Reduction of the transfer price does not reduce the customs value

When determining transfer prices for intra-group, cross-border deliveries of goods, companies often resort to year-end adjustments to ensure that the profit margins achieved are within tax-approved ranges. In contrast, separate rules apply to the determination of the customs value. As a rule, only the value ratios already determined at the time of the customs declaration are relevant here. Subsequent adjustments are not taken into account - at least not if they result in a price reduction.

The search for the right price

Cross-border trade often takes place between affiliated companies before the goods finally reach the final customers in the country of destination. Structures in which products are first manufactured in country A, shipped to a group-affiliated distribution company in country B, and from there onwards, pose a variety of challenges for companies and tax authorities. It is necessary to find the "right" price for the delivery from country A to country B, because this not only influences the profit (and thus the tax burden of A and B), but under certain circumstances also the amount of customs duty. However, the rules for price determination are not identical, which has recently been confirmed once again by case law.

Transfer pricing system with year-end adjustments

The decision was based on the following case: H GmbH purchased goods from its Japanese parent company and distributed them in Germany. The (provisional) price invoiced by the parent company for the individual goods was also declared as the customs value. In the year in dispute 2010, this concerned various goods from more than 1,000 consignments. For income tax purposes, the group had concluded a so-called Advanced Pricing Agreement (APA) with the tax authorities involved in Germany and Japan. This stipulated that the return on sales of H GmbH for the entire year had to be within a certain range. If this range was exceeded or undershot, corresponding recalculations or credits were made at the end of the year. In this specific case, the return on sales of H GmbH was below the defined target range. Therefore, the parent company of the GmbH issued a credit note for all goods delivered in the year amounting to approximately € 4 million. H GmbH then applied for an adjustment of the customs amount and a pro rata reimbursement of customs duties.

Adjustment without effect on the customs value

The case had already been before the European Court of Justice (ECJ) a few years ago. In its Hamamatsu ruling of 20 December 2017 (C-529/16), the ECJ ruled that a lump-sum adjustment after the end of the accounting period does not lead to a correction of the customs value according to the so-called transaction value method if it is not possible to say in advance whether an upward or downward adjustment will be made at the end of the accounting period. Rather, a subsequent adjustment of the customs value is only possible in special cases, for example, if the goods were defective or if defects were discovered after their release for free circulation.

After being referred back to the Munich Fiscal Court, the case now ended up before the Federal Fiscal Court. On the one hand, it confirmed the ECJ's ruling on the transaction value method. On the other hand, the judges at the Federal Fiscal Court stated that the subsequent price adjustments were not to be taken into account under customs law according to the so-called closing value method. This is because the value of the goods cannot be quantified at the time of the customs declaration if at that time it is not yet certain whether an adjustment is to be made at all at the end of the accounting period and whether, if this is the case, it is to be made upwards or downwards.

The Two Worlds Problem Remains

Even after the Hamamatsu case has completed its journey through all the judicial instances, questions remain open for practice. The first question is whether and how it is possible to implement a transfer pricing system in which only one price can be used as the basis for taxation and customs treatment. Secondly, there is the question of whether the lack of relevance of year-end adjustments under customs law applies in both directions. In the case decided, it was a matter of a subsequent reduction of the prices applied during the year. For the reverse case, it can in any case be observed in practice that the customs administration assumes the corrected value as the customs value in the case of subsequent price increases. Companies can therefore only be advised to plan as precisely as possible, even for transfer pricing systems with adjustment mechanisms, in order to avoid major adjustments at the end of the year. This is no easy task in times of high inflation, supply bottlenecks and uncertain economic forecasts.