The now published ruling of the FFC of May 17, 2022 (VII R 2/19) is the long-awaited follow-up ruling in the case "Hamamatsu Photonics Germany" (hereinafter "Hamamatsu").
The existing discrepancies between the regulations on transfer pricing and the provisions on customs valuation have been a topic of discussion at the Commission level and at the WCO for years, and in some cases pose considerable problems for affiliated companies, particularly in the case of retroactive price adjustments. The FCC ruling that has now been issued in the Hamamatsu case is clear in its tenor but leaves many questions unanswered in terms of practical implementation.
In the case "Hamamatsu Photonics Germany", claims for a refund under customs law were filed on the basis of lump-sum credits made in the context of the year-end adjustment (downward price adjustment) in the relationship between two affiliated companies.
In determining whether the refund requested with regard to the year-end adjustment must be granted, it first had to be decided whether a transaction value may be used at all to determine the customs value, which consists of the amount originally invoiced and declared upon importation (price), but which is adjusted downward after the accounting period at the end of the year according to the characteristics of the existing transfer price agreement.
According to the ruling of the European Court of Justice (“ECJ”) in the reference proceedings (C-529/16), Articles 28 to 31 of the Customs Code (former CC) do not allow the customs value to be based on an agreed transaction value that consists partly of an amount initially invoiced and declared and partly of a lump-sum adjustment after the end of the accounting period, without it being possible to say whether this adjustment will be made upwards or downwards at the end of the accounting period.
Accordingly, in its ruling of November 15, 2018 (14 K 1974/15), the Munich Tax Court rejected the requested refund of the import duties paid due to the downward year-end adjustment. An appeal against this judgment has been filed.
In its appeal decision, the FFC follows the ECJ ruling and also states that even if the customs value is determined according to the final method pursuant to Article 31 CC (former version), the transfer price cannot be used.
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 at the time of acceptance of the customs declaration, which consequently still has to be determined, cannot be taken into account within the meaning of Article 8 (3) of the Convention on the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.
This is because even in the case of the final method, a commodity and cut-off date-related determination of value must always be carried out. A punctual determination of the customs value, which refers to a concrete transaction, is decisive. However, the FFC does not elaborate on the customs valuation methods to be used prior to the final method.
In addition to this principle, the FFC clarifies with regard to the refund claim that changes in the factual or legal circumstances that occur only after payment of the duty amount cannot justify a refund in principle. In particular, in the event of a subsequent change in the purchase price pursuant to Art. 145 (2) CCIP (old version), no refund is to be granted pursuant to Art. 236 CC (old version) - apart from in the case of damage.
Absence of a refund possibility
It should be undisputed that a refund based on a year-end adjustment based on an Advance Pricing Agreement ("APA") is not possible according to the FFC ruling if a concrete quantifiability of the transaction value at the time of customs acceptance is not possible. Insofar as the year-end adjustment is based on the residual profit split method agreed between the affiliated companies, as in the Hamamatsu case, the possibility of a successful refund procedure appears rather remote even if another transfer pricing method is used as a basis, insofar as the point-in-time quantifiability is not given here either.
This is also likely to be the case when applying the current legislation. Although the court ruled on the basis of the old legal situation and in this respect referred in particular to Art. 145 (2) CCIP (old version); even under the current legal situation, however, a refund in the event of a change in the purchase price is only provided for to a very limited extent - in the event of damage (Art. 132 UCC-IA).
For the rest, the ruling can be interpreted rather speculatively.
Requirement to notify subsequent adjustments in Germany?
In Germany the obligation to make a subsequent declaration is based on Article 23 (2) UCC in conjunction with § 153 of the German Tax Code (AO). According to Art. 23 UCC, the holder of the decision must inform the customs authorities without delay of all events occurring after the decision was issued that could have an impact on the maintenance of the decision or its content. Accordingly, according to common administrative practice, it was previously incumbent on customs declarants to notify the German customs administration of subsequent year-end adjustments to their disadvantage for the purpose of initiating subsequent collections.
It is questionable whether this obligation will continue to exist in the future, if only the individual consideration at the time of the customs declaration is to be decisive.
It seems that this cannot be determined with certainty at the present time. This is because even before the FCC ruling, the time of acceptance of the customs declaration was laid down as decisive both in the relevant ordinances and in the service regulations. In the service regulation on the customs value, the responsible main customs offices are also instructed to point out to the parties involved that subsequent price adjustments must be reported immediately as subsequent debits.
Accordingly, an obligation to report retrospective adjustments cannot be excluded for certain from a German point of view.
The FFC continues the case law of the ECJ and thereby raises questions, however. In particular, it is questionable whether the customs administration can continue to assume the lived practice of price influence between affiliated companies if retroactive price adjustments (upwards) are to be carried out against the background of price determination according to transfer pricing methods. The currently associated tax relevance of a retroactive price adjustment has not been clarified.
In the absence of a corresponding specific guideline from the European Commission or a recommendation from the World Customs Organization (WCO), a solution cannot be clearly seen at present. This is particularly true in view of the fact that the member states handle the issue differently in some cases.
With respect to Germany, it seems sensible to initially continue to notify the responsible main customs office in a timely manner of any retroactive year-end adjustments as (possibly) tax-relevant facts with reference to the current legal ambiguity due to the FFC ruling. If subsequent levy or amendment notices are issued as a result, it is possible to file an objection to this. If the time limit for filing an appeal has already expired, it might be worth considering filing a refund application as a precautionary measure. In the case of overcharged import and export duties, a refund application can be filed within three years after notification of the customs debt (Art. 121 (1) (a) UCC).
It remains to be seen whether individual member states will take the ruling as an opportunity to change their administrative practice.
Due to the existing legal uncertainty, PwC Germany has contacted the Customs Valuation Group in Germany directly and are currently in discussion with them.
Until a final statement from German Custom’s side, we recommend that companies using transfer prices as a basis for customs valuation check whether their transfer prices can be an acceptable and, above all, legally compliant basis for customs valuation, taking into account the FFC ruling discussed here.
We will keep you posted on any updates.
UCC = Union Customs Code
Christina Haas Bruni
Senior Manager Customs & International Trade, Basel, PwC Switzerland
+41 58 792 51 24
Senior Manager Customs & International Trade, PwC Switzerland
+41 58 792 56 96