Key message
In general, pricing for cross-border delivery of goods or services between related parties has to comply with the arm’s length principle. The definition of arm’s length prices is already a challenging task and often leads to discussions within tax audits. This becomes more complex when customs duties are levied on the delivered goods and customs rules have to be considered.
Actual situation
The H GmbH buys goods from its Japanese parent company and sells them in Germany. The price invoiced by the parent company was indicated as customs value. In the year of dispute 2010 several goods from more than 1,000 consignments were affected. According to the applied transfer pricing method, the sum of the invoiced amounts is regularly monitored and – if necessary – adjusted in order to guarantee the result is compliant with the arm’s length principle for income tax purposes. Since the GmbH’s profit margin was below the determined target range in the year of dispute, the GmbH’s parent company issued a credit note in the amount of € 4 m covering all goods delivered within the year. Thereupon the GmbH applied for an adjustment of the customs value and a partial refund of customs duties. After the main customs office refused the application, the GmbH filed a lawsuit at the fiscal court of Munich. The fiscal court of Munich stayed its proceedings until the principal questions are clarified by the European Court of Justice.
Decision
The European Court of Justice decided with its judgment of 20 December 2017 that a lump-sum adjustment after expiry of the invoicing period does not automatically lead to an adjustment of the customs value, if it is not foreseeable if the adjustment will be upwards or downwards at the end of the invoicing period. The judges of the European Court of Justice emphasize that retroactive adjustment of the customs value may be possible in special cases, e.g. if the goods were defective or defects were detected after the release for free circulation.
Consequence
The European Court of Justice emphasizes through this judgment that the transfer prices of internationally related companies for income tax purposes and the customs-related transaction values are not necessarily identical. The judgment does not state whether retroactive adjustment of the customs values due to transfer pricing adjustments is allowed in special cases. It therefore remains to be seen how the fiscal court of Munich will implement this decision in the aforementioned case. Companies concerned should, however, certainly consider both income tax aspects and customs-related aspects when determining their transfer prices.