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Determining customs values for transactions between affiliated companies – Are subsequent adjustments allowed?

In the case of transactions between affiliated companies, the fiscal administration likes to presume that these companies invoice each other not in the way that unrelated third parties would but, instead, so that the profit arises in the country where the taxation rate is lower. In the following report, we provide information about the calculation of the so-called customs value that ensues from the invoices between affiliated companies.

Customs value in the case of transactions between affiliated companies

The fiscal administration requires affiliated companies to draw up and document a transfer pricing concept so that it will be able to check whether or not the allocation of profits stands up to an arm’s length comparison. This requirement also applies to cross-border goods transactions; in such cases, the so-called transaction value has to reported to the customs authorities. This transaction value is the customs value on the basis of which import duties, such as the tariff and the import VAT on the goods, are charged. In a transfer pricing concept between affiliated companies it is possible to specify that the provisional transfer price on the date of the border-crossing will only be definitively determined at the end of the year (the so-called fall-back method); alternatively, this can be agreed in a so-called advance pricing agreement (APA). The local tax offices will accept such arrangements. Then, however, the customs authorities are faced with the question of whether or not the original transaction value on which the duty paid was based likewise has to be subsequently adjusted. Frequently, it is not possible to apportion the amount of the adjustment to specific imported goods so that, for example, in the case of different rates of duty for individual imported goods it is difficult to reassess the customs duty.

A case concerning this issue was referred to the Federal Fiscal Court (Bundesfinanzhof, BFH); in its ruling of 17.5.2022 (case reference: VII R 2/9, so-called ‘Hamamatsu’ case), the court decided that there should be no adjustment. This was because customs debt on imports occurs when goods that are liable for import duties are released for free circulation. The assessment base for customs is the transaction value on the date when the customs debt occurs. However, this transaction value may not be judged to be unacceptable solely because the buyer and seller are connected with each other.

Method for determining the customs value

In principle, the transaction value has to be entered as the customs value, i.e. the price actually paid or payable for the goods when sold for export in the customs territory of the Union, where necessary, adjusted for add-backs and deductible items. This transaction value includes all payments actually made or to be made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller.

Where the customs value cannot thus be determined, the transaction value for identical or similar goods will be applicable, or the customs value will have to be determined on the basis of a deductive process or a calculated value. If it is likewise not possible to calculate the customs value according to these methods then it would have to be calculated on the basis of data that are available in the Union using appropriate methods for which there are guidelines.

Limitations on adjustments on the basis of flat-rate adjustments

In the opinion of the BFH, the respective factors that affect the transaction value amount have to be ascertainable at the time of importation. Changes in the factual or legal circumstances that arise only once the duties have been paid should not be used to justify a refund (or subsequent payment). Consequently, subsequent adjustments to the transaction value should only be permitted in exceptional cases. In cases where a flat-rate adjustment to the purchase price has been agreed, but at the time of importation it is not clear if the adjustment will be up or down then, according to the BFH, an adjustment of the customs value would not be permissible. Instead, surcharges and deductions should only be taken into account if objective and quantifiable indications for these were already available at the time of importation.

Please note: Subsequent adjustments to transfer prices on the basis of an advance pricing agreement would not satisfy these requirements if, based on this APA, it were not possible to establish already at the time of importation whether or not the purchase price would have to be adjusted and if the potential adjustment would be made by increasing or by decreasing the price. In the context of methods for determining customs values, such transfer price adjustments would not affect the relevant customs value.

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