“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 ...

A local manufacturer – BASF Argentina S.A. – belonging to the German multinational group – BASF – specialized in chemical products which it produced and sold. For these activities it used imported and national inputs that it transformed through licensed industrial procedures owned by companies of the same group. It had signed 6 technology transfer and trademark use license agreements (CTT) with three related companies, under which it paid a fee for the sale of products manufactured in the country with the licensed technologies and trademarks. BASF Argentina S.A. also imported finished products with the same brands, but only for resale in the country. It claimed that no royalties were paid for these products. The customs authority objected to the non-inclusion of royalties in the import value. Judgement of the Tax Court The Court found that the royalties paid were also part of the value of the imported goods. Excerpt “…In this state of affairs, it is clear that the percentages of 99%, in both charges, allow to conclude, with a reasonable degree of certainty, that the universe of import shipments whose value adjustment was challenged and subject of the proceedings, correspond to inputs acquired from companies of the same economic group whose corporate name includes the name “BASF”, so it is in line with reality to induce that such products carry the ”BASF” technology and, therefore, the “BASF” brand of its manufacturer. And it is precisely the circumstance of inseparability which adds commercial value to the product, bringing certainty to the consumer as to the production process involved in its manufacture. Indeed, over the four years under study, the inputs imported by the plaintiff have been manufactured by more than thirty different companies, located in different parts of the world, which share the characteristic of including the name “BASF” in their corporate name. From this perspective, it is unequivocal that the inputs are manufactured with BASF’s intellectual property and licensed to the Argentine buyer, who, when acquiring them, necessarily imports the product plus the intangible (BASF trademark), guarantee of the manufacturing technology of the tangible. This hypothesis is reinforced by an analysis of the absurd: it is contrary to all logic to suppose that BASF Argentina carries out in 4 years more than 14,000 purchases from more than 30 BASF suppliers all over the world, of inputs manufactured by them, and to suppose that all of them do not have in their real implicit commercial value the BASF technology that assures the buyer – BASF ARGENTINA – a certain quality/prestige/guarantee that comes with knowing, precisely, that it was manufactured by the BASF economic group. And it is this added value that corresponds to the denomination “brand”. In view of the foregoing, the tax representatives are right when they state, in relation to the non-connection maintained by the plaintiff, that what is said does not reflect the commercial reality of the economic group since, according to the declaration of the import dispatches analysed above, the companies supplying the products bear the word “BASF” in their names, from which it is reasonably certain that they would form part of the same economic group with BASF ARGENTINA S. A. A. And, it is worth noting that this conclusion was not undermined by the appellant with evidence sufficiently convincing to remove all doubt. In short, in order for imported inputs to be entitled to a certain intangible, they do not need to be subjected to any industrial process in the national territory, since such circumstance involves another type of taxable event. On the other hand, the generating event in question refers to the importation of goods for consumption for an indefinite period of time; and everything that forms part of the product that enters through customs will form part of the taxable value. Thus, neither the process to which the product was subjected abroad -whose consequence does affect the taxable value of the imported good- nor the process that could affect it while nationalised is under discussion; only the state of the product at the time the HI is perfected, i.e. at the time of release for free circulation -regular imports- is of interest. In short, it is concluded that all the transactions carried out by BASF ARGENTINA and for which it imported BASF branded inputs, must include in the taxable value the real value of the product, understood as the aggregate of the tangible and intangible value. …” Click here for English Translation Click here for other translation ...

Surprise Drinks a. s. imports plastic toys from China, generally inspired by animated films (‘the imported goods’), which it added as a gift to a drink sold by it (‘the finished product’). In its customs declarations it did not include royalties paid in the value of the imported toys. According to the customs office, the royalty/licence payments should have been included and therefore the customs office decided to impose a duty of CZK 50 541. An appeal was filed with the Regional Court. According to Surprise Drinks a. s., the customs authorities had erred in its interpretation of the Customs Code of the European Union. It follows from the wording of that provision itself that royalties form part of the customs value of goods only in so far as they relate to the goods being valued. However, it is only the final product, i.e. the beverage, that is the subject of the royalty, not the imported toys and labels. Therefore, the customs authorities’s conclusion that the inclusion of royalties in the customs value of the goods is not affected by the fact that royalties are paid only on the value of the beverage is incorrect. Surprise Drinks a. s. also argued that the second condition for the inclusion of royalties in the customs value under Article 71(1)(c) of the Customs Code, which is that the royalties must be paid by the purchaser as a condition of the sale of the goods being valued, is not fulfilled. Since neither the labels nor the toys are sold separately and the royalties are payable only on the sale of the final product, the applicant is not required to pay royalties as a condition of the sale of the imported goods. Judgement of the Court The Regional Court dismissed the appeal. Excerpts (Unofficial English Translation) “25. This judgment was followed up by the CJEU on 9 July 2006. 2020 in Case C-76/19, interpreting the same provision, and concluded that it must be interpreted as meaning that the proportionate part of the royalties paid by a company to their parent company in consideration for the provision of know-how for the production of final products must be added to the price, actually paid or to be paid for the imported goods in circumstances where those goods are intended, together with other components, to form part of those final products and the former company obtains those goods from sellers other than the parent company, where – royalties have not been included in the price actually paid or payable for those goods, – relate to the imported goods, which presupposes that there is a sufficiently close relationship between the royalties and those goods, – the payment of the royalties is a condition of the sale of the goods in question, so that, if they were not paid, the contract of sale in respect of the imported goods would not be concluded and the goods would not be delivered; and – a reasonable allocation of royalties can be made on the basis of objective and measurable data, which must be verified by the referring court in the light of all the relevant circumstances and, in particular, the legal and factual relationships between the buyers, the individual sellers and the licensor. 26. In the present case, the amount of the royalty is based on the price of the final product to which the imported goods are attached, although the subject matter of the licence agreements is the imported goods, as the court verified from the licence agreements. The situation is therefore the same as in the cited case. Case C-175/15, in that the royalties relate only to the part of the final product on which the royalty is payable. Even in that situation, the CJEU considered the royalties to be part of the customs value of the goods and that conclusion can be applied to the present case. The Regional Court adds that the fact that, if the applicant wished to dispose of the imported goods for their intended purpose, i.e. to attach them as a gift to the final product sold, it could not do so without paying the licence fee, is a matter of concern. Without payment of the licence fee, the beverage and the toy with it could not be legally sold. Thus, although the amount of the licence fee and the time at which it is payable are linked not to the sale of the imported goods but to the sale of the final product of which they form part, payment of the licence fee is a condition of the sale of the product (condition under C-76/19). 27. In the present case, the other conditions set out above in C-76/19 CJEU are also fulfilled. The royalty was not included in the price actually paid or payable for the goods, i.e. actually paid by the applicant to its supplier, since that royalty is paid only at the time of sale of the final product. There is a relationship between the royalty and the imported goods, since the royalty provisions in the licence agreements relate to the imported goods. On the last condition, the possibility of allocating royalties reasonably on the basis of objective and measurable data, the Regional Court will comment below (see paragraph 31 of this judgment). … 32. The Regional Court fully agrees with that assessment, since the applicant does not put forward any arguments which contradict the defendant’s conclusions. According to Article 73 of the Customs Code, the customs authorities may, on application, allow the following amounts to be determined on the basis of specific criteria where those amounts are not quantifiable at the date of acceptance of the customs declaration: (a) the amounts to be included in the customs value in accordance with Article 70(2); and (b) the amounts referred to in Articles 71 and 72; Article 71(c) concerns royalties. Thus, there was nothing to prevent the applicant from requesting specific criteria by which the amounts of the estimated value of the royalties ...

What “Vehicles Distributor” seeks to achieve in the present case is an attempt to adjust (reduce) the transaction price retrospectively by reference to a new transfer price, and not to claim repayment of the customs duty overpaid as a result of an incorrect customs value in the customs declarations upon release for free circulation. The customs declarations at issue were lodged as regular declarations and customs duties were levied on the value of the goods determined therein. It is not, therefore, the case that the value indicated in the declarations was arbitrary or fictitious or that the price at the time of sale of the goods could not be determined. Nor is there any basis in the facts for the applicant’s allegation that the goods were released for free circulation on the basis of the provisional value of the goods. Click here for English translation Click here for other translation ...

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 ...