Customs valuation ā€” the key trade trend in the European Union

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EY - Walter de Wit

By Walter de Wit
Partner/Principal, Indirect Tax
+31 6 21251881

While 2016 saw the introduction of the Union Customs Code (UCC) in the European Union (EU) triggering a lot of questions and issues for EU trade, the primary issue in 2017 was customs valuation, which has been the focus of the Court of Justice of the European Union (CJEU). Although these cases were all decided under the EU’s old legislation, the Community Customs Code (CCC), since they deal with principles that continue to apply under the UCC, they are very relevant for businesses going forward.

Royalties and license fees (GE Healthcare)
The UCC brought new attention to the possible inclusion of royalties in the customs value for imported goods. At the same time, the CJEU delivered a fundamental judgment on this topic.

The case of GE Healthcare (C-173/15)1 involved payments made between related companies. GE Medical Systems Deutschland GmbH & Co. KG (GE Germany) concluded a standard-form license agreement with Monogram Licensing International Inc. (Monogram); both subsidiaries belong to the General Electric group (the GE Group). The date on which royalties were due was set at 31 December of each calendar year. The royalties for the use of the GE trademark amounted to 0.95% of GE Germany’s annual turnover. GE Germany had acquired goods originating in third countries from subsidiaries belonging to the GE Group, but had not declared the corresponding royalties paid to Monogram in the customs value declarations.

The CJEU concluded that the royalty payments should form part of the value of the imported goods. For royalties or license fees to be regarded as related to the goods being valued, the CJEU noted that the provisions in the CCC must be interpreted as not requiring the amount of royalties or license fees to be determined. Furthermore, under the CCC, such royalties or license fees are considered to be “related to the goods being valued,” even if those royalties or license fees relate only partly to those goods.

Cost of transport
In principle, the cost of transport, up to the place where goods are brought into the customs territory of the EU, should be included in the customs value of the imported goods. The Shirtmakers(C-59/16)2case deals with the scope of the concept of “cost of transport.”

Shirtmakers BV imported textile goods from Asia and entrusted the customs formalities to another company, which also organized the transport through various transport companies. For these services, the company charged fees to the importer, without making the distinction between its own fees and the actual costs of transport. The question was whether the supplements to the actual costs should be included in the customs value. In that respect, the CJEU ruled that the concept of “cost of transport” should be interpreted broadly. Therefore, the agent’s profit margin and costs are also captured in the “cost of transport” and should be included in the customs value of the imported goods.

Transfer pricing and customs valuation
Transfer pricing and customs valuation both aim at setting the prices of intercompany transactions in conformity with the arm’s-length principle. Despite the different objectives, the debate about mutual relationship and convergence between transfer pricing and customs valuation has gained a lot of attention from businesses as well as tax and customs authorities in recent years, in particular due to the increase of intercompany trade transactions.

In that context, the question about the impact of retroactive transfer-pricing adjustments on determining the customs value has been debated quite extensively over the last decades. Given the lack of EU legislation or case law in this area, there has been legal uncertainty on this issue, and EU Member States have taken divergent views. While some national courts denied a refund of import duties when companies made downward transfer-pricing adjustments, others allowed it. However, across the EU there was no doubt in the minds of customs authorities that upward adjustments should lead to additional payments of import duties.

The CJEU issued its decision in the Hamamatsu case (Cā€‘529/16) toward the end of 2017. The case deals with the question of whether a transfer price subject to retroactive price adjustments can be used as the basis for the “transaction value” (TV) method to determine the customs value.

In this much-awaited decision, the CJEU ruled that EU customs law does not permit an agreed transaction value — composed of an amount initially invoiced and declared and a retroactive adjustment made after the end of the accounting period — to form the basis for the customs value when it is unknown at the time of import whether that adjustment will be positive or negative at the end of the accounting period.

This ruling may have a considerable impact for businesses with intercompany EU-import transactions, as the CJEU seems to be questioning the use of the TV method for these types of transactions. Although the ruling is subject to different interpretations as explained below, it is likely that customs authorities will view year-end adjustments (upward or downward) as no longer applicable for determining the TV, or may even reject the use of the TV as such, thus forcing importers to use alternative customs valuation methods.

No official reaction from the European Commission has been published on this matter yet. However, it is understood that the case was discussed in the Customs Valuation Committee meeting held in April 2018. Most Member States’ customs authorities have not yet reacted to the judgment, pending the outcome of this discussion. Nevertheless, the customs authorities of Belgium, Germany and the Netherlands have already reacted unofficially in various ways.

  • The Belgian authorities have issued new customs valuation guidelines. While not referring to the Hamamatsu case, the new guidelines only allow a TV to be based on a transfer price if that transfer price itself is based on the “comparable uncontrolled price“ (CUP), “resale minus” or “cost plus.”
  • The German authorities have informally indicated they will maintain their past policy, i.e., they will not allow a refund of import duties on downward adjustments, but they will retroactively assess import duties on upward transfer-pricing adjustments.
  • Finally, the Dutch authorities have indicated they will allow a transfer price being used as TV and will also take into account both upward and downward adjustments. However, importers should agree on this with the customs authorities.

These actions indicate that different Member States’ customs authorities are likely to adopt divergent approaches. If that does indeed happen, businesses will need to carefully consider their position, and they may need to discuss their policies with the customs authorities.

Refund of duties on warranty costs
It is settled case law of the CJEU that the TV should reflect the real economic value of the imported goods. Post-clearance adjustments to the price actually paid or payable are limited to specific situations. One of these situations concerns the refund of duties on warranty costs in the case of “defective goods.” EU customs law allows importers to reduce the price actually paid or payable in proportion to the reduction in the commercial value of the goods owing to a hidden defect that was shown to be present before their release into free circulation and gave rise to subsequent repayments under a warranty obligation.3 In short, the CJEU extended the period for price adjustments for defective goods and broadened the definition concept of “defective goods” in the X BV case.4

X BV purchases passenger cars (type A, type C and type D) from a manufacturer established in Japan and releases them for free circulation into the EU customs territory. X sells those cars to dealers, who sell them to final purchasers. Within one year, the manufacturer requested X to invite all owners of type A cars to make an appointment with a dealer in order to have the steering coupling replaced, free of charge. X reimbursed the costs associated with that recall to the dealers. The manufacturer then reimbursed those costs to X pursuant to a warranty obligation included in the contract of sale concluded with X.

After types C and D cars had entered into service, they showed door-hinge and rubber-seal defects, respectively. The dealers concerned repaired those defects in 2010 under the warranty that they provide. Once again, X reimbursed the costs of those repairs to the dealers on the basis of the warranty obligation in the sales contract concluded with them. The manufacturer then reimbursed those costs to X pursuant to its warranty obligation under the sales contract concluded with it.

In 2010, X BV applied for partial repayment of the customs duties, which it had paid in respect to the type A, C and D cars. The Dutch customs authorities rejected the claim in regard to the type A cars on the grounds that they were not “defective” within the meaning of Article 145 of the Implementing Provisions of the CCC (CCIP).5 Regarding the type D and C cars, they also rejected the application for repayment of the customs duties on the grounds that the period of 12 months from the date of acceptance of the customs declaration, whose time limit is laid down in Article 145, paragraph 3, of the CCIP, had expired.

The CJEU ruled that Article 145, paragraph 3, of the CCIP, in so far as it provides for a time limit of 12 months from acceptance of the declaration for entry into free circulation of the goods, within which an adjustment of the price actually paid or payable must be made, is invalid. In other words, the standard period of three years applies for the filing of applications for repayment of customs duties paid for defected goods.

The CJEU also ruled that the concept of “defective goods” should be interpreted more broadly to cover cases where it is established that, at the date of acceptance of the import declaration, there was a manufacture-related risk that an imported product may actually become defective.

The ruling of the CJEU might create opportunities for businesses, since it extends the period for price adjustments and broadens the concept of “defective goods.” In particular, importing companies in the automotive, retail or fashion industry or any other sector facing high import duties could benefit from this ruling as it creates import-duty refund opportunities.

It is important to note that the CJEU ruled its decision under the CCC. Meanwhile, the UCC came into effect on 1 May 2016. To apply for a refund under the concept of “defective goods” the acceptance date of the entry declaration to free circulation of the defected goods depends on whether the provisions of the CCC or the UCC applies. In that respect it should be noted that Article 132, paragraph c, of the Implementing Act of the UCC (I-UCC)6 sets a time limit of 12 months for price adjustments for defective goods. Although the CJEU ruled in the X BV case that Article 145, paragraph 2, of the CCIP is invalid, this does not automatically apply to Article 132, paragraph c, of the I-UCC.

Notwithstanding the acceptance date of the customs declaration, the procedural rules of the UCC apply to the refund request. Depending on the date, either the substantive rules of the CCC or the UCC applies:

  • Refund request for defective goods imported before 1 May 2016
    If the refund request relates to defective goods imported prior to the introduction of the UCC on 1 May 2016, the substantive rules of the CCC applies. Viewed from today’s perspective, this means the refund request should be filed within three years after the acceptance of the customs declaration.

  • Refund request for defective goods imported on or after 1 May 2016
    If the customs declaration for defective goods has been filed after 1 May 2016, the procedural and substantive rules of the UCC apply. In that scenario, Article 132, paragraph c, of the I-UCC applies. Therefore, in principle the import-duty refund request should be filed within one year after the acceptance of the customs declaration. In this scenario, the three-year period would only apply if the CJEU also declares Article 132, paragraph c, of the I-UCC invalid or the European Commission changes the I-UCC.


In recent years, customs valuation has become an important issue in EU customs law, with more attention being paid to the correct application of the valuation rules by customs authorities. This had resulted in more valuation cases coming before the courts and more controversy issues with the customs authorities.

The Hamamatsu case is expected to further increase the number of disputes with customs authorities since it seemingly rejects the link between transfer pricing and customs valuation — and the judgment can be interpreted in several ways.

1 CJEU 9 March 2017, C-173/15, ECLI:EU:C:2017:195.
2 CJEU 11 May 2017, C-59/16, ECLI:EU:C:2017:362.
3 CJEU 19 March 2009, C-256/07, EU:C:2009:167.
4 CJEU 12 October 2017, C-661/15, EU:C:2017:753.
5 Commission Regulation (EEC) No. 2454/93 of 2 July 1993 lays down provisions for the implementation of Council Regulation (EEC) No. 2913/92 establishing the Community Customs Code.
6 Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 lays down detailed rules for implementing certain provisions of Regulation (EU) No 952/2013 of the European Parliament and of the Council’s rules for the Union Customs Code.