The ECJ held that such pricing arrangements, when adjustments are based on objective and pre-determined criteria, can still fall under the transaction value method (TVM) under Article 70 of the Union Customs Code (UCC), provided that simplified procedures under Articles 166 and 167 of UCC are followed for releasing the goods.
Background
Retroactive price adjustments, such as transfer pricing (TP) adjustments, could potentially impact the customs value of goods imported into the EU and the amount of customs duties payable. The impact of transfer pricing adjustments on the customs value of goods has been under scrutiny in the EU since the judgment of the ECJ in the Hamamatsu case (C-529/16). The ECJ ruled in the Hamamatsu case that there is no legal basis under the Community Customs Code (CCC) for using customs values that are based on TP principles with year-end retroactive TP adjustments. However, firstly, the Hamamatsu ruling was made based on certain specific facts. It remained uncertain how applicable it is under different circumstances. Secondly, it was not clear whether this case is still applicable under the UCC that replaced the CCC in 2016. The Tauritus case provides further clarity regarding these issues.
Facts
A Lithuanian company Tauritus imported diesel and jet fuel into the EU in 2015 – 2017. Contracts and pro forma invoices included provisional prices. These contracts also stated that the prices will be adjusted according to the average market price of the fuel concerned during a given period and the average exchange rate during that period. Therefore, the final price could be higher or lower than the provisional price.
In the customs declaration, Tauritus used the provisional price as a customs value, based on the fallback method of customs valuation. Tauritus did not always request an adjustment of the customs value of the goods, despite that the final invoices indicated a higher value than initially declared.
During the post-clearance inspection, Lithuanian customs authorities noted that the TVM should have been applied and customs declarations should have been adjusted to the final value. They required a correction and sought to impose penalties.
The ECJ was asked whether TVM should be used where, at the time of importation only the provisional price is known, which is subsequently (that is to say, after the declaration has been lodged and the goods have been released for free circulation) adjusted upwards or downwards in the light of circumstances beyond the control of the parties to the transaction.
Decision
The ECJ decided that, where, at the time when goods are imported, only their provisional price is known, with the sales contract stipulating that their final price will be determined on certain objective factors the value of which is beyond the control of the parties, the customs value must be determined by applying the TVM. Furthermore, a simplified customs declaration procedure should be made use of if only the provisional price is known at the moment of importation. A supplementary declaration should be filed to adjust the customs value after the final price is known.
Hamamatsu case
The ECJ stated that its decision is not called into question by the judgment in the Hamamatsu case. First, that case concerned the revision of transfer prices concluded between companies belonging to the same group, on the basis of an a posteriori allocation of residual profits between the entities of that group, on the basis of criteria set by the parent company. If an importer’s price adjustments are predefined by contract (for example, tied to published indices or formulas) – as in Tauritus – the transaction value method remains applicable. Second, the Hamamatsu decision comes under a different legal context from the Tauritus case, since it concerns the application of a provision of CCC, relating to a procedure for revising the customs declaration, which is not found in the UCC.
Conclusion
Value of the imported goods must be determined on the basis of the transaction value method when final prices are known after release of goods, provided that adjustments are based on pre-agreed objective factors, the value of which is beyond the control of the parties. In situations of retroactive price adjustments where the final price is determined after the release of goods, the simplified customs declaration procedure must be used, and a correction must take place. Importers should submit a supplementary declaration providing the final customs value where the price payable for the goods is adjusted after the release of the goods.
Practical Implications
The ECJ decision guides businesses using provisional prices that are adjusted after importation. It confirms that TVM still applies if retroactive adjustments are made.
It is important to inform customs authorities about retroactive price adjustments to avoid any penalties and not to miss refund opportunities.
The case is significant for businesses that use transfer pricing methods involving retroactive pricing adjustments or other flexible pricing methods.
Simplified customs procedure
The UCC provides possibilities to establish a process under which a provisional price and adjustments can be accepted as a basis for the TVM. UCC allows simplified customs declarations to be filed. Where the importer wishes to apply a provisional price that is later adjusted, as the basis for its transaction value, under the simplified declaration process, the reporting of the adjustment via a supplementary declaration should be used.
The Tauritus decision implies that the Hamamatsu judgment should be assigned a limited interpretation. In Tauritus, an importer’s price adjustments were predefined by contract and tied to average prices and published exchange rates. From the ECJ’s judgment in Tauritus it follows that objective, formula-based pre-agreed adjustments are valid for customs value purposes. However, TP adjustments not meeting these criteria might still face scrutiny.
Importers are required to report to the Customs authorities a post-importation change in the reported customs value. Additional customs duties and VAT are due if an increase to the customs value is reported. The duty refunds are available if a change in the previously declared customs value decreases the customs value.
To avoid interest on duties and VAT or even penalties, businesses should ensure timely action. On the other hand, timely reclaim in cases of downward adjustments increases the chance for a refund. If a customs value changes due to expected recurring adjustments, importers might consider engaging with customs authorities in advance. For example, importers can obtain customs valuation rulings and advance pricing agreements.
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