“MC Parts B.V.”, is part of a multinational group and from its transfer pricing documentation it follows that it has two activities within the group: distributor and support service provider. – “MC Parts B.V.” is a distributor of spare parts and accessories. The parts are supplied by both by group companies and external suppliers. Remuneration for these activities is determined on the basis of turnover (transactional net margin method, 3.1% of operating margin) in accordance with the transfer pricing documentation. – “MC Parts B.V.” performs various activities for a group company 2, including technical services, marketing and logistics. The support activities qualify as “after sales activities”. The remuneration for these activities is determined in accordance with the transfer pricing documentation on the basis of the costs to be allocated to this function, using a profit mark-up (net total cost plus 5%). On the initiative of group company 2, a transfer pricing adjustment took place for the said fiscal year in accordance with the transfer pricing documentation. On this basis, “MC Parts B.V.” was required to pay an amount of €20,091,000 to company 2. By invoice dated 31 March 2016, company 2 invoiced “MC Parts B.V.” an amount of €19,388,000. The invoice was calculated using total sales (consisting of the items sales P&A and KO parts), a margin, total G&A (March estimate based on Year to Date average), an operating profit of 11.1% and a company 2 proposed profit of 3.1%. The invoice takes into account a reservation of €703,000 for additional import duties expected to be paid by the claimant. This amount was deducted from the proposed recharge of €20,091,000. In 2020, “MC Parts B.V.” submitted an application for repayment of €711,221 in customs duties. By decision of 11 March 2021, the tax authorities rejected this application on the grounds that the customs value must be calculated using the transaction value method and that the €19,388,000 paid by “MC Parts B.V.” to company 2 is part of the price actually paid or payable for the imported goods (the transaction value) and is therefore part of the customs value. In the alternative, in case the transaction value method cannot be followed, the position is that the claimant and [company 2] have established a notional (related) transfer price that is too low and that the customs value should be determined using reasonable means, which could then be consistent with the value based on the transfer pricing agreement. According to the tax authorities, there is indeed a relationship between the transfer pricing adjustment and the imported goods. This is evidenced, inter alia, by company 2’s invoice to “MC Parts B.V.” dated 31 March 2016. The invoice set aside an amount of €703,000 for customs duties payable. “MC Parts B.V.” paid that invoice. The invoice is an after-payment for goods that “MC Parts B.V.” purchased from company 2 and does not cover the support services that the claimant performs for company 2. While “MC Parts B.V.” argues that the higher profit margin (higher than 3.1%) is caused by factors other than the purchase price for goods paid by “MC Parts B.V.” to company 2, it does not substantiate this. The reliance on the Hamamatsu judgment is not valid. In the case of “MC Parts B.V.”, imputation took place to all imported goods. In Hamamatsu, there was a flat-rate adjustment where the adjustment amount was not broken down by separately imported goods. In “MC Parts B.V.”‘s case, however, it is possible to impute by goods. Moreover, the Hamamatsu judgment only provides protection if the customs value is adjusted downwards, as this has the effect of protecting the Union’s own resources. Furthermore, the prices between [Company 2] and “MC Parts B.V.” were not contractually agreed, whereas in the Hamamatsu case they were. The transaction value of the “MC Parts B.V.”‘s goods was rightly adjusted upwards. But even if the transaction value cannot apply, the customs value was rightly adjusted, namely by applying Article 31 of the CCC, the value method of reasonable means. The tax authorities concludes by dismissing the appeal as unfounded. Judgment of the District Court The Disterict Court dismissed the appeal of “MC Parts B.V.” and upheld the decision of the tax authorities. Excerpts in English “25. Based on the foregoing, the court is of the opinion that the Hamamatsu ruling does not preclude the inclusion in the claimant’s case of the claimant’s subsequent payment to [company 2] based on a transfer pricing adjustment. The subsequent allocation of these costs to the customs value of the goods imported by the claimant is in principle possible. (…) 32. The court finds that the defendant has plausibly established a link between the transaction value of the goods and the subsequent payment under the transfer pricing adjustment. The calculation of the amount of €20,091,000 is based on a (58-page) overview of “CoS Parts” transactions between [company 2] and the claimant submitted by the claimant when requested. A percentage of 3.5 of average import duty on parts was deducted from the amount. According to the court, the use of the term “duty on parts” supports that the data included in the statement is intended to provide information on parts. The court therefore does not follow the claimant’s argument that the description “Parts And Accessories” refers to a particular division of the claimant and not to imported goods. The court further takes into account that although the claimant argues that it does not source some of the motorbike parts and accessories it sells from [company 2] but from third parties, it has not substantiated this with factual data. To the extent that these are third parties who supply goods from outside the EU, the claimant had the information to do so: it could produce the declarations for these goods. To the extent that these are third-party goods from within the EU, the claimant is pre-eminently the one who can provide information about them, the defendant does not have this information in any case. The court assumes that the ...

The Argentinian company Materia Pampa S.A. exported products to a Brazilian company, Companhia De Bedidas Das Americas in Brazil (Ambev), via a related party in Uruguay, Maltería Uruguay S.A. There was a significant difference between the price declared on export to Uruguay and the price used for the subsequent final shipment to Brazil. An assessment was made by the tax/customs authorities, which resulted in an upward adjustment of the price received for the products from the related party in Uruguay, which in turn resulted in additional taxes and VAT. The price adjustment was based on the guidance provided in the OECD TPG, and in relation to the application of the arm’s length principle in determining prices for customs purposes, reference was made to the guidance provided in paragraph 1.137 of the 2017 TPG, which states. “The arm’s length principle is broadly applied by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value of similar goods imported by independent enterprises. However, valuation methods for customs purposes may not be consistent with transfer pricing methods recognised by the OECD. Nevertheless, customs valuations may be useful to tax administrations in assessing the arm’s length character of a transfer price in a controlled transaction and vice versa. In particular, customs officials may have contemporaneous information about the transaction that may be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation that provides detailed information about the circumstances of the transaction.” ...

The customs value declared by “Import GmbH” of the goods imported from related parties X, Y and Z was in dispute. In the course of a customs audit, the customs office (Hauptzollamt, HZA) found that Y had invoiced “Import GmbH” for subsequent debit amounts of EUR (…) for 2015, EUR (…) for 2016 and EUR (…) for 2017. These were based on a Distribution Agreement of (…) concluded between “Import GmbH” and Y, according to which “Import GmbH” undertook to purchase products from the latter and to sell them in the defined distribution area. With the 1st Supplementary Agreement of (…), supplies from affiliated companies of the group company were also included in this agreement and thus, inter alia, also the supplies from Z. With the second supplementary agreement of the same date, it was stipulated that “Import GmbH” should receive an “agreed margin” which was described as customary for third parties. According to the agreement, the margin resulted from the rolling three-year average of the arm’s length ranges, which were determined on the basis of database analyses for returns on sales of comparable companies. For the period at issue here, the database analysis determined an arm’s length range for returns on sales and Y determined a margin of 1.93% from this range, which was within the arm’s length range for returns on sales of comparable companies. In fact, “Import GmbH” achieved returns on sales of 23.24% (2014/2015), 26.24% (2015/2016) and 28.49% (2016/2017) by reselling the products in the (…) business unit. During the year, “Import GmbH” received invoices for the delivered goods, which had already been reduced in advance by a calculated deduction from the list price, namely the so-called “agreed margin”. “Import GmbH” declared these transfer prices paid during the year as the basis for determining the customs value in the customs declarations. Since the double-digit returns on sales actually achieved in the business years 2015 to 2017 were considerably higher than the agreed margin and thus, in the opinion of the customs office, not at arm’s length, “Import GmbH” was charged subsequent debit amounts of EUR (…) to EUR (…) (…). According to the customs office, the unusually high profits were only possible because the transfer prices during the year had been calculated too low. The returns on sales achieved had been adjusted within the group to the margin of 1.93%, so that the aforementioned subsequent debit amounts had been determined on this basis and charged to “Import GmbH” with debit notes or paid by the latter. On the basis of the facts established, the customs office came to the conclusion that the customs values originally declared during the year had to be increased by correction factors (1.34 for the years 2014 and 2015 and 1.44 for the years 2016 and 2017) in order to determine the correct customs value for the import goods. It therefore subsequently assessed a higher duty of EUR (…) (based on a correction factor of 3.88) for the goods imported in November and December 2014 by import duty notice of 26 October 2017, which it reduced to EUR (…) (based on a correction factor of 1.34) in the opposition decision of 4 February 2020 following “Import GmbH”‘s objection. An appeal was filed by “Import GmbH”. Judgement of the Finanzgericht The Court upheld the appeal of “Import GmbH”. Excerpts “52 If the customs value is determined using the closing method, as the HZA assumes on the basis of the connection and the existing price influence, the time of importation must in principle also be taken into account with regard to the other appropriate methods to be used, according to the opinion of the BFH in the above-mentioned ruling of 17 May 2022 (marginal no. 45). 53. It follows from this, according to the BFH in its judgment of 17 May 2022 (marginal no. 49), that the dictum of the BFH of 17 May 2022 is not applicable. 49), that the dictum of the ECJ, according to which the CC does not permit the customs value to be based on an agreed transaction value that is composed 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 upward or downward at the end of the accounting period, is also decisive for the determination of the customs value according to the final method pursuant to Article 31 CC. 54. If it was not clear at the time of the customs declaration whether an adjustment would have to be made at all at the end of the accounting period and whether, if this was the case, it would have to be made upwards or downwards, then the value of the goods determined in this way – or actually still to be determined after the end of the accounting period – at the time of the customs declaration was not relevant within the meaning of Article 8(3) of the Convention on the Implementation of Article VII of the General Agreement on Tariffs and Trade. VII of the General Agreement on Tariffs and Trade of 1994. 55. The burden of proof in the case of subsequent recovery lies with the HZA. The latter must explain and, if necessary, prove that or to what extent duties have been assessed too low. If this proof cannot be provided, a subsequent levy is excluded. 56. On the basis of these legal principles, the conditions for the subsequent levy based on Article 101 or Article 105 (2) and (3) of the CCC are not met in the present case. The HZA did not prove that the customs debt paid by the applicant had to be assessed higher at the time of the acceptance of the respective customs declaration. 57. The parties initially determined the customs value on the basis of the prices invoiced to the applicant during the year in accordance with Article 29 CC/CCC using the transaction value method ...

H-Customs GmbH – the applicant and appellant – is a subsidiary of H, Japan. In the period at issue, from 17 October 2009 to 30 September 2010, H-Customs GmbH imported more than 1,000 consignments of various goods from H, which it had cleared for free circulation under customs and tax law at the defendant HZA (Hauptzollamt – German Customs Authorities). H-Customs GmbH declared the prices invoiced to it by H Japan as the customs value. Some of the imported articles were duty-free; for the articles that were not duty-free, the HZA imposed customs duties of between 1.4 % and 6.7 % by means of import duty notices. In 2012, H-Customs GmbH applied to the HZA for a refund of customs duties for the goods imported during the period at issue in the total amount of… €. It referred to an Advance Pricing Agreement (APA) concluded between it and H for transactions in the tax field and stated that the adjustments to the transfer prices carried out on the basis of the APA had not been taken into account when declaring the goods for customs clearance and that it was now doing so. The APA had already been concluded in 2009 as part of a mutual agreement procedure under the agreement between the Federal Republic of Germany and Japan for the avoidance of double taxation with regard to taxes on income and certain other taxes. The Federal Central Tax Office and the local Tax Office had approved the APA. The customs authorities had not been involved. The APA covered the sale of end products and components from H Japan to H-Customs GmbH as well as other business transactions related to the trade in goods. On the basis of the APA, transfer prices were determined for certain business transactions. In the process, H initially invoiced H-Customs GmbH a certain amount for each of the goods it supplied. The sum of these amounts was reviewed after the end of the business year and, if necessary, corrected in favour of or to the detriment of H-Customs GmbH. In this way it was to be ensured that the transfer prices stood up to an arm’s length comparison. For this purpose, the German and Japanese authorities involved chose the so-called residual profit split method at the request of H-Customs GmbH and with reference to point 3.19 of the transfer pricing principles of the Organisation for Economic Cooperation and Development. According to this method, the combined profit of H-Customs GmbH and H Japan from the audited intra-group transactions was split in two stages. In a first stage, each party was first allocated a sufficient profit to achieve a minimum return. As a starting point, the returns on sales routinely achieved by comparable companies with similar operating profiles were used. In order to calculate the routine profit to be allocated, the full cost mark-up was used as profit indicators for H and the return on sales for the applicant. After apportioning the routine profit, in a second step the remaining residual profit was apportioned proportionally according to the profit apportionment factors. After determining the routine profit and the residual profit, the target range of the applicant’s return on sales (operating margin) was set. If the applicant’s actual profit was outside the target range, the profit was adjusted to the upper or lower limit of the target range and credits or debits were made to the applicant. H-Customs GmbH’s return on sales was below the target range set out in the APA. For this reason, H-Customs GmbH and H Japan adjusted the transfer prices after the end of the accounting period for 2009/2010 by way of a credit note in the amount of … €. The report of the Main Customs Office Cologne, Federal Customs Valuation Office, to which the Fiscal Court (Finanzgericht, FG) refers in the contested judgment, states that the amount had been allocated to various product groups on the basis of an allocation key; there had been no explanation of the individual product groups. The apportionment formula applied had been specified by H; the applicant was not aware of the basis on which H had determined this apportionment formula. H-Customs GmbH had calculated the duty to be refunded in its view by reducing the sum of all original customs values by the amount of the adjustment from the APA and then applying an average duty rate of 1.02% rounded up to the original or the adjusted customs value. The refund amount sought by the applicant resulted from the difference between the two values determined in this way. H-Customs GmbH did not allocate the adjustment amount to the individual imported goods. In its decision of 4 June 2014, the German Customs Authorities rejected the refund application on the grounds that the method chosen by the applicant in the form of a global correction of the total price was not compatible with Article 29(1) of the Customs Code in conjunction with Article 144 of the Implementing Regulation. Article 144 of the Customs Code Implementing Regulation (CCIP). Due to the fact that the amount of the adjustment was not broken down by product, it was ultimately not possible to clarify and prove to which specific import goods the adjustment exactly related and in what amount it was to be made for them. By decision of 2 July 2015, the German Customs Authorities rejected H-Customs GmbH’s objection as unfounded. An appeal was then filed by H-Customs GmbH with the Tax Court. In a judgement issued in 2019 the appeal was dismissed and the assessment of the German Customs Authorities upheld. An appeal was then filed with the Bundesfinanzhof Judgement of the Bundesfinanzhof The Court dismissed the appeal as unfounded and upheld the decision of the Tax Court. Excerpts “The contested decision by which the HZA refused to refund the import duties sought by the plaintiff is lawful (§ 101 sentence 1 FGO). The applicant is not entitled to a refund of part of the duty it paid under the first ...

Taxpayers may have competing incentives in setting values for customs and tax purposes. In general, a taxpayer importing goods may be interested in setting a low price for the transaction for customs purposes so that the customs duty imposed will be low. (There could be similar considerations arising with respect to value added taxes, sales taxes, and excise taxes.) For tax purposes, however, a higher price paid for those same goods would increase the deductible costs in the importing country (although this would also increase the sales revenue of the seller in the country of export). Cooperation between income tax and customs administrations within a country in evaluating transfer prices is becoming more common and this should help to reduce the number of cases where customs valuations are found unacceptable for tax purposes or vice versa. Greater cooperation in the area of exchange of information would be particularly useful, and should not be difficult to achieve in countries that already have integrated administrations for income taxes and customs duties. Countries that have separate administrations may wish to consider modifying the exchange of information rules so that the information can flow more easily between the different administrations ...

The arm’s length principle is applied, broadly speaking, by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value for similar goods imported by independent enterprises. Valuation methods for customs purposes however may not be aligned with the OECD’s recognised transfer pricing methods. That being said, customs valuations may be useful to tax administrations in evaluating the arm’s length character of a controlled transaction transfer price and vice versa. In particular, customs officials may have contemporaneous information regarding the transaction that could be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation which provides detailed information on the circumstances of the transaction ...

Factors other than tax considerations may distort the conditions of commercial and financial relations established between associated enterprises. For example, such enterprises may be subject to conflicting governmental pressures (in the domestic as well as foreign country) relating to customs valuations, anti-dumping duties, and exchange or price controls. In addition, transfer price distortions may be caused by the cash flow requirements of enterprises within an MNE group. An MNE group that is publicly held may feel pressure from shareholders to show high profitability at the parent company level, particularly if shareholder reporting is not undertaken on a consolidated basis. All of these factors may affect transfer prices and the amount of profits accruing to associated enterprises within an MNE group ...

Malteria Pampa S.A in Argentina exported malt to a related intermediary in Uruguay that in turn sold on the goods to the brewery in Brazil at a higher price. The tax authorities applied the Sixth method and issued an assessment where the export price was determined based on the latter price used in the transaction with the brewery in Brazil. Furthermore a substantial fine was issued to the Malteria Pampa S.A. for non compliance. In February 2019 the Tax Court decided in favour of the tax authorities. “That the factual and legal points considered by the customs verification – corroborated in this pronouncement – complied with the application parameters of the TP rules invoked in the Technical Report, forming a solid conviction that the transactional prices of the sale declared in the field “Merchandise Value” of the PE 07-003-EC01-004994-P and PE N° 07-003- EC01-004995-Z of Maltería Pampa S. A. are manifestly inaccurate, constituting an under-invoicing that causes the plaintiff to engage in the conduct punishable by Article 954(1)(c) of the Civil Code, for the entry into the country -actual or potential- of an amount as an export price different from that which would have corresponded; consequently, the fine imposed by the DGA must be confirmed.” This decision was then appealed to the Federal Administrative Court. Judgement of the Federal Administrative Court The Court dismissed the appeal of Malteria Pampa SA ruled in favor of the tax authorities. “this Court hereby recognises that the interpretation that conceives of Law 22.415 and Law 20.628 as bodies of law that make up Federal Law and not as watertight compartments that run along parallel paths with no possibility of intersection is correct. The fact of export under-invoicing deserves to be analysed under the convergent application of those laws that deal with this case. From this perspective, the Chamber concludes that the application of the transfer pricing institute should be validated, in this case, so that customs can control the entry of the amount that effectively corresponds, since the operation involves the export of commodities between companies that are functionally linked.” “the veracity and accuracy of the customs declaration, as legal assets protected by section 954 of the Customs Code, involve the interest of the Federal Government in preventing price manipulation manoeuvres in international trade between companies that make up the same economic group in order to reduce prices in our country and transfer the difference to jurisdictions with lower levels of taxation and foreign exchange control, with the harmful consequences that this implies for the collection of the national treasury and the macroeconomy of the Argentine Republic.” “In view of the foregoing, the Court RESOLVES: to dismiss the appeal lodged by the plaintiff and, consequently, to uphold the judgment under appeal. With costs, as there is no merit for a waiver (art. 68, first paragraph of the CPCCN)” Click here for English Translation Click here for other translation ...

A Permanent Establishment (PE) in Kenya of MAN Diesel and Turbo SE Germany (MAN) entered into a consortium with a firm called MPG Services to engineer, procure and construct an 87 MW generating capacity thermal power plant on behalf of Thika Power Ltd. The role of MAN’s Kenyan PE in the project was mobilization, engineering and design, reservation of the diesel sets, and steam turbine and other start-up costs associated with its part of the works which included supervision of the assembly and installation of engines and commissioning the engines. MAN Germany was to provide for the materials up to the port of export and the PE was to assist in the onshore part which included supervision of the assembly and installation work as well as commissioning the work but did not include supply of equipment. In 2015, the tax authorities initiated an audit which resulted in a final tax assessment issued in 2017. According to the assessment MAN’s Kenyan PE owed additional taxes on undeclared income (income resulting from the imports of Equipment), penalty and interest in an amount of Kshs 347,518,798.00. MAN filed an appeal with the Tax Appeals Tribunal (TAT) premised on the grounds that the tax authorities erred in fact and in law in its demand for additional tax for FY 2012 and 2013. According to MAN, income from offshore supply of equipment by MAN DT Germany is not attributable to MAN’s Kenyan PE under Article 7 of the DTA by virtue of the Force of Attraction Rule. The Tribunal allowed the appeal and set aside the assessment. The tax authorities then filed an appeal with the High Court. Judgement of the High Court The High Court dismissed the appeal of the tax authorities and decided in favor of MAN’s Kenyan PE. According to the High Court, income from the supply of equipment by MAN DT Germany is not attributable to MAN’s Kenyan PE under Article 7 of the DTA by virtue of the Force of Attraction Rule. Excerpts “44. Identifying the Commissioner’s true case is important because of the nature of his statutory mandate which involves the exercise of an extraordinary administrative power enabling the Commissioner to apply the laws. The exercise of that power involves his ‘determining’ a tax liability. An appeal in this context is against the Commissioner’s ‘decision’ namely his determination of a tax liability and its amount. The basic jurisdictional requirement for the exercise of the power is that the Commissioner is ‘satisfied’ of the various requirements. Once the Commissioner reaches the requisite level of satisfaction, an appeal must, of necessity go to whether he justified in being so satisfied. He must stand or fall by his reasons for exercising the power.” 45. The reason offered by the Commissioner is that the Respondent failed to avail documents to support the income from the imports. This argument sounds attractive. But, the challenge is, the Respondent was not the importer and his role was clearly defined in the documents provided. That being the case, the Commissioner’s decision that stands on shaky ground and the TAT correctly declined to uphold it. 46. Closely tied to the above ground is the appellant’s argument that the Respondent did not produce some documents as required by section 23 of the TPA. Whereas the said section obliges a tax payer to avail records, the flip side of this position is that a party can only produce documents in his possession. It could not have been the intention of the law to compel tax payers to produce documents in the hands of a third party and more so, if the transactions were undertaken by third parties. The Respondent persuaded the TAT that it was not the importer and it could not produce documents in the hands of a third party. To expect the Respondent to produce import documents in the hands of a third-party amounts to overly overstretching the ambit of sections 23, 56(1) and 30 of the TPA. On this ground, the appellant argument collapses. 47. The evidence on record on this particular issue leaves no doubt that the Respondent discharged the burden of proof. As Lord Denning held in Miller v Minister of Pensions,[20] ‘The…{standard of proof}…is well settled. It must carry a reasonable degree of probability…if the evidence is such that the tribunal can say: ‘We think it more probable than not’ the burden is discharged, but, if the probabilities are equal, it is not.’ 48. The burden placed upon the Respondent by the law was to establish by evidence that it was not the importer and to confirm its role under the contract. Simply put, it was required to demonstrate that the tax was not due. The test is whether the Respondent established a prima facie case and having done so, the evidential burden shifted to the appellant to persuade the TAT on the contrary. It never did so. … 56. In conclusion, I find no basis at all upon which I can interfere with the TAT’s decision. The upshot is that the appellant’s appeal fails. The appeal is hereby dismissed with costs to the Respondent.” Click here for other translation ...

Levi Strauss South Africa (Pty) Ltd, has been in a dispute with the African Revenue Services, over import duties and value-added tax (VAT) payable by it in respect of clothing imports. The Levi’s Group uses procurement Hubs in Singapore and Hong Kong but channeled goods via Mauritius to South Africa, thus benefiting from a favorable duty protocol between Mauritius and South Africa. Following an audit, the tax authorities issued an assessment in which it determined that the place of origin certificates issued in respect of imports from countries in the South African Development Community (SADC) and used to clear imports emanating from such countries were invalid, and therefore disentitled Levi SA from entering these goods at the favorable rate of zero percent duty under the Protocol on Trade in the Southern African Development Community (SADC) Region (the Protocol). The tax authorities also determined that the transaction value of the imported goods on which duty was payable should include certain commissions and royalties paid by Levi SA to other companies in the Levi Strauss group – Singapore and Hong Kong. Judgement of the Supreme Administrative Court The Court issued a decision predominantly in favour of the tax authorities. Click here for translation ...

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”). Both the payment of royalties and the purchase fee are further regulated in the group’s transfer pricing document. Following an audit, the Customs Directorate added the payment of concept fee to the price of the acquired products for customs purposes. Decision of the Court The Court of Appeal ruled that the Customs Directorate’s decision on determining the customs value for the import of clothing and gift items was invalid. There was no basis for including a paid “concept fee” in the customs value. The condition of payment of concept fee had no connection to the sellers of the goods, but sprang from the buyer’s own internal organization. Click here for translation ...

Following an audit the tax authorities issued a adjustment to BMW Hellas S.A. related to its pricing of imported cars. The adjustment was later annulled by the Administrative Court of Appeal. Not satisfied with this result, the tax authorities then filed an appeal with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Court dismissed the appeal of tax authorities and upheld the decision of the Administrative Court of Appeal. Excerpts “Because, as is clear from the above-mentioned provision of Article 137.C(C)(2) of the Customs Code, the customs authorities are not in breach of their obligations under Article 137.C(2) of the Customs Code. 1 of Law No. 3583/2007, smuggling, when importing a vehicle into the country, occurs where the non-payment or reduced payment of the tax or duty provided for by law is the result of the declaration of false information or the falsification of the documents required for importation or the use of special devices. For the purposes of those provisions, any action which misleads the customs authorities as to the nature, extent and amount of the tax or duty liability constitutes a deception and, more generally, an act intended to avoid payment of the taxes and duties legally due. The importation of vehicles at wholesale selling prices which are lower than the wholesale selling prices at which similar imports have been made in the past, but which are in accordance with the manufacturer’s price list and on which the statutory taxes (and, where appropriate, duties) have been calculated and paid, does not therefore constitute a deception in that sense, irrespective of the business policy which dictated the reduction in wholesale prices and irrespective of whether that business policy was subsequently changed; nor do such imports subsequently acquire the character of a ploy because the retail price is not set in line with the reduced wholesale price and the benefit of the importer’s payment of a lower price is not passed on to consumption, but legally calculated, regardless of whether that non-passing on is compatible with the sound operation of trade. Consequently, in the circumstances of the case, the Administrative Court of Appeal rightly held that the mere reduction in the factory prices of the cars imported by the first respondent in 2011, 2012 and 2013, without, at the same time, any other misleading action on the part of the appellants to deceive the customs authorities during the customs clearance of the cars, did not constitute a case of a ploy within the meaning of Article 137 C(1)(b) of the Customs Code. 7 and 155(7). 2(m) of the National Customs Code and that, as a result, the objective element of smuggling was not established in this case, and that the claims to the contrary, given that the first respondent’s benefit from the reduction in its tax burden on importation of the cars imported at a reduced wholesale price was not passed on to the retail selling prices of the cars imported at a reduced wholesale price, must be rejected as unfounded.” Click here for English translation Click here for other translation ...

Malteria Pampa S.A in Argentina exported malt to a related intermediary in Uruguay that in turn sold on the goods to the brewery in Brazil at a higher price. The tax authorities applied the Sixth method and issued an assessment where the export price was determined based on the latter price used in the transaction with the brewery in Brazil and a substantial fine was also issued to the Malteria Pampa S.A. for non compliance. Decision of the Tax Court “That the factual and legal points considered by the customs verification – corroborated in this pronouncement – complied with the application parameters of the TP rules invoked in the Technical Report, forming a solid conviction that the transactional prices of the sale declared in the field “Merchandise Value” of the PE 07-003-EC01-004994-P and PE N° 07-003- EC01-004995-Z of Maltería Pampa S. A. are manifestly inaccurate, constituting an under-invoicing that causes the plaintiff to engage in the conduct punishable by Article 954(1)(c) of the Civil Code, for the entry into the country -actual or potential- of an amount as an export price different from that which would have corresponded; consequently, the fine imposed by the DGA must be confirmed.“ Click here for English Translation ...

Taxpayers may have competing incentives in setting values for customs and tax purposes. In general, a taxpayer importing goods may be interested in setting a low price for the transaction for customs purposes so that the customs duty imposed will be low. (There could be similar considerations arising with respect to value added taxes, sales taxes, and excise taxes.) For tax purposes, however, a higher price paid for those same goods would increase the deductible costs in the importing country (although this would also increase the sales revenue of the seller in the country of export). Cooperation between income tax and customs administrations within a country in evaluating transfer prices is becoming more common and this should help to reduce the number of cases where customs valuations are found unacceptable for tax purposes or vice versa. Greater cooperation in the area of exchange of information would be particularly useful, and should not be difficult to achieve in countries that already have integrated administrations for income taxes and customs duties. Countries that have separate administrations may wish to consider modifying the exchange of information rules so that the information can flow more easily between the different administrations ...

The arm’s length principle is applied, broadly speaking, by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value for similar goods imported by independent enterprises. Valuation methods for customs purposes however may not be aligned with the OECD’s recognised transfer pricing methods. That being said, customs valuations may be useful to tax administrations in evaluating the arm’s length character of a controlled transaction transfer price and vice versa. In particular, customs officials may have contemporaneous information regarding the transaction that could be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation which provides detailed information on the circumstances of the transaction ...

Factors other than tax considerations may distort the conditions of commercial and financial relations established between associated enterprises. For example, such enterprises may be subject to conflicting governmental pressures (in the domestic as well as foreign country) relating to customs valuations, anti-dumping duties, and exchange or price controls. In addition, transfer price distortions may be caused by the cash flow requirements of enterprises within an MNE group. An MNE group that is publicly held may feel pressure from shareholders to show high profitability at the parent company level, particularly if shareholder reporting is not undertaken on a consolidated basis. All of these factors may affect transfer prices and the amount of profits accruing to associated enterprises within an MNE group ...

In June 2015 the World Customs Organization (WCO) published a guide to Customs Valuation and the relationship to Transfer Pricing. This relationship between Customs valuation and transfer pricing has been discussed in various national and international fora over the past few years. The business community has raised the issue as a matter of concern, in particular advocating that Customs take into account available transfer pricing information prepared for direct tax purposes when examining related party transactions and also give consideration to the impact of transfer pricing adjustments on the Customs value. It has been recognised that at this stage any alignment or merger of tax and Customs methodologies is not a realistic proposition given the particulars of the existing legal frameworks upon which they are based. The essence of the issue therefore is contained in the following question: to what extent can information contained in transfer pricing documentation, primarily developed for  taxation purposes, provide useful information for Customs to determine whether or not the price declared for imported goods has been influenced by the parties’ relationship, in order to make a final determination of the Customs value? The Technical Committee on Customs Valuation has confirmed the basic principle that transfer pricing documentation may provide useful information for Customs in respect of related party transactions, on a case by case basis (see Chapter 4). The focus is now on providing further guidance to Customs on how to examine and interpret transfer pricing documentation which may be helpful in this regard. The other key question is the impact of adjustments made (after importation) for transfer pricing purposes; in which cases, if any, should such adjustments be taken into account by Customs in determining the Customs value of the imported goods? Additionally, the WCO is working with the OECD and World Bank Group to encourage Customs and tax administrations to establish bilateral lines of communication in order to exchange knowledge, skills and data, where possible, which will help ensure that each authority has the broadest picture of a MNE’s business, its compliance record and can make informed decisions on the correct revenue liability ...

In this case the Federal Court of Appeal upheld the decision of the Canadian International Trade Tribunal in which the tribunal upheld seven decisions – one for each of the years 2005 through 2011 – of the Canada Border Services Agency under subsection 60(4) of Canada’s Customs Act. Skechers Canada, a subsidiary of Skechers USA, purchases footwear to sell in Canada from its parent at a price equal to the price paid by Skechers US to its manufacturers, the cost of shipping the foodware to the US and warehousing, and an arm’s length profit. Skechers Canada also makes payments to Skechers US pursuant to a cost sharing agreement to compensate the parent for activities associated with the development and maintenance of the Skechers brand and to the creation and sale of footwear. The Court ruled that CSA payments relating to research, design, and development (R&D) were “in respect of” the goods sold for export into Canada and thus part of the “price paid or payable” for the goods for customs purposes. As a result, Skechers Canada must add the amounts of these payments made to Skechers USA to the customs value of imported footwear supplied by its parent. In its conclusion, the Court found that the conclusion reached by CITT “falls within the range of possible, acceptable outcomes, defensible in respect of the facts and the law.” ...

Although customs officials and tax administrations may have a similar purpose in examining the reported values of cross-border controlled transactions, taxpayers may have competing incentives in setting values for customs and tax purposes. In general, a taxpayer importing goods is interested in setting a low price for the transaction for customs purposes so that the customs duty imposed will be low. (There could be similar considerations arising with respect to value added taxes, sales taxes, and excise taxes.) For tax purposes, however, the taxpayer may want to report a higher price paid for those same goods in order to increase deductible costs. Cooperation between income tax and customs administrations within a country in evaluating transfer prices is becoming more common and this should help to reduce the number of cases where customs valuations are found unacceptable for tax purposes or vice versa. Greater cooperation in the area of exchange of information would be particularly useful, and should not be difficult to achieve in countries that already have integrated administrations for income taxes and customs duties. Countries that have separate administrations may wish to consider modifying the exchange of information rules so that the information can flow more easily between the different administrations ...

Both customs officials and tax administrations, however, generally seek to determine the value of the products at the time they were transferred or imported. (For tax administrations, the relevant time is generally when the contract for transfer is concluded, but in many cases this coincides with the time of transfer). Thus, customs valuations, because they may occur at or about the same time the transfer takes place, may be useful to tax administrations in evaluating the arm’s length character of a controlled transaction transfer price. In particular, customs officials may have contemporaneous documentation regarding the transaction that could be relevant for transfer pricing purposes, especially if prepared by the taxpayer ...

The arm’s length principle is applied, broadly speaking, by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises and the value for similar goods imported by independent enterprises ...

Customs administrations, broadly speaking, also apply the principle of arm’s length pricing and use it also to provide a neutral standard of comparison between values attributable to goods imported by associated enterprises and values for similar goods imported by third parties. Since customs and income tax administrations are not always looking at the same sort of transfers (customs being concerned with transfers across borders, with or without change of ownership, and income tax administrations being concerned with transfers between entities),. and since customs administrations have traditionally examined goods at the time of importation while income tax officials consider the price at the transfer of ownership sometime after the transaction has taken place, and for other reasons, the approaches of the two administrations have sometimes differed. In more recent years, however, a number of customs administrations have found it increasingly impracticable to consider imports by MNEs on a consignment by consignment basis and have begun to apply methods analogous to those described in this report to reach an acceptable price for a range of imported goods. Co-operation between income tax and customs administrations in reaching such a price is becoming more common and this should help to diminish the number of cases where customs values are found unacceptable for income tax purposes or vice versa. (See Article VII of the General Agreement on Tariffs and Trade and the Convention on the Valuation of Goods for Customs Purposes signed in Brussels on 15th December, 1950 which is based on that article.) ...