In its ruling of May 17, 2022, the German Federal Tax Court (Bundesfinanzhof, BFH) confirmed that it is irrelevant to determine the customs value of imported goods if the transaction value is subsequently adjusted (Case No. VII R 2/19). The sentence marks the end of the Hamamatsu case, in which the Court of Justice of the European Communities (CJEU) had already taken a position (Judgment of December 20, 2017, C-529/16). The core of the proceedings revolves around whether transfer pricing adjustments in cross-border transactions between affiliated companies should be taken into account retrospectively when determining customs value.
the Hamamatsu The dispute, which spanned several years, arose from an unsuccessful application filed by the claimant in 2012 for the refund of customs duties that the claimant believed he had overpaid. When declaring the imports, the claimant had indicated the actual price charged for the goods in question. The price was based on an advance price agreement between the claimant and the claimant’s Japanese parent company. Under this agreement, certain transfer prices were initially set and invoiced for the goods supplied. After the closing of the fiscal year, these prices were reviewed and then corrected under the residual profit distribution method. Because this method resulted in a reduction of the transfer price, the plaintiff argued that, consequently, the customs value of the goods should also be reduced by the respective adjustment amount as a lump sum.
According to art. 236 (1) of the Customs Code (DC), which is applicable to the period in question, such reimbursement of customs duties paid is possible if the amount paid was not actually due at the time of payment, i.e. the import duty in question was not incurred for the amount paid. The import duty is determined, among other things, by the customs value of the goods in question. This will be determined mainly by the “transaction value method” on the basis of the price actually paid or payable for the goods in question (Art. 29 CC). If the customs value cannot be determined in this way, the transaction value of identical or similar goods must be used. Alternatively, the customs value can be determined deductively or according to a calculated value (Art. 30 CC). If none of the aforementioned methods is usable in individual cases, the customs value can be determined on the basis of data available in the EU by other appropriate methods under the residual method (Art. 31 CC).
If a subsequent correction of the customs value were taken into account, this could in principle lead to the repayment of the part of the customs duty that the claimant had overpaid on the basis of the original customs value. The Munich Tax Court, which was handling the action against the authorities’ negative decision, referred this matter to the ECJ. The latter refused to take into account any subsequent adjustments to the transaction value. After the tax court subsequently rejected the claim, the claimant appealed to the BFH.
The BFH rejected the appeal and confirmed the decision of the Tax Court. There was no right of return, since the customs value could not be retroactively adjusted downward. According to the BFH, only the moment of acceptance of the customs declarations was decisive for determining the customs value under the transaction value method pursuant to art. 29 CC, since the import duty was incurred at this time (cf. Art. 214 (1) CC). Therefore, the customs value determination was “a valuation related to the goods and to the effective date” (paragraph 40 of the BFH judgment). At this reference date, however, it was not certain for the imported goods in dispute whether an adjustment would be made after the end of the fiscal year, and if so, whether it would be upward or downward. Therefore, the price adjustments in question could not be taken into account.
Beyond the statements already found in the ECJ ruling, the BFH also held that this principle applies “in the context of all customs valuation methods”, including the residual method under art. 31 CC (para. 59 of the sentence). This method was, as the BFH pointed out, equally specific to the goods and the date. Art. 31 (1) CC further referred to the Agreement on the Implementation of art. VII of the General Agreement on Customs Tariffs and Trade of 1994 (Execution Agreement). According to art. 8(3) of that Agreement, price additions to determine customs value can only be based on objective and quantifiable data. The BFH held that this rule also applies in the case of withholdings (para. 48 of the judgment). However, at the time of the customs declaration, any subsequent price adjustments were not precisely quantifiable and therefore should not be taken into account in the result.
Given the CJEU ruling, the BFH’s decision was to be expected with respect to the downwardly corrected price adjustments. However, it is also likely to have a considerable impact beyond this constellation. In our opinion, the following three points support this assessment:
- First, the BFH did not differentiate between downward and upward price adjustments. In other words, the main conclusion of the BFH, namely that a subsequent price adjustment, which cannot be quantified at the time of acceptance of the customs declaration, should not be taken into account, applies in case of adjustments to both it goes down as it goes up. This is also supported by the analogy that the BFH makes to art. 8 (3) of the Implementing Agreement, which, according to its wording, only allows additions to the price on the basis of quantifiable data. This does not appear to be (easily) compatible with a subsequent charge on imports due to initially understated transaction values.
- Second, the case resolved by the BFH concerned the assertion of a flat rate price adjustment. In our opinion, the basic considerations of the judgment could also be applied if the adjustment is broken down by individual assets. In the event that the respective correction was not foreseeable at the time of acceptance of the customs declaration, it should not be relevant to the customs value either.
- Finally, the BFH decision is likely to influence the contemporary legal situation under the Union Customs Code (UCC). This is because the rules on customs valuation according to art. 69 et seq. UCC essentially parallel to those of CC.
In the context of the BFH ruling, we recommend that any subsequent import duty charges be reviewed in a timely manner. Businesses should check whether it is necessary to adjust the customs process, even using a simplified customs procedure, to reduce financial risks. It may also be advisable to file an objection to the imposition of duties at the same time as the customs declaration.
However, the last word has probably not yet been said in this context. This is particularly true as the World Customs Organization has so far considered post-adjustment of customs value permissible on the basis of advance pricing agreements (see World Customs Organization, Guide to Customs Valuation and Transfer Pricing, 2018, pp. 68 et al.ss.). Current administrative practice in Germany seems to allow a retroactive adjustment of the customs value only under three conditions:
- First, the price adjustment must have been agreed in principle at the time of acceptance of the customs declaration;
- second, the respective adjustment must be determined in relation to individual assets or groups of assets and not on a lump sum basis; Y
- third, the adjustment must be calculated exclusively according to a previously agreed calculation method.