Interactions between transfer pricing and customs rules further to the Hamamatsu case: a potential turmoil in Luxembourg?

More than five years ago, the Court of Justice of the European Union ("CJEU") ruled in the Hamamatsu Photonics Deutschland GmbH (“Hamamatsu”) case¹ that, according to the former EU customs legislation² , a taxpayer cannot make ex post adjustments to customs value based on an intercompany agreement for goods under an advance pricing agreement (“APA”) concluded with the tax authorities.

An APA is an arrangement that may be unilateral (i.e., involving one tax administration and a taxpayer), bilateral (i.e., involving a taxpayer, an associated enterprise in a foreign country and the tax authorities in both countries) or multilateral (i.e., involving the taxpayer and two or more associated enterprises as well as the tax authorities in at least three countries) and which aims to determine, before transactions between related parties occur, an appropriate set of criteria (e.g., method, comparables, adjustments, etc.) for the determination of the transfer pricing for those transactions over a fixed period of time³ .

In the case at hand, Hamamatsu’s operating margin fall below the arm’s length range disclosed in the APA, so the customs value of its merchandise was lowered during the period of adjustment. The CJEU interpreted that an adjustment applied across all products for transfer pricing purposes could artificially reduce the economic value reported for certain products and is not supported under the EU customs legislation.

Today, it cannot be excluded that the national court of an EU member state takes a different (and positive) approach for the taxpayer in the framework of the spiralling inflation and energy crisis. Therefore, it is interesting to navigate through the facts of the Hamamatsu case to understand potential implications in Luxembourg.

Facts of the Hamamatsu case

Hamamatsu is a German company belonging to a Japanese group specialised in the distribution of optoelectronic devices, systems and accessories. For the purpose of its activity, Hamamatsu imported goods from its parent company in Japan at prices agreed with the German tax authorities based on an APA.

For almost one year, Hamamatsu released for free circulation goods from consignments and declared a customs value corresponding to the price charged by the Japanese parent. Due to a decrease of its operating margin, the transfer prices were consequently adjusted at the level of Hamamatsu, triggering a relevant credit. It is important to note that the adjusted amount was not allocated to the each of the imported goods, but indistinctly to the mixed consignments.

In line with the transfer pricing adjustment (“TPA”), Hamamatsu requested the refund for the excess of customs duties paid. However, the Principal Customs Office in Munich⁴ rejected the request because the applicable legislation was referring to the transaction value of individual goods (instead of mixed consignments).

Therefore, Hamamatsu filed an appeal with the Finance Court of Munich⁵. The latter decided to refer to the CJEU as regards whether an agreed transfer price can form the basis for the customs value regardless of whether a debit or credit charge is made to the declarant at the end of the declaring period due to a flat-rate adjustment. In addition, a classification was sought to determine whether a TPA can amend a customs value.

The decision of the CJEU: a milestone case for customs and transfer pricing matters?

The CJEU recalled that as a general rule, the price to be paid for the goods forms the basis for calculating the customs value, but can be adjusted if necessary to avoid an arbitrary or fictitious customs value. An adjustment in the transaction value (i.e., the first method used as customs value) is limited to specific situations, such as in case of quality defects or manufacturing defects, at the request of either the customs authorities or the declarant, once the goods have been released for free circulation but also before (e.g., in case of hidden defect).

In fact, the EU customs legislation applicable at that time did not entitle the declarant to amend the transaction value as a result of a TPA. This possibility was only offered to the customs authorities in very specific cases as explained above.

It is relevant to note that in the Hamamatsu case, the CJEU did not analyse the correlation between the customs valuation and the transfer prices. Such analysis would have been precious for multinational companies importing goods in the European Union.

Definition of TPA

According to the OECD⁶ , “transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises. Two enterprises are associated if one of the enterprises participates directly or indirectly in the management, control, or capital of the other or if the same persons participate directly or indirectly in the management, control, or capital of both enterprises.”

Transfer prices are significant for both taxpayers and tax authorities because they determine to a large extent the income and expenses, and therefore the taxable profits, of associated companies in different tax jurisdictions.

That said, a TPA can be defined as a revision of the price agreed between two or more related parties⁷ for a determined transaction to respect an arm’s length outcome. In fact, the tax authorities generally test on an annual basis the arm’s length nature of the transactions between related parties.

Therefore, it is of the utmost importance for taxpayers to have complete and updated transfer pricing documentation (e.g., local and master files) in case of a challenge by the local and/or foreign tax authorities.

Calculation of customs duties in Luxembourg

Based on the above, it is clear that a TPA may negatively impact the taxable profit of a company. For instance, the tax authorities may carry out an upward TPA to increase the taxable amount of the original supply.

But what about customs duties? In general, they are calculated based on the value of the goods, the customs tariff and the origin of the goods and generally paid at the time of filing of the import declaration before the goods are released for free circulation within the EU customs territory⁸. The principles of customs valuation are set out in the World Trade Organization’s Customs Valuation Agreement. The customs value provides the basis for assessment of the customs debt, which is normally calculated as a percentage of the customs value. In essence, there are different valuation methods provided by the Union Customs Code, but the primary one shall be the transaction value ⁹. In case the customs value cannot be determined by the transaction value method, one of the secondary methods of customs valuation should be used (e.g., the deductive value).¹⁰

In Luxembourg, the customs value is therefore generally based on the transaction value method, i.e., the price effectively paid. However, if the buyer and seller are related parties¹¹, the transaction value is generally not taken into consideration. In this respect, it should be noted that the mere existence of a relationship between a seller and a buyer cannot be by itself a reason that prevents the application of the transactional value method. In case of doubt, the Luxembourg customs authorities¹² will examine the specific circumstances of the sale. In case they deny the transaction value method, the customs value must therefore be declared on the basis of one of the remaining five alternative methods (i.e. the “identical goods method”, the “similar goods method”, the deductive method, the computed method and the fall-back method).

As a consequence and to the extent accepted by the Luxembourg customs authorities, a TPA amending the customs value might therefore result in an increase or decrease of customs duties due.

Any expected impact in Luxembourg?

This question arises further to a judgment of the German Federal Fiscal Court¹³ issued last year, where it is mentioned that a retroactive TPA does not have an impact on the customs value. In fact, the German Federal Fiscal Court is aligned with the outcome of the CJEU in the Hamamatsu case, but in its decision it includes some attention points that may or may not be followed by the Luxembourg courts.

For instance, timing is a crucial factor for the payment of customs duties. The amendment at a later stage of the amount due to the customs authorities may lead to legal insecurity for both taxpayers and customs authorities. Therefore, it would be interesting to know whether a TPA may amend a customs value if the Luxembourg customs authorities are informed within a reasonable timeframe. It should be stressed that an APA is based on historic data whereas the customs value is determined at the time the goods arrive into the EU customs territory.

Moreover, we are of the opinion that the Luxembourg customs authorities may not accept or reject a TPA depending on the valuation method selected. Indeed, based on the current Luxembourg guidance, there are no solid arguments to make a distinction amongst the valuation methods when considering a TPA.

Another point raised was the allocation of the TPA to only certain products. Based on our experience, we cannot imagine the Luxembourg customs authorities to deviate from the initial customs value only with respect to certain products. In fact, it is unlikely that the Luxembourg customs authorities would consider the amendment of the customs value if the TPA only impacts some of the goods considered to calculate the customs value.

It would also be interesting to know whether the outcome of the CJEU would have been the same under the “new” EU customs legislation (“Union Customs Code”).¹⁴ The new legal framework is not very different from the former even though some changes regarding valuations rules have been introduced. Note as well that the Luxembourg customs authorities also rely on Belgian legislation¹⁵ (in particular for penalties).

An alternative for the importer to mitigate a tax leakage could be to file a simplified declaration¹⁶ when the customs value may be likely amended. Some EU customs authorities (e.g., the Spanish customs authorities) seem to follow this approach when the importers apply TPAs on a regular basis. However, to opt for a simplified declaration requires the filing beforehand of an authorization where the importer commits to adjust the customs value at a later stage.

It can therefore be concluded that an updated transfer pricing documentation may circumvent, to a certain extent, the payment of irrecoverable customs duties and thus mitigate the amount of final costs at the level of the importers.

_{¹Case Hamamatsu Photonics Deutschland GmbH v Hauptzollamt München, C-529/16, EU:C:2017:984.
²Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code, repealed as of 1 May 2016.
³OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Chapter IV, Paragraphs 4.140 and 4.141.
⁴Hauptzollamt München.
⁵Finanzgericht München.
⁶OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Preface, January 2022.
⁷According to article 9 of the OECD model tax treaty as implemented by articles 56 and 56bis of the Luxembourg Income Tax Law, “two enterprises are deemed associated when one enterprise participates, directly or indirectly, in the management, control or capital of the other, or if the same persons participate, directly or indirectly, in the management or share capital of both enterprises.”
⁸List of countries/territories can be found in the following link: https://taxation-customs.ec.europa.eu/territorial-status-eu-countries-and-certain-territories_en.
⁹Article 70 of Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code.
¹⁰Article 74 of Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code.
¹¹The buyer and seller are considered as related when one of the conditions specified in Article 217 of Implementing Regulation 2015/2447 is met.
¹²L’Administration des douanes et accises.
¹³Case VII R 2/19 published on 29 September 2022 by the German Federal Fiscal Court - Bundesfinanzhof.
¹⁴Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code.
¹⁵Belgian General Customs and Excise Law dated 18 July 1977 (as amended).
¹⁶According to article 166 of the Union Customs Code.}