The convergence between Customs, VAT, and Transfer Pricing in a global supply chain

Transcription

1 The convergence between Customs, VAT, and Transfer Pricing in a global supply chain By: S., Claeys, Post-Master in EU Customs Law,

2 Table of contents Table of contents... 1 List of abbreviations Introduction The interaction between Customs and VAT Main principles, legal framework and geographical scope Main principles of Customs and VAT Customs VAT Legal framework Customs VAT Geographical scope and playfield Importation of goods Definition The importation process from a customs and VAT perspective Pre-entry, customs supervision, and temporary storage Release for free circulation Special procedures Re-exportation Other VAT exemptions upon importation Chargeable event at importation General Chargeable event of supply of goods which are technically not imported the Profitube case Documentary requirements at importation Required documents for customs purposes Required documents for VAT purposes Debtor of the customs duties and VAT Debtor of the customs duties Debtor of the VAT Exportation General Documentary requirements upon exportation Required documentation for customs purposes Required documentation for VAT purposes

3 2.3.3 Exporter Debtor of the customs duties and VAT The interaction between Customs, VAT, and Transfer Pricing Value from a Customs, VAT and TP perspective Background The general principles for customs valuation Transaction value Other valuation methods for customs Customs value and taxable amount for VAT Customs value and Transfer Pricing Underlying principles of customs value and Transfer Pricing Principles of Transfer pricing Principles of Customs Value Convergence or divergence between customs duties and transfer pricing? Objectives Valuation methods and application base Timing of valuation Transfer pricing adjustments and its impact on VAT and Customs duties Types of TP adjustments TP adjustments and VAT TP adjustments and Customs The Hamamatsu case Consequences and open questions after the Hamamatsu case Recent developments selected topics AEO and CTP BEPS Introduction to BEPS BEPS and customs Changes under UCC affecting VAT Exporter Centralized clearance ( CC ) Royalties and license fees Last sale for export...29 Conclusion Annexes

4 Annex I Territorial scope Customs and VAT...32 Annex II Comparison valuation methods for Customs and TP...34 Literature list

5 List of abbreviations AEO: Authorized Economic Operator B2B: Business to Business BEPS: Base Erosion and Profit Shifting CC: Centralized Clearance CCC: Customs Community Code, Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code CJEU: Court of Justice of the European Union CTP: Certified Taxable Person EC: European Commission EEC: European Economic Community e.g.: exempli gratia, for example ERP: Enterprise Resource Planning etc.: et cetera EU: European Union EU VAT Directive: Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax FSFE: First Sale for Export i.a.: inter alia, amongst others i.e.: id est, in other words LSFE: Last Sale for Export MS: Member State (of the EU) OECD: Organisation for Economic Co-operation and Development resp.: respectively SAD: Single Administrative Document 4

6 TEU and TFEU: Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union 2012/C 326/01 TP: Transfer Pricing TV: transaction value UCC: Union Customs Code, Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code UCC DA: Union Customs Code Delegated Act, Commission Delegated Regulation (EU) 2015/2446 of 28 July 2015 UCC IA: Union Customs Code Implementing Act, Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 UCC TDA: Union Customs Code Transitional Delegated Act, Commission Delegated Regulation (EU) 2016/341 of 17 December 2015 VAT: Value Added Tax vs.: Versus WCO: World Customs Organization WTO: World Trade Organization 5

7 1. Introduction Multinational companies are faced with an increased level of globalization. Not only when dealing with external parties, but also intercompany, an increased number of transactions are taking place in a cross-border and cross-regional context. This leads inevitably to a multitude of obligations for both direct and indirect taxation. Companies not only need to ensure their compliance with each of these taxes separately, in addition, they also need to find the balance on how to combine the different tax obligations in place. The purpose of this thesis is to examine the interaction of Customs, VAT and Transfer Pricing when operating under a global supply chain. Can it be stated that we are moving towards a convergence of these taxes? In a first part (Chapter 2), I will focus on the interaction of Customs and VAT. In a second part (Chapter 3), the interaction between Customs and TP (and VAT) will be discussed. I will conclude my thesis with some recent developments, underlining the interaction between customs, VAT, and TP (Chapter 4). Given the wide scope and range of rules governing international trade, it was a necessity to limit myself to some selected topics which I believe are the most recurring for businesses trading internationally. Further, the scope of this thesis is limited to the EU and will only cover B2B transactions. The focus will be on physical movements rather than services. Although I do consider the latter to be of great importance given the increased level of e-commerce and digitization of the world in general, a discussion of this topic would go beyond the scope and purpose of this thesis. 6

8 2. The interaction between Customs and VAT 2.1 Main principles, legal framework and geographical scope To understand the interaction of Customs and VAT, the first aspect to consider are the main principles, legislation and territorial scope governing both taxes Main principles of Customs and VAT Customs The European Customs Union is based on the principle of a single trading area where all goods circulate freely. 1 Goods entering the market get an identical treatment, disregard of the MS of entrance within the Customs Union. Contrary to the EU VAT system (see below), for import duties there is no multitude of taxable events, nor differences in duty rates applicable within the Union. The UCC only knows two dutiable events: customs debts on import and customs debts on export 2. Businesses performing dutiable imports or exports, will bear the cost of the payable duties incurred which as such, different than what is the case for VAT as a consumption tax, will become a final cost. Customs duties have a protective role for the internal market within the Customs Union by controlling what comes in and what goes out. Customs duties are an important source of income for the EU. 3 The effective customs duty burden will be determined by three elements: the classification, the origin, and the customs value of the product. The latter will be discussed in more detail in chapter 3 about transfer pricing VAT VAT is a consumption tax that weighs on the actual consumer of the good or service. VAT is however levied at each stage of the production and distribution process. 4 Nonetheless, the end consumer of the product or service bears the actual cost of the VAT. The party responsible for paying the VAT to the tax authorities is the taxable person. These taxable persons are the businesses in each stage of the production and distribution process. VAT is as such no cost for the business, as the actual VAT paid to the tax authorities can be reclaimed. 5 The income from VAT belongs to the Member State in which it was levied. There are multiple scenarios possible which lead to a taxable event for VAT 6. The taxable events for VAT are: Supplies of goods (local, intra-community and export supplies); Supplies of services (local or cross-border); Intra-Community acquisition of goods; Importation of goods. 1 TEU and TFEU, art ; ({HYPERLINK 2 UCC, art 77 resp Over 15% of the total revenue in 2016 (Source: European Commission, DG Budget). 4 EU VAT Directive, art 1. 5 Assuming it concerns a taxable person with full right of deduction and a taxable supply for which no deduction restrictions exist. 6 See EU VAT Directive, Title IV. 7

9 2.1.2 Legal framework Customs rules and VAT rules are governed by two different bodies of legislation. Although there are several reciprocal relations between the two as we will further explore, it is important to bear in mind the fact that both are governed by their own rules and concepts Customs The legal framework regulating Customs matters is laid down in the UCC and the Commission s delegated 7 and implementing 8 acts of the UCC. These legal acts have direct effect within the EU. 9 This means that all EU Member States are bound to recognise and enforce this legislation without having to transpose the rules into national legislation. National authorities can however opt to implement additional customs legislation insofar it does not deviate from the Union s legislation. Next to the UCC legislation, several international agreements with other countries than Member States on customs matters exist. Significant importance is also assigned to the case law of the CJEU, providing additional guidance on the interpretation and correct application of rules foreseen by the law VAT Starting in the 1960 s, the EEC started introducing several VAT Directives, in view of establishing a harmonized VAT system. 10 Today, the main piece of legislation governing VAT is the EU VAT Directive. A Council Directive, contrary to a Council Regulation, requires the Member States to establish a legal framework to implement the provisions thereof at national country level and is as such not directly applicable. Hence, all EU Member States have their national VAT legislation. Also for VAT, decisions from the CJEU have an important authority given the binding character of its judgments Geographical scope and playfield The geographical scope of the EU Customs 11 and VAT legislation 12 largely overlaps as both connect to the EU territory as a starting point. There are however some exceptions 13, which make an important difference in terms of VAT vs. customs obligations to be fulfilled. As an example, the Canary Islands form part of the Customs Union. They are however not part of the EU VAT area. This implies that when goods originating from this area, enter e.g. into the Netherlands, import formalities and obligations are still to be complied with for VAT. Moreover, import document needs to be drafted and liability for import VAT arises. In contrary, no obligations exist from a mere customs perspective. 7 Commission Delegated Regulation (EU) 2015/2446 of 28 July 2015 ( UCC DA ); Commission Delegated Regulation (EU) 2016/341 of 17 December 2015 ( UCC TDA ). 8 Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 ( UCC IA ). 9 TEU and TFEU, art I.a. First and Second Directives of the EC dated 11 April 1967, with the EC Sixth Directive issued on 17 May 1977 being a significant move towards a harmonized VAT system. 11 UCC, art EU VAT Directive, art See Table 1 in Annex I 8

10 Another important difference is the fact that there are still administrative frontiers 14 in place between EU Member States from a VAT point of view. Not only for importations or exportations, but also for other taxable events (cf ), certain VAT obligations will need to be complied with. 2.2 Importation of goods Given the close relationship between Customs and VAT during the import process, this section will further elaborate on this interaction Definition The term importation generally refers to the act of bringing goods into a given territory. From a Customs perspective, no particular definition is given, however, import of goods typically refers to the process whereby non-union goods obtain the status of Union goods after being released for free circulation. 15 This leads to customs duties and other taxes (mainly VAT and excise duties) becoming due, as well as the application of commercial policy measures, where applicable. The VAT Directive defines importation of goods as the entry into the Community of goods which are not in free circulation (these are the so-called non-community goods ). It further defines that also the entry into the Community of goods which are in free circulation, coming from a third territory forming part of the customs territory of the Community (i.e. Community goods), shall be regarded as importation of goods. 16 This underlines again the difference in the territorial scope of the Customs Union and the EU VAT system as described in the previous section The importation process from a customs and VAT perspective In what follows, an overview will be given of the different stages and possible customs status and special procedures possible upon importation Pre-entry, customs supervision, and temporary storage When goods are brought into the customs territory, they are subject to an entry summary declaration, usually done by the carrier. 17 This entry summary declaration enables the customs authorities to perform a risk analysis on the goods entering the territory. As from the moment the goods entered, the goods will be under customs supervision and may be subject to customs controls. 18 The supervision remains in place until a customs status of the goods has been determined. The period, of in principle max. 90 days, between presentation of the goods and assignment of the customs-approved treatment or authorized use is called temporary storage Examples are the obligation to register for VAT, file VAT returns, Sales listings and Intrastat returns on a periodical basis. 15 UCC, art 5 (23, b). 16 EU VAT Directive, art UCC, art UCC, art See UCC, art

11 At the end of the temporary storage, the goods will either be placed under a customs procedure or re-exported. 20 Until that moment, no importation from a VAT perspective has occurred Release for free circulation The standard procedure for goods when entering the customs territory of the Union is release for free circulation. This entails the fulfilment of customs formalities as well as the payment of customs duties, VAT, and other taxes, if applicable. Several exceptions or suspension regimes exists, as explained in the next part Special procedures When goods are placed under a special customs procedure upon importation, such goods are not subject to: Import duty; Other taxes related to their import, such as VAT and/or excises; Commercial policy measures. The UCC foresees in the following procedures: Transit. This can be either External Transit ( T1 goods ) or Internal Transit ( T2 goods or Union goods). From a VAT perspective Internal Transit is the same as an intra-community delivery of goods. Storage. This can refer to both storage in a customs warehouse as well as in a designated free zone. Specific use, being either temporary admission or end-use. For cross-border EU scenarios, VAT has an equivalent relief, where it explicitly refers to the temporary use for customs purposes. 22 Processing. This can be either Inward Processing Relief ( IPR ) or Outward Processing Relief ( OPR ). Also here, VAT has its equivalent for this regime in an EU cross-border context under the regime of so-called non-transfers Re-exportation Goods which are under temporary storage or under a special procedure, will be released from that regime by either releasing the goods for free circulation or by re-exporting them Other VAT exemptions upon importation Apart from the suspension regimes for customs, also other VAT exemptions upon importation are possible. 24 The most common exemptions are i) importation followed by an intra-community delivery and ii) reimportation of goods by the same person than who exported the goods. EU Member States can also introduce a VAT exemption for supplies made within tax warehouses (typically used for excise products) or similar warehouses. When a 20 UCC, art. 149(d) 21 See EU VAT Directive, art17.2(g)-(h). 23 EU VAT Directive, art17.2(f). 24 These exemptions are listed in art. 143 of the EU VAT Directive. 10

12 Member State opted for the VAT exemption of supplies within a customs warehouse, it should apply the same for supplies made in tax or other warehouses Chargeable event at importation General An important question when considering the convergence of customs duties with VAT, concerns the timing of when both taxes are to be paid. In other words, when does the taxable event occurs leading to customs duties and VAT becoming due? As mentioned previously, when imported goods are released for free circulation, customs duties become due, where applicable. In addition, the customs debt will also become due in case of non-compliance with certain customs obligations. 26 The VAT legislation refers to the moment of importation of the goods as regards the chargeable event. 27 It further also adheres to the suspension regimes foreseen in the customs legislation, in the sense that the chargeable event is postponed until the goods cease to be covered by such arrangement or situation. 28 Generally, import VAT will thus become chargeable at the same time that duties on importation become due. Important to note is that this suspension for VAT only applies to the import VAT itself. It does not automatically apply to the VAT liability on other taxable supplies performed while the goods are under the suspension regime. For the latter, the Member States may opt to exemp these supplies from VAT. This will be discussed in the next subsection. When such option to exempt is taken, it must also apply to intra-community acquisitions of goods under these conditions Chargeable event of supply of goods which are technically not imported the Profitube case As discussed previously, VAT knows several taxable events, apart from importation, i.e. the supply of goods or services and the intracommunity acquisitions of goods. Hence, the question arises what the consequences are when goods, which are technically not yet imported (i.e. released for free circulation), are supplied onwards within the EU. Can a taxable event for VAT take place before goods are imported? The VAT Directive gives no direct answer to this question. In this respect, a request for a preliminary ruling was raised to the European Court of Justice in the Profitube case. 30 In the Profitube case, the facts were as follows. Semi-finished steel products (coils) were imported from Ukraine into Slovakia on behalf of the Slovakian company Profitube. Upon arrival in Slovakia, the goods were placed by Profitube under a customs warehousing arrangement. Subsequently, in view of processing the coils into structural steel, the goods were placed under an inward processing arrangement. Once finished, the steel was sold onwards to another Slovakian company, Mercurius. Mercurius placed the steel under a customs warehousing arrangement, being the same warehouse they were placed in previously. 25 EU VAT Directive, art 160(2). 26 UCC, art EU VAT Directive, art EU VAT Directive, art EU VAT Directive, art C-165/11 Daňové riaditeľstvo Slovenskej republiky v Profitube spol. s r.o. [2012] OJ C 9 from , p

13 The Slovakian tax authorities claimed that the sale from Profitube to Mercurius should be subject to Slovakian VAT as it concerns a domestic supply of goods. Profitube, however, claimed that no VAT should be applied, since the goods in question were non- Community goods and hence, the supply was to be considered as outside scope of VAT. The debate resulted in a preliminary ruling with the CJEU to get an answer on whether a supply of goods in a customs warehouse falls in scope of the VAT provisions. I.e. is a customs warehouse part of the VAT territory and are supplies made within such warehouse taxable supplies? The Court emphasized that as a rule, VAT becomes due when goods are i) imported or ii) sold ( supplied ). In first instance, the Court addressed the question whether the goods have been imported or supplied in the meaning of the VAT Directive. As the goods were continuously placed under such arrangement, they cannot have been subject to an importation. The fact that the goods changed customs arrangement has no relevance. Therefore, the obligation to pay VAT can only be based on the existence of a supply of goods. For a supply of goods to be taxable, certain cumulative conditions are to be met. 31 First, there must be a transfer of the right to dispose of tangible property as owner 32. Second, it must concern a supply for consideration. Third, the supply must be affected by a taxable person as such. It was not disputed that these three conditions were all met. As a last condition, the Court examined the question whether the transaction was carried out within the territory of the European Union. In other words, is a customs warehouse considered to be part of the territory of the Member state, and hence, falling under the scope of the provisions of the VAT Directive? When looking at it purely geographically, there is no doubt that in the case at hand, a customs warehouse located in Slovakia falls within the geographical scope of the Community. The question is however, whether a customs warehouse on itself falls within the territorial application scope of the VAT Directive. When reading the provisions of the EU VAT Directive, it is indisputable that customs warehouses are part of the EU territory 33. The only territories which are excluded from this territory are explicitly listed in article 6 of the EU VAT Directive. Customs warehouses are not on this list. Also for customs purposes they fall within the scope of the Customs Union. 34 The CJEU noted that the EU VAT Directive does not make a distinction in terms of defining a supply of goods whether the supply concerns Community goods or not. The fact that the goods in question have not been subject to an actual importation is therefore of no importance. 31 See EU VAT Directive, art 2(a) and See Case C 320/88 Shipping and Forwarding Enterprise Safe [1990] ECR I 285, paragraph 7; Joined Cases C 497/09, C 499/09, C 501/09 and C 502/09 Bog and Others [2011] ECR I 1457, paragraph This was also confirmed in a previous case C 305/03 Commission v United Kingdom [2006] ECR I 1213, paragraph Ibid, para

14 The conclusion of the CJEU was therefore that the sale from Profitube to Mercurius constitutes a supply of goods in the meaning of the VAT provisions. Hence, it is subject to the obligation to pay VAT under the general rules for VAT. Nevertheless, Member States have the option to exempt certain supplies of goods from VAT when the supplied goods are intended to be placed under, amongst others, a customs warehousing procedure or inward processing arrangements Documentary requirements at importation Required documents for customs purposes When goods enter the Customs territory of the Union, a customs declaration is to be made to subject the goods to a certain customs procedure. 36 This declaration can take several forms including deemed declarations 37. The official standard model is SAD. Depending on the customs procedure, there are certain documents to accompany the declaration. For goods released for free circulation the usual documents required are: the invoice based on which the customs value of the goods is declared, as well as any other document or declaration needed to assess the customs value, the documents related to the preferential tariff arrangements, where applicable documents concerning previous customs procedures and transport documents Required documents for VAT purposes For VAT purposes, the most relevant document when it comes to importations, is the customs declaration (usually the SAD). In view of VAT deduction of import VAT, the person deducting the VAT must hold an import document where he is indicated as consignee or importer and on which the VAT due (or the elements needed to calculate the VAT due) is mentioned. 38 Contrary to what applies for customs purposes and different than what is the case for VAT deductions on other taxable transactions for VAT, holding an invoice is no legal requirement for import VAT deduction. 39 Hence, in terms of base document, VAT legislation converges to customs legislation. As explained in the example under section (geographical scope), when goods are imported from a third country which is part of the customs territory, from a VAT point of view it will still need to comply with the same formalities as imposed on goods coming from a third country outside the customs territory Debtor of the customs duties and VAT Debtor of the customs duties The debtor for customs purposes of duties payable on import (and export) is in first instance the declarant or the person on behalf of whom the customs declaration is made in case of indirect representation. 41 In cases of non-compliance, also the person who was required to fulfill the customs obligations, the holder of the goods any person who knew 35 EU VAT Directive, art 156 (c). 36 UCC, art See UCC DA, art 136 and 141. E.g. for non-commercial items contained in traveler s luggage. 38 EU VAT Directive, art 178(e). 39 The fact that there is no invoicing obligation for importations in the EU is also explicitly confirmed in the explanatory notes related to Invoicing Directive 2010/45/EC. 40 EU VAT Directive, art UCC, art 77.3 and

15 or was reasonable ought to know the obligations were not fulfilled, as well as any participant to the act that led to the non-compliance are considered as debtor for customs purposes When this would lead to several persons being liable for the duties, there is a several and joint liability for the payment of the duties Debtor of the VAT VAT shall be payable by any person or persons designated or recognised as liable by the Member State of importation. This is usually the customer or an import agent acting on the customer s behalf. When goods are subject to a special arrangement or treatment, the debtor of the VAT shall be the person who causes goods to cease to be covered by such arrangement or treatment. 44 In addition, Member States may introduce a joint and several liability for the payment of the VAT for any other person. 45 Given this broad interpretation of debtor for customs duties and VAT, it is in practice likely that there will be a concurrence between VAT and customs debt, especially where Member States have used the option to appoint any other person as being jointly and severally liable for the VAT. As a closing remark, it is interesting to note that the VAT provisions may lead to a disconnection between liability to pay the import VAT and the right to deduct that VAT. Art.168 (e) of the EU VAT Directive foresees that the import VAT is deductible by the taxable person insofar the goods and services are used for the purposes of the taxable transactions carried out in that Member State. This might lead to situation where a taxable person is liable to pay the VAT at import, but has in theory no right to deduct it Exportation General When goods leave the customs territory of the Union, an exportation takes place. Exportations entail the application of export formalities, including commercial policy measures and, where appropriate, export duties. 47 From a VAT perspective, exportations are exempt from VAT. 48 In the next sections, a concise overview will be given on the formalities to be complied with when exporting goods. 42 UCC, art 79 and See in this respect also case C 454/10 Oliver Jestel v Hauptzollamt Aachen [2011] OJ C 25 from , p EU VAT Directive, art EU VAT Directive, art Such situation was also the subject of CJEU case C-187/14 Skatteministeriet v DSV Road A/S [2015] OJ C 279 from , p UCC, art 267 (3). 48 EU VAT Directive, art

16 2.3.2 Documentary requirements upon exportation Required documentation for customs purposes Goods that are to be taken out of the customs territory of the Union are to be covered by a pre-departure declaration. This can, depending on the customs status of the goods, exist of a customs declaration, a re-export declaration, or an exit summary declaration. 49 The goods are to be presented to customs on exit by either the person taking out the goods of the customs territory of the Union, by the person in who s name or on whose behalf the goods are taken out of the customs territory of Union, or, by the person assuming responsibility for the carriage prior to exit. The exit summary declaration is to be lodged by the carrier. Alternatively, it can be lodged by the exporter, the consignor or another person in whose name or behalf the carrier acts, or any other person who is able to present the goods or have them presented at the customs office of exit Required documentation for VAT purposes The EU VAT Directive does not explicitly state which documents are needed from a VAT perspective upon exportation of goods, other than for goods included in a traveller s personal luggage. 51 For export supplies, it is however of utmost importance to have the necessary proof at hand to proof the eligibility to the VAT exemption for export. In practice, most Member States assign a predominant importance to the export customs declaration, stamped for export by the customs office of exit. In practice, the authorities often require additional documents, such as transport documents, order confirmations, bill of lading, import document in country of arrival etc. Such corresponding set of documents should enable the party relying on the VAT exemption for export to proof the goods left the Community and were delivered in a destination outside the Community Exporter For a current debate on the interpretation of exporter for customs and VAT, reference is made to chapter 4 of this thesis Debtor of the customs duties and VAT As regards the debtor of the customs duties (and VAT), where applicable, reference is made to section 2.2 related to importation. 49 UCC, art UCC, art EU VAT Directive, art Currently, a request for a preliminary ruling to the CJEU is pending on whether it is sufficient to have a TIR carnet validated by the country of destination as proof for export in case the customs declaration is missing (See C-495/17 Cartrans Spedition SRL). 15

17 3. The interaction between Customs, VAT, and Transfer Pricing When it comes to the interaction between Customs, VAT, and Transfer Pricing ( TP ), there are two main areas to emphasize. First, there is an important interaction between Customs/VAT and TP in the field of valuation, especially for transactions taking place between related parties. Second, the aspect of pricing adjustments plays an important role. Both angles will be elaborated in the following sections. 3.1 Value from a Customs, VAT and TP perspective A correct customs value is an essential element for the well-functioning of a customs union. The equal treatment of importers and the prevention against any distortion of competition resulting from a different application of the rules for valuation and related duties are important guarantees to be fulfilled Background For customs purposes, the WTO Valuation Agreement 53 (implementing art. VII of the GATT1994) is a cornerstone in the field of customs valuation. 54 This importance is also reflected in several cases brought before the CJEU. 55 The Court underlined in these cases that the objective of the customs valuation rules is about ensuring a fair, uniform, and neutral system that leaves no room for fictitious or arbitrary customs values. One must search for the real economic value of an imported good. The implementation of these principles can be found in art of the UCC The general principles for customs valuation The primary basis and preferred method for customs value is the transaction value or TV. 56 When the TV is not acceptable or not available, there are five other methods of customs valuation foreseen in the WTO Valuation Agreement Transaction value The TV is the price paid or payable for the goods when sold for export to the country of importation. 57 To this value, adjustments are to be made in case certain costs are incurred by the buyer which are not reflected in the price used for the customs value. 58 These adjustments are done to ensure the price actually paid or payable reflects the total payment made or to be made for the imported goods by the buyer to or for the benefit of the seller. 59 In the first place, there are certain upward adjustments, to reflect specific costs or obligations incurred by the buyer in relation to the acquired goods. Typical examples are royalty payments and license fees and costs of freight, packaging, and insurance. 53 Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 ( WTO Valuation Agreement ). 54 Can e.g. be derived from the fact that the EU Guidance on customs valuation extensively refers to the principles and case studies of the WCO (see e.g. EC Guidance on Customs Valuation, Taxud B4/ (2016) revision2, under para. 2.2) 55 See e.g. Case C-306/04 Compaq Computer International Corporation v Inspector der Belastingdienst Douanedistrict Arnhem [2006] OJ C 228 from , para WTO Valuation Agreement, art 1 57 UCC, art 70 and WTO Valuation Agreement, art WTO Valuation Agreement, art Interpretative Note to WTO Valuation Agreement, art 1. 16

18 Secondly, there are also certain downward adjustments that may be applicable such as buying commissions, transport costs related to transport after arrival in the Customs territory and financing costs. The use of the TV as customs value can only be applied in case the following cumulative conditions are met: 1) There must be no restrictions as to the disposal or use of the goods by the buyer (other than legal, geographical related restrictions or in case the restriction does not substantially affect the value). 2) The value cannot be subject to conditions or considerations for which no value can be determined. 3) The proceeds resulting from a subsequent resale, use or disposal of the goods by the buyer may not directly or indirectly benefit the supplier. 4) The buyer and seller are not related persons or the relationship did not influence the price. When a transaction takes place between related parties, it does not automatically imply that the TV cannot be accepted as customs value. Customs authorities will seek confirmation on whether the relationship influenced the declared price. When doubts arise about the acceptability of the price, customs authorities will need to further investigate the surrounding facts. 60 This can be done by, amongst others, applying the circumstance of sale test, where it will consider industry practices, price setting with unrelated parties, expected profit margins etc. If, based on the tests performed, it is established that the TV of the imported goods is not acceptable, customs will determine the customs value by applying one of the other valuation methods Other valuation methods for customs Without going into too much detail, when the TV method is inadequate, there are five other valuation methods that can be applied to arrive at the customs value. These methods are to be applied in a strict order, where only the order of method four and five (i.e. deductive value and computed value method) can be changed. The possible valuation methods, to be applied when the TV is inadequate are the following: 1) TV of identical goods; 2) TV of similar goods; 3) The value based on the unit price at which the imported goods, or identical or similar imported goods, are sold within the customs territory of the Union in the greatest aggregate quantity to persons not related to the sellers; 4) Computed value, based on the costs of production, materials, profits, general expenses, and certain other items; 5) Fall-back method, whereby the value will be calculated based on reasonable means Customs value and taxable amount for VAT To calculate the appropriate import duties and VAT to be paid, it speaks for itself that the assessment of a correct taxable base is key. The value of the taxable base will directly affect the (ad valorem) duties and VAT payable. 60 UCC, art 70(3)(d) jo. UCC IA, art

19 Article 73 of the VAT Directive establishes the taxable amount for a supply of goods or services. According to this article the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply". In other words, everything that is considered as a consideration, which typically is captured by the contractual agreements in place, constitutes the taxable basis. 61 This is also referred to as a subjective value. 62 For importations into the EU, however, the taxable amount to be used to calculate import VAT, adheres to the value determined for customs purposes. 63 Hence, VAT relies on a correct value established at customs level. This principle is also confirmed by the fact that having a valid VAT invoice is no requirement at importation. 64 There are some corrections to be made to the customs value to arrive at the taxable amount for VAT, such as inclusion of certain taxes and duties and incidental expenses as commission, packing, transport, insurance incurred until destination as well as the exclusion of certain discounts and rebates. 65 When certain services related to the importation of goods are rendered, these should be excluded from VAT when already included in the taxable base for customs. 66 Without going into too much detail, it should be noted that in practice, difficulties often arise with services linked to the goods supplied. In principle, services being a condition of sale are to be included in the taxable base for customs. However, when such services are invoiced separately, VAT might become chargeable twice: at the import of the goods as well as on the service itself. 67 Although, some practical issues may arise in case of composite supplies, the above leads to the conclusion that there is a high degree of convergence between Customs duties and in terms of customs value resp. taxable base at importation. Where customs value and Transfer Pricing, as we will see under , always search for an objective value, reflecting a fair market value, VAT only has such provision in case of tax evasion or fraud, i.e. when parties are associated (family, financial or other economic link). This provision is optional for Member States to implement. If such circumstances exist, the VAT Directive prescribes the use of an open market value. 68 The open market value is defined as the full amount that, in order to obtain 61 See also CJEU case law, e.g. C-230/87 Naturally Yours [1988], C-40/09 Astra Zeneca [2010]. 62 See comments VAT Committee, Working paper No 923, Possible VAT implications of Transfer Pricing, p EU VAT Directive, art As can be derived from i.a. art. 178 e) of the EU VAT Directive and Explanatory notes for Council Directive 2010/45/EU on VAT invoicing rules (see comments on art. 219a section B-1). 65 EU VAT Directive, art EU VAT Directive, art This is the so-called double dip for VAT and can especially constitute a burden for taxpayers with limited right of VAT deduction. Examples are CJEU cases C-41/04 Levob Verzekeringen BV and OV Bank NV v Staatssecretaris van Financiën [2005] and C-491/04 Dollond & Aitchison Ltd v Commissioners of Customs & Excise [2006]. 68 EU VAT Directive, art

20 the goods or services in question at that time, a customer at the same marketing stage at which the supply of goods or services takes place, would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax. It further states that in case no comparable supply is available, the open market value to be used is the purchase price of the same or similar goods. In absence of a purchase price, the actual cost price at the time of supply should be used. 69 This comes close to the principle applied in customs matters under the circumstance of sales test. It also reflects the sensitivity of the tax authorities when dealing with associated parties, similar to what is the case for transfer pricing. Nevertheless, being an optional anti-avoidance rule and an exception to the main principle of subjective value 70, its scope of application for VAT is considered narrower compared to what applies for transfer pricing Customs value and Transfer Pricing Customs and TP authorities have a similar viewpoint on the fact that a fair TV, free from influence need to be established (see subsection ). Nevertheless, there are also important divergences, resulting from the fact both approach the transactions to be valued in a different way. Also in terms of what they intend to achieve with the set pricing, is different. This will be subject of subsection Underlying principles of customs value and Transfer Pricing Principles of Transfer pricing Before digging into the convergences and divergences between customs value and transfer pricing, it is important to understand what both valuation systems envisage and by which rules they are governed. Transfer pricing is all about ensuring a fair valuation of cross-border transactions between affiliated enterprises integrated under the same management. 71 It aims at preventing prices to be set at artificially high or low levels and as such distort the taxable income allocated to the different jurisdictions. It also aims at avoiding double taxation. For these reasons, transfer pricing has been historically seen as an aspect of direct taxation. Nevertheless, in today s world of increased globalization, where a large share of the cross-border transactions concerns intercompany transactions, the link with indirect taxation, such as customs duties and VAT is more present than ever. 72 Direct tax authorities seek to apply the arm s length principle. This principle is elaborated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ( OECD TP Guidelines ). These guidelines, although not legally binding, have an important authority when it comes to governing transfer pricing practices in OECD countries. The arm s length principle states that transactions should be valued as if they had been carried out between unrelated parties, each acting in his 69 EU VAT Directive, art Case C-621/10, Balkan and Sea Properties (2012) EU:C:2012:248, para See OECD glossary under transfer price, 72 Valuation of Related Party Transactions for Transfer Pricing, Customs and VAT purposes was the subject of two major conferences jointly organised by the World Customs Organisation (WCO) and the Organisation for Economic Cooperation and Development (OECD) in May 2006 and May

21 own best interest. 73 In other words, it will compare the conditions of controlled transactions with comparable uncontrolled transactions. Comparability will follow e.g. from the characteristics of the goods or services sold, the functions performed and risks assumed by each party, contractual terms, economic circumstances, and business strategies. The OECD TP Guidelines foresee in 5 methods to arrive at an at arm s length price Principles of Customs Value As seen before, it should be ensured that the customs value is based on a fair, uniform, and neutral system that precludes the use of arbitrary or fictitious customs values. 74 When dealing with intercompany transactions, the customs authorities will perform certain tests to ensure the applicable price has not been influenced by that relationship Convergence or divergence between customs duties and transfer pricing? When reading these principles, one might arrive at the conclusion that both customs duties and transfer pricing, although having a different set of rules at the source, are grounded on the same basis principle: finding the at arm s length price or fair value for cross-border transactions between related parties, that is free of influence. In practice however, important differences can be observed in how this general principle is applied. Examples are the diverging objectives of direct vs. indirect taxes, the valuation methods used and the level at which they are applied, the timing at which the pricing is evaluated, documentation requirements and the approach taken for retrospective pricing adjustments Objectives By applying a correct transfer price, direct tax authorities are focused on a fair distribution of income (and thus taxes) between the countries at stake. The income tax authorities of a given importing country are inclined to value the transfer price as low as possible. A low price will result in a higher taxable profit and less deductible expenses for the importing company, and hence, a higher tax revenue for the authorities in that country. Indirect tax authorities have the exact opposite interest. The higher the price at importation, the higher the duties they can levy (where applicable), and thus, the higher the income for these authorities. The same applies for the VAT collected at the border, which is derived from the established customs value Valuation methods and application base When considering the different methods used for valuation in transfer pricing versus customs duties, great similarities can be found (see annex 2 for a comparison). There are two main categories of methods applied for TP: The traditional transaction based methods the preferred option according to current OECD TP guidelines and the transactional profit-based methods. In practice, these transaction based methods are rarely applied in their pure, strict form for TP valuation. TP will look at the broader supply chain and economic circumstances during a certain timeframe to find the at arm s length price or range that should be applied, rather than looking at a single transaction level. 73 See OECD glossary under arm s length principle, 74 See Para. 4 Agreement on the Implementation of Art. VII of the GATT. 20

22 This implies that the transfer pricing is usually applied at an aggregated level rather than at a transactional level. Since customs value is looked at from a transactional level, it is obvious that both are difficult to compare due to the lack of a (transactional) link Timing of valuation As the determination of the customs value is done at a transactional level, also the moment of valuation evidently takes place at the time the transaction takes place. This is, in case of importation of goods, the moment the goods are presented to customs in view of their release into free circulation. For transfer pricing the mechanism works in a significant different manner. As mentioned above, TP considers aggregated values for a given period, usually the financial year. When it appears that the transfer price used is not at arm s length or does not correspond with the targeted profit margins and related intercompany pricing set by the company, transfer pricing adjustments are performed. These adjustments and their impact on the value declared for customs will be discussed in the next part. 3.2 Transfer pricing adjustments and its impact on VAT and Customs duties In this section, it will be investigated how transfer pricing adjustments may or may not affect the customs value (and the taxable amount for VAT at importation) Types of TP adjustments There are two main categories of TP adjustments. First, there are those made by the tax authorities, after the tax return for the year was filed ( primary adjustments, corresponding adjustments and secondary adjustments ). These are adjusting the taxable profit as such, rather than the pricing itself. Second, there are those corrections made by the company itself, usually performed before filing of the tax return for the year in question ( compensating adjustments ). Under compensating adjustments, the taxpayer in fact anticipates a primary adjustment by the tax authorities. These adjustments can take different forms. Often, they take the form of dividend payments or (additional) royalties, but they can also take the form of an actual retrospective pricing adjustments (e.g. issuing an intercompany credit or debit note) TP adjustments and VAT When making TP adjustments, the question inevitably arises about the impact such adjustments have on VAT and customs duties paid. For VAT, this question has been dealt with recently at the level of the European Commission in a working paper issued by the VAT Committee. 75 In this working paper, the VAT Committee addressed the question whether a TP adjustment could qualify as a taxable supply. To qualify as a taxable supply, there are two conditions to be met: first, it must be a supply made in exchange for consideration, and second, a direct link must be established between them. As regards the first condition of existence of a taxable supply the VAT Committee states that it is not enough that the adjustment is only made for tax purposes. It must also be 75 See Working Paper No. 923 of the EC VAT Committee. 21