ACITA NATIONAL MEETING JEREMY WHITE Wednesday 21st March 2018 Transfer Pricing and Customs Valuation - Hamamatsu 1

Hamamatsu Photonics Deutschland 20 Dec 2017, Court of Justice of the EU, Case C‑529/16 Interpretation of Art 29 of CCC: ‘The customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community …’

Facts and procedure Hamamatsu Group distributes optoelectronic devices, systems and accessories. H Germany purchased and imported goods from H Japan making payment in accordance with the advance pricing agreement (APA) concluded between H group and the German tax authorities. APA conformed to the ‘arms-length’ principle laid down in the guidelines of the Organisation for Economic Co-operation and Development (OECD) on transfer pricing for multinational undertakings and the tax authorities.

Residual Profit Split Method Consistent with OECD Guidelines. 1st stage, each participant is allocated sufficient profit to produce a minimum rate of return. 2nd stage, residual profit allocated proportionally in accordance with specific factors H Germany’s operating margin range is established. If the profit actually generated falls outside that margin, result is adjusted to the upper or lower limit of the margin and credits or subsequent debit charges are made.

Imports and adjustments 2009 - 2010, H Germany released for free circulation more than 1000 consignments of mixed goods of various rates from H Japan. Operating margin of H Germany fell below the range for the APA operating margin. As a result the transfer prices were adjusted. H Germany received a credit from Hamamatsu Japan. Single adjustment in respect of the total overpaid in the period.

Repayment claim H Germany applied for repayment of customs duties on the overpayment. No allocation of the adjustment amount to the individual imported goods. German customs rejected application on the ground that the method adopted by the H Germany was incompatible with Article 29(1) of the CCC which refers to the transaction value of individual goods, not that of mixed consignments. H Germany appealed to Finance Court.

Finance Ct referred 2 questions to CJEU ‘(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 recognized?’

Restatement of first question The Court restated the first question as follows: ‘whether Articles 28 to 31 of the Customs Code must be interpreted as meaning that they permit the adoption, as the customs value, of an agreed transaction value which consists partly of an amount initially invoiced and declared and partly of a flat- rate adjustment made after the end of the accounting period, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down.’ Assumed finding of the Finance Court - impossibility of knowing at the end of the accounting period whether the adjustment would be made up or down.

Art 78 and Incomplete declaration The Court acknowledged Art 78 of CCC. But limited to specific situations where goods were damaged before their release for free circulation or had hidden defects which meant that the declared transaction value did not reflect the true commercial value of the goods (see Mitsui & Co. Deutschland, C‑256/07). Court stated that the second question (incomplete declaration simplified procedure) expressly applies only if the first question is answered in the affirmative.

Answer Art 29 does 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. Art 29 does permit adjustment when the goods were damaged before their release for free circulation or had hidden defects. Mitsui & Co. Deutschland, C‑256/0, Case 183/85 Repenning Gmbh, [1986] ECR 1873 or Case 59/92 Ebbe Soennichsen Gmbh, [1993] ECR 2193. Court accepted that the transaction value can be determined by factors other than the expressed contract price.

Price review clause 1st question: “an agreed transaction value” composed of an initial invoice amount and “a flat-rate adjustment” was a reference to a type of contract of sale which includes a price review clause. Price is only fixed provisionally. Final determination of the price payable is subject to certain factors which are set forth in the provisions of the contract itself. Customs value depends upon the kind of factor to which the price is subject to.

WTO/WCO Technical Committee on Customs Valuation Commentary 4.1 Where the final price is determined: for goods delivered a considerable time after the contract “on the basis of an agreed formula which recognizes increases or decreases in [costs]”; or for goods manufactured or delivered over time where “each price was derived from the same formula specified in the original contract”; or where final settlement is predicated on an examination or analysis at the time of delivery; “since the price actually payable for the imported goods can be established on the basis of data specified in the contract such price review clauses do not preclude valuation under Article 1 of the Agreement”.

Scope of factors in Commentary 4.1 Not every price review clause affects the customs value. A price review clause that is valid for corporation tax purposes may not affect the customs value if the clause is outside the scope of the factors described in the Commentary.

Not possible to know Recall the restatement of the question: it was “not possible to know at the end of the accounting period whether the adjustment would be made up or down”. If the Court was intending to follow Commentary 4.1, the Court was probably drawing attention to a factor which was outside the scope of those described in the Commentary. The Court may have believed: seller decides how to allocate the overpayment to the various goods at the various rates of duty; and/or it may have been necessary for a person to intervene and decide whether the upper or lower margin was used. Not simply a matter of applying a pre-agreed formula to determine the variables. Specific factors in Hamamatsu’s case were outside the scope of Commentary 4.1.

Flat rate formula Cannot assume Court would have rejected the adjustment pursuant to any kind of flat rate formula. Could design a formula related to the imported goods that simply determines the price of each consignment of goods at the end of an accounting period without any intervention. Then it would be possible to know at the end of the accounting period whether the adjustment would be made up or down.

Case C-422/00 Capespan AG Leger (followed by the Court) said: ’83 In reality, the only situation in which importers may need to make an incomplete declaration within the meaning of Article 254 of the implementing regulation is where they use the second method in Article 5(1)(b) of Regulation No 3223/94 for calculating the entry price. In that case the value of the products may be determined on the basis of the unit price relating to sales of identical or similar imported products. That means that the price of the products which form the subject-matter of the declaration is not necessarily known at the time when they are cleared through customs. … 85 …an importer who is not in a position to make a definitive declaration of customs value at the time when the products are cleared through customs may give a provisional indication of that customs value in accordance with Article 254 of the implementing regulation only when the value of the products is determined in accordance with the rules provided for in Article 5(1)(b) of Regulation No 3223/94’

CJEU accepting Finance Ct’s 2nd question CCCIP Arts 254-259 provide for provisional indications of customs value and final determination under the incomplete declaration simplified procedure where particulars are missing at the time that the declaration is accepted. No procedural remedy for a contract including a price review clause linked to variables that are not determined simply by a pre-agreed formula. It would not have helped H if they had declared the goods for the incomplete declaration simplified procedure. The incomplete declaration procedure relates to factors (including variables) that exist at the time of importation, yet are unknown at that time. The procedure does not relate to variable factors that are determined by some form of intervention. The incomplete declaration procedure would have been available if the adjustment had been determined simply by a pre-agreed formula.

ACITA NATIONAL MEETING JEREMY WHITE Wednesday 21st March 2018 Transfer Pricing and Customs Valuation - Hamamatsu 1