At present, there seems to be a renewed interest in the venerable Winston Churchill in popular culture. Between John Lithgow’s portrayal in The Crown and Gary Oldman’s version in The Darkest Hour, we are presented with a reintroduction to some of Mr. Churchill’s more memorable quotes. One of my favourites is, “There is nothing wrong with change, if it is in the right direction.”
Unfortunately, this quote does not accurately reflect customs duty adjustments based on retroactive changes in transfer pricing agreements.
The European Court of Justice (ECJ) ruled on December 20th, that transaction value could not be used for the basis of customs valuation if companies import using a transfer pricing agreement that allows for retroactive change up or down to the declared value, and that companies cannot use this mechanism to file for duty refunds.
In this case (C-529/16), a German company imported product from a related foreign company and declared the import value of that merchandise in line with their existing transfer pricing agreement between the two companies.
This transfer pricing agreement set pricing in accordance with the Organization for Economic Cooperation and Development (OECD) standards and was on file with the German tax authorities. Within the transfer pricing agreement, allowances were made for end-of-year adjustments if, at a later date, it was determined that the initial transfer price was not arms-length.
This would occur if the importing company’s actual operating margin at the end of the year did not fall within a benchmark range. The German importer discovered that their initial transfer price did not meet the arms-length test and could be adjusted downward.
Thus, they requested that German customs issue a duty refund based on their overstated import value. German customs initially denied the request and, upon appeal, the Munich Finance Court referred the case to the ECJ for the interpretation of the Customs Code on this matter.
The ECJ decided that transfer-pricing agreements that allow retroactive adjustments cannot be used as the basis for customs valuation under transaction value (Valuation Method 1). It should be noted that the court’s ruling was made against Community Customs Code rules that were in place until April 30th, 2016.
However, the Union Customs Code currently in force does not differ substantially from the previous legislation, meaning that it is likely that the ECJ’s interpretation is applicable to the current law.
Following the direction of the court’s ruling, importers must determine if their transfer pricing agreements contain retroactive adjustment provisions and, if so, evaluate whether or not an alternative valuation methodology must be used.
If transaction value is disqualified and a company is required to use the deducted or computed value method, this will increase their administrative responsibilities in terms of recording and managing their customs value.
Additionally, importers will need to evaluate whether or not any current agreements with Member State Customs authorities on post-declaration adjustments to value need to be revisited.
Should you have any concerns on your company’s appropriate valuation practice, or this decision’s impact on your declared customs value, remember another Churchill quote: “Let our advance worrying become advance thinking and planning.”
Also, and most importantly, talk to an expert. Contact Tradewin.