[Opinion] Achtung – German Rulings on the Customs and Transfer Pricing Conundrum

Amer Qureshi – [2023] 151 taxmann.com 199 (Article)

Introduction

Intra-group trade within different cross border arms of multinational companies (MNCs) has increased exponentially over the past decades across the globe. This rapidly growing cross border trade within MNCs has made prices of goods traded amongst related entities, one of the most closely scrutinised areas for Revenue authorities. Whilst the primary objective of Customs valuation and Transfer Pricing (TP) methodologies has always been the same – to ensure that the price for cross border related party transactions is not in any way influenced owing to the relationship between the parties – there exists a dichotomy due to a contrary impact. On one hand, higher the import value of goods, higher would be the Customs duty collected; on the other hand, lower the import value of goods, lower would be the deduction available (i.e., higher would be the taxable income) to taxpayers for corporate income-tax purposes.

In the context of global supply chains of MNCs, Limited Risk Distributor (LRD) model – wherein the local related party distributor receives a targeted operating margin for its role – has become fairly common worldwide. To ensure that the targeted operating margin is achieved in a particular fiscal year, year-end TP adjustments (TPAs) to the import price of goods have also become commonplace. For testing the margins of such LRDs for compliance with local TP regulations, typically the Transactional Net Margin Method is adopted in the TP documentation (Local File).

This article deals with a couple of pertinent German case laws covering both scenarios – upward as well as downward year-end TPAs.

BFH Ruling

A German distributor of a Japanese parent company was importing goods from the Japanese parent entity and determined the Customs value based on the prices invoiced during the year using the transaction value method. In order to align the operating margin with the arm’s length level, year-end balancing payments were made, thereby resulting in a downward TP adjustment (illustrative example given below).

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