photonics Germany, EU: C:2017:984, para 24, with further references,?ZfZ?2018, 68).

If the customs value cannot be determined by these methods either, it must be determined in accordance with Art. 31 (1) CC based on data available in the Union by means of appropriate methods that comply with the guidelines and general rules of the Convention on the Implementation of Art. VII of the General Agreement on Tariffs and Trade 1994 and provisions of Art. 28 to 36 CC.

According to Article 31(1) CC, an assessment based on data that is not available in the Union is inadmissible. Although the origin of the data on which the determination of the customs value is based is not in itself a ground for excluding the application of the final method, the customs authorities must be able to satisfy themselves as to the correctness or accuracy of that data when applying the conclusion method (12.3 of the Advisory Opinions of the Technical Committee on Customs Valuation in the Application of Article 7 of the Convention on the Implementation of Art. VII of the General Agreement on Tariffs and Trade of 1994).

?The general regulations to be considered under Article 31 (1) CC include Article 8 (3) of the Convention implementing Article VII of the General Agreement on Tariffs and Trade of 1994. According to this, additions to the price actually paid or payable may only be made based on objective and quantifiable information. This requirement, too, must be related to the time the customs debt is incurred, in this case, the time at which the customs declaration is accepted. It follows that additions to the price paid or payable may only be made based on information that can already be available and quantified at the time of the customs declaration.

According to the ECJ case law (judgment Hamamatsu Photonics Germany of 20.12.2017 - C-529/16, EU: C:2017:984,?ZfZ?2018, 68), Art. 28 to 31 Customs Code do not allow the customs value to be based on an agreed transaction value that is composed partly of an initially invoiced and declared amount and part of a lump-sum adjustment after the end of the accounting period.

The final method under Article 31 of the Customs Code provides that if at the time of acceptance of the customs declaration, it is not certain whether an adjustment will have to be made at all at the end of the accounting period and, if this is the case, whether the adjustment will have to be made upwards or downwards, then a value of the goods that has consequently still to be determined at the time of acceptance of the customs declaration is not to be regarded as a value within the meaning of Article 8(3) of the Convention implementing Article VII of the General Agreement on Tariffs and Trade of 1994.

The burden of proof in the case of an application for a refund under Article 236 (1), the first subparagraph of the Customs Code, lies with the applicant (Article 878 CCIP). The applicant must explain and, if necessary, prove that or to what extent duties have been paid incorrectly and, under Art. 6 CC, provide all the necessary information and documents for the customs authorities' decision.

?If this proof cannot be provided, a refund is excluded. Ambiguities that cannot be resolved are at the expense of the applicant.

Based on these legal principles, the requirements for a refund under Article 236(1) CC are not met in the present case. The applicant has not proven that the customs debt it paid was not legally owed at the time of acceptance of the respective customs declaration.

According to the undisputed findings of the Fiscal Court, the parties initially determined the customs value based on the prices invoiced to the applicant by JC during the year following Article 29 CCC using the transaction value method. At the time of the acceptance of the customs declarations, which were not submitted as incomplete, there were no indications that these prices did not reflect the actual economic value of the imported goods and did not take into account all elements of these goods that had an economic value. In particular, according to the Court of First Instance findings, the customs authorities were not involved in the agreement reached during the mutual agreement procedure.

Thus, at the time of acceptance of the customs declaration, there were neither conditions within the meaning of Article 29(1)(b) CC which would have precluded a determination of the customs value according to the transaction value method, nor was the relationship between the applicant and JC under Article 29(1)(d) in conjunction with Article 29(2)(a).

The applicant did not prove that the imported goods had a lower value at the time of acceptance of the customs declarations. The subsequent adjustment of the transfer prices due to the APA is unsuitable in the present dispute to prove a lower transaction value. In this respect, the tax court correctly referred to the ECJ ruling.

Finally, the APA at issue is also not suitable to justify a subsequent adjustment of the transfer prices according to the conclusion method (Article 31 CC). At the time of the respective customs declarations, it was not clear whether the declared values of the goods would be corrected based on the transfer prices that had yet to be determined after the end of the accounting period and, if this were to be the case, whether a correction would be made employing upward or downward markdowns. It was also unclear how much the corrections would have to be. This meant, however, that the surcharges or deductions that might in any case only possibly result were not known at the time of the customs declaration within the meaning of Article 8(3) of the Convention implementing Article VII of the General Agreement on Tariffs and Trade.