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Customs valuation and transfer prices

1.   General

The primary basis for determining the customs value of goods is the transaction value, which is the price actually paid or payable on the sale of goods for export to the customs territory of the EU, to be adjusted if necessary (see Article 71 UCC, including royalties).


In the case of affiliated companies, i.e. in the case of goods transactions between two group companies or between a permanent establishment located inside and outside the EU, stricter standards apply, as there is a risk of price influence due to the affiliation of the companies or permanent establishments (Art. 70 Para. 3 d UCC).

2.   Price Influence Due to the Affiliation

Price influencing is a so-called undefined legal term. It is to be interpreted with reference to the "General Agreement on Tariffs and Trade" (GATT) treaties, the WCO's comments on them and EU and national case law. The commentary and recommendations of the WCO have no legal character but, according to the prevailing legal opinion, serve as expert opinion in the interpretation of undefined legal terms.


The WCO published the "WCO Guide to Customs Valuation and Transfer Pricing" in 2015, with a new edition in 2018, according to which tax transfer pricing methods are generally suitable for proving that there is no price manipulation. The most practice-relevant statements can be found in case study 14.1 (page 89 ff.), according to which


  • tax transfer pricing documentation can be used for the examination of price manipulation by the customs authorities and


  • Tax transfer pricing methods may be suitable for proving that there is no price manipulation.


Extract from case study 14.1 of the WCO Guide to Customs Valuation and Transfer Pricing:

Hamamatsu, Jahresendanpassungen, FG München, EUGH, BFG, Zollwert

The fact that further information ("additional information") can be consulted during the audit has a restrictive effect. Accordingly, transfer pricing evidence is handled quite differently in the individual GATT member states.

3.   Transfer Pricing Basics

a.) Transfer pricing methods


According to the WCO Guide to Customs Valuation and Transfer Pricing, the arm's length principle for tax purposes also applies when examining price influence in customs valuation, i.e. in the case of goods transactions between related parties.

Like "price influence", the arm's length principle is an undefined legal concept that must be interpreted by case law (in particular the established case law on disguised profit distribution) and with the help of commentaries by the OECD. The most relevant commentary is the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 ("TP Guidelines").


The principle of the TP Guidelines is that related parties must behave in the same way as unrelated third parties would have behaved (arms length principle). Unlike the WCO, however, the OECD has created a comprehensive set of transfer pricing methods that can be used to prove arm's length. According to this, the arm's length nature of transfer prices can be proven using the following methods:

  • Transaction-related methods of transfer pricing

    • Comparable uncontrolled price method for determining the transfer price

    • Resale method for determining the transfer price (resale price method)

    • Cost plus method for determining the transfer price (cost plus method)

  • Profit-oriented methods of transfer pricing

    • Profit split method

    • Transactional net margin method

From a customs and tax perspective, proof that the price is not influenced by the affiliation, i.e. that it is at arm's length, must be provided for each individual goods transaction.

b.) Determination of transfer prices (ex ante or ex post)


There are problems between transfer prices and the determination of the customs value, particularly with regard to the time of determination. The customs value is systematically linked to the value of the goods at the time of import, while transfer prices are generally determined on the basis of historical values. The only exception to this may be the price comparison method. With all other methods, prices are determined on the basis of benchmarks (e.g. margin, cost mark-up or operating profit) which, in the absence of real-time data, are based on a database that is usually 1 to 2 years old. Another exception to this is the profit split, which can only be determined at the end of the year.


With regard to pricing, the TP Guidelines distinguish between two methods:

  • Price setting approach: According to this approach, the parties set a price at the beginning of the financial year on the basis of which the affiliated companies achieve an arm's length result. This is subject to the proviso that the business performance corresponds to that on which the price is based. Any deviations in business performance from expectations are borne by the parties. In practice, assumptions about business development are often the subject of dispute, as these are often tested against current knowledge as part of a tax audit (hindsight is always wiser).  


  • Outcome testing approach: Here the price should be set in the same way as with the price setting approach, but the parties agree to adjust the prices at the end of the year if the business result is not within the agreed range (e.g. the routine distributor is outside the benchmarked operating ranges). These are so-called year-end adjustments.

Year-end adjustments are widely used in corporate practice, also due to the fact that some countries only accept the price setting approach if it is to their advantage. The main advantage of year-end adjustments is that the uncertainties with regard to possible business developments are corrected with the year-end adjustment, resulting in an arm's length result.


Year-end adjustments must be reported to customs in accordance with Section 153 AO. The Federal Ministry of Finance states "Subsequent transfer price adjustments in the form of subsequent charges by the seller must be reported immediately by the declarant to the competent main customs office (Section 153 AO). In the case of subsequent transfer price adjustments in the form of credit notes from the seller, there is sometimes a claim for reimbursement. However, the adjustment must have been contractually agreed between the parties to the purchase agreement prior to the imports in terms of reason and amount and must be product-related." (BMF IV B 5 - S 1341/19/10017 :001; DOK 2021/0770780, BStBl. I p. 1098).

c.) Year-end adjustments in customs law


In accordance with the BMF letter cited above, the German customs administration is generally willing to recognize year-end adjustments in both directions for customs purposes. In practice, however, the official requirements for price reductions are so high that they are difficult for traders to demonstrate. In contrast to tax law, customs requires proof of arm's length at product level, which as a result virtually rules out fundamental economic considerations on deviating product profitability within a product portfolio or mixed calculations. Furthermore, it contradicts the benchmarking approach, which in principle can only present average values across a product portfolio, but cannot provide product-specific key figures.


The requirements for year-end adjustments from a customs law perspective differ considerably from those for tax purposes, as these are aimed at the product level. Accordingly, it is crucial that the distribution or supply agreements between the affiliated companies take this into account accordingly (e.g. provisional nature of prices until the year-end adjustment). These points are often irrelevant from a tax perspective and are therefore often not taken into account by in-house tax functions or lawyers and tax advisors without customs expertise when drawing up contracts.

The German customs administration currently only sees indications of price influencing if a year-end adjustment is accompanied by a price reduction (tax profit increase). In this respect, the current legal opinion of the German customs administration appears to be purposefully to the detriment of the taxable person. The customs administration feels vindicated in its approach by the recent case law of the European Court of Justice in the Hamamatsu case, in which a customs refund was requested due to a year-end adjustment, which was denied by the European Court of Justice.


The first follow-up ruling on the reverse Hamamatsu case has now been issued, which deals with the question of whether profit-reducing year-end adjustments (increase in product price) are relevant for the customs value. This was denied by the Munich tax court, judgment of 27.10.2022 - 14 K 588/20 as a result of the ECJ case law on the Hamamatsu case.

To assume that year-end adjustments in both directions are now irrelevant appears to be a fallacy, as this would lead to massive abuses. If the case law of the Munich tax court is confirmed by the highest court, it can be assumed that the customs authorities will have to delve much deeper into the issue of price manipulation and transfer prices. An administratively efficient solution that accepts blanket adjustments based on the transfer price would then hardly seem possible. Instead, it will be necessary to examine how the actual price was formed at the time of import, i.e. just as in tax law, customs will have to deal with the question of pricing in detail. In this context, the principles of the price setting approach could gain considerable importance for the purposes of customs value. This would lead to a massive additional administrative burden at the level of the customs administration and the customs debtor, but without improving the quality of the customs valuation.

4. Transfer Pricing Documentation

In principle, every taxable person who carries out business transactions with foreign affiliated companies or permanent establishments is obliged to prepare transfer pricing documentation (Section 90 (3) AO).

There are exceptions for smaller companies that can prove compliance with the arm's length principle by providing information and do not have to submit comprehensive documentation, provided that the total remuneration for supplies to or from related parties does not exceed MEUR 6 and does not exceed EUR 600,000 for services (Section 6 GAufzV).


The tax authorities may request the submission of records in accordance with paragraph 3 at any time. Customs authorities are tax authorities within the meaning of the German Fiscal Code.

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