EU: Retroactive intercompany transfer pricing adjustments and customs valuation of imported goods

EU: Retroactive intercompany transfer pricing

For many companies, the coronavirus (COVID-19) pandemic has led to severe disruptions in their global supply chains and the demand for their products.


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As a result of these disruptions, many companies are experiencing unusual profit outcomes and, as a consequence, are considering making retrospective (retroactive) intercompany transfer pricing adjustments or additional payments (insofar as this has not already taken place as part of a company’s regular transfer pricing policy). This is a frequently recurring issue for entities that earn profit margins or markups within target ranges—so-called “dependent companies” such as certain distributors, manufacturers or service providers. However, depending on the facts and circumstances, this could also apply to other types of entities.

Many companies are not aware that retroactive intercompany transfer pricing adjustments could potentially affect the customs valuation of goods imported into the EU. It is therefore imperative that action be taken.

Transfer pricing and EU customs valuation

Based on EU customs legislation, transactions between two entities belonging to the same entity group are treated as related-party transactions. Such transactions may be examined by the customs authorities to determine whether the price declared for the imported goods is “influenced” by that relationship. In this respect, the customs authorities will examine all circumstances surrounding the sale and, if necessary, the importer will be given an opportunity to supply further detailed information about those circumstances. If it cannot be demonstrated that the price between two entities belonging to the same entity group is not influenced by that relationship, the transaction value method cannot be used and an alternative value method must be applied.

When using the transaction value method, transfer pricing adjustments (either upward or downward) have an impact on the customs value that must be declared upon import and, as such, potentially on the amount of customs duties payable. In principle, EU rules require importers to enter into a reconciliation program if goods could be subject to value adjustments. The reconciliation program requires EU importers to submit provisional customs declarations followed by a supplementary declaration once the final price (after a transfer pricing adjustment) is known.

In practice, due to technical restrictions in the electronic declaration system (AGS) used by the Dutch Customs authorities, the reconciliation program cannot be applied in the Netherlands. This is because AGS automatically “closes” the provisional declaration at the end of the month following the month in which the provisional declaration was filed and at that time it is unlikely that the respective transfer pricing adjustments will have been processed.

Consequently, most importers in the Netherlands prefer using an annual disclosure process in which the transfer pricing adjustments are reported and the customs duties payable are recalculated (via a lump-sum disclosure). In order to use this annual disclosure process, it is necessary to obtain a ruling from the Dutch Customs authorities that covers the disclosure process (e.g., the manner in which the transfer pricing adjustment has to be allocated over the various import entries).

CJEU judgment in the Hamamatsu case (C-529/16)

In December 2017, the Court of Justice of the European Union (CJEU) rendered a judgment in a case concerning retroactive transfer pricing adjustments in relation to the customs value of goods imported into the EU. In short, the CJEU found that if the initial transfer price could be subject to retroactive adjustments, a provisional price cannot be used for customs valuation purposes. This implies that either incomplete customs declarations must be submitted, which are reconciled afterwards or that an alternative customs valuation method must be used. As the implementation of either of these alternatives involves significant practical challenges, the Dutch Customs authorities are, for the time being, still open to concluding pragmatic customs valuation rulings with importers in which they allow importers to use the provisional price for day-to-day customs valuation purposes, as long as the importer periodically discloses the upward or downward adjustments.

KPMG observation

The CJEU concluded that under EU legislation there is, in principle, no legal obligation to report year-end retroactive transfer pricing adjustments. However, if not reported voluntarily, it appears that the Dutch Customs authorities will challenge the use of the provisional transfer price for customs valuation purposes and thus force the importer to use an alternative customs valuation method going forward. On the other hand, downward compensating transfer pricing adjustments (decreasing the customs value) may lead to the EU customs duties that were paid being refunded. Hence, this may provide a potential refund opportunity.

Companies that perform (or are considering) year-end transfer pricing adjustments need to assess their EU customs value position and consider further action if required.

Read an August 2020 report prepared by the KPMG member firm in the Netherlands

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