The case concerns the effect of transfer pricing year-end adjustments on VAT – the relationship between transfer pricing and the valuation of goods for customs (VAT) purposes (Hamamatsu case C-529/16).
Hamamatsu Photonics Deutschland GmbH (Hamamatsu) is a German subsidiary of the Japanese company Hamamatsu, and it acts as a distributor of optical devices purchased from the parent company. The transfer pricing policy of the group, which is covered by an Advanced Pricing Agreement (APA) with the German Tax Authorities, provides that the consideration paid by Hamamatsu to purchase the goods sold allows Hamamatsu Photonics a target profit.
Hamamatsu accounted for an operating margin below the threshold agreed upon in the APA. The Japanese parent company consequently carried out a downward adjustment to allow the achievement of the target profitability by its German subsidiary. Hamamatsu filed a refund claim for the higher customs duties paid on the price that was declared to customs at the time of importation. Customs, at that stage, did not seem to have challenged the carrying of adjustments but refused the refund claim, arguing that no allocation of the adjustment to the individual imported goods was made.
The Finanzgericht München handling the case i Germany refered the following questions to the Court of Justice for a preliminary ruling: .
(1) Do the provisions of Article 28 et seq. of [the Customs Code] permit an agreed transfer price, which is composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, using an allocation key, regardless of whether a subsequent debit charge or credit is made to the declarant at the end of the accounting period?
(2) If so:
May the customs value be reviewed and/or determined using simplified approaches where the effects of subsequent transfer pricing adjustments (both upward and downward) can be recognised?’
The CJEU Ruling
According to CJEU jurisprudence, the transaction method is the primary criterion for customs valuation, and it only should be derogated if the price actually paid or payable for the goods cannot be determined. Customs value must thus reflect the real economic value of an imported good and take into account all of the elements of that good that have economic value. Thus, the transaction value may have to be adjusted where necessary in order to avoid an arbitrary or fictitious customs value. However, a subsequent adjustment of transaction value is limited to specific cases such as, for instance, the presence of defected or damaged goods.
The court ruled as follows:
“…in the version in force, the Customs Code does not impose any obligation on importer companies to apply for adjustment of the transaction value where it is adjusted subsequently upwards and it does not contain any provision enabling the customs authorities to safeguard against the risk that those undertakings only apply for downward adjustments.
The Customs Code, in the version in force, does not allow account to be taken of a subsequent adjustment of the transaction value, such as that at issue in the main proceedings.
Therefore, Articles 28 to 31 of the Customs Code, in the version in force, must be interpreted as meaning that they do not permit an agreed transaction value, composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down.”
“As the second question expressly applies only if the first question is answered in the affirmative, there is no need to answer it.”