Ian Worth explains why transfer pricing adjustments can cause problems when it comes to customs valuations and explains a possible solution.
When considering customs valuation, it is important to remember that an estimated 95% of all import declarations are submitted using customs valuation Method one (transaction value). This is based on the invoice value of the goods when sold for export to the UK and requires that the sale for export as shown on the invoice represents the full price paid or payable by the buyer to the seller. Other valuation methods apply in hierarchical order where Method 1 cannot be used, but it is not necessary to expand on those for the purposes of this article.
Related party transactions and transfer pricing
Transactions between related parties can raise concerns as to the integrity of the customs value declared and presents challenges in justifying the fairness of such a value. To address this, many inter-company transactions are undertaken in accordance with a documented transfer pricing agreement.
Such an agreement is primarily designed to demonstrate the accuracy of the price charged between related parties so that the correct tax treatment is applied in the correct jurisdiction. This protects revenue authorities from multinational companies inflating their taxable profits in lower tax territories.
Transfer pricing agreements are often complex, and in some cases include provision for an adjustment to be made after the goods in question have been sold. In these circumstances, the adjustment calls into question the reliability of the original sale value declared for customs purposes, and often (but not always) represents a retrospective uplift to the value on which customs duty has been paid in the importing country.
Conflict between transfer pricing adjustments and Method 1
The use of a “true-up” mechanism within a transfer pricing agreement can lead to an adjustment to the invoice value for the goods. It has long been the case that customs authorities consider that intercompany transaction values may be vulnerable to manipulation, as a tactic to reduce the customs duty liability. However, where a documented transfer pricing agreement is in place, this can be valuable supporting evidence to justify the integrity, or “arm’s length” nature, of the eventually agreed transaction value.
Although the invoice value is often an acceptable and legally compliant value for customs purposes that fulfils the requirements of Method 1, difficulty arises where the transfer pricing agreement includes a subsequent adjustment mechanism. This creates uncertainty as to whether the declared value at the time of import was the true 'transaction value'. This issue was brought into focus by the decision of the European Court of Justice (ECJ) in the Hamamatsu case. HMRC’s guidance reflects the principles established in that case.
The decision in Hamamatsu
In Hamamatsu Photonics Deutschland GmbH v Hauptzollamt München [2017] C-529/16, the ECJ was asked to give a preliminary ruling on whether an agreed transfer price comprising the following parts could form the basis for a customs value:
- an amount initially invoiced; and
- an adjustment made after the end of the accounting period where the effect of that adjustment could not be known at the end of the accounting period.
Hamamatsu Photonics Deutschland GmbH (Hamamatsu) purchased imported goods from its parent company in Japan. It declared a customs value equal to the price charged which was determined in accordance with the advance pricing agreement concluded between the group and the German tax authorities. Following its normal practice, the group later adjusted the amount charged – in this case, downwards – to ensure that the sale price met the arms-length principle. Hamamatsu applied for and was refused the repayment of customs duties, and the dispute found its way to the ECJ.
Having found that a subsequent adjustment to a declared customs value could only be made in limited circumstances relating to defects in the goods discovered after their release, the ECJ concluded that the rules do not permit an agreed transfer value arrived at in the circumstances set out above to form the basis for adjusting the declared customs value.
The recent decision of the ECJ in Tauritus UAB v Muitinės departamentas prie Lietuvos Respublikos finansų ministerijos [2025] Case C‑782/23 has helped to clarify the principles established in Hamamatsu. In this case, Tauritus imported diesel fuel and jet fuel into Lithuania under contracts that allowed for invoices to be issued with a provisional price, and for that provisional price to be adjusted at a later date taking into account average market prices and exchange rates over a specified period. Although only the provisional price was known at import, the ECJ ruled that the transaction value method could be used in these circumstances, as the later adjustment was to be made by reference to “objective factors the value of which is beyond the control of the parties”. Put simply, where the initial price is found to be too low, additional duties are due, and where it is found to be too high, a refund of duties paid may be sought.
At first glance, it may appear that the decision in Tauritus conflicts with that in Hamamatsu. However, as explained by the ECJ, the two sets of circumstances are different as, in Hamamatsu, “the revision of transfer prices” was “concluded between companies belonging to the same group, on the basis of an a posteriori allocation of residual profits between the entities of that group, on the basis of criteria set by the parent company”. Importantly, in Tauritus, the final price was to be determined by objective factors over which neither party had control.
HMRC’s default position
The default position from HMRC is that where it is known that an adjustment may be made to the value of goods after the time of import, the invoice value at import does not represent the full price paid or payable by the buyer, and therefore disqualifies the use of Method 1.
This requires the importer to then apply a different valuation method, usually more complex, alongside a subsequent disclosure to report and account for any additional duty due arising from the adjustment. However, in reality most declarations continue to use the invoice value incorrectly, with true-up payments not being declared.
A possible solution
A number of customs valuation specialists from industry and practice recently met with HMRC’s customs valuation policy team to continue discussions around the valuation method to be applied for goods traded between related parties, where the price at import may be subject to a subsequent adjustment.
A potential solution has been proposed. This allows for the use of a Method 1 customs value, even where it is known that a future adjustment may be made, but only where the importer has applied to HMRC for an “advance valuation adjustment agreement”.
This agreement would set out the means by which an adjustment will be calculated and declared, and would need to be noted on the import declaration to identify the obligation to submit an adjustment. Without an approved agreement in place, importers would not be permitted to use Method 1 for related party transactions where it is known that a future adjustment may be made.
Next steps
The proposal has been broadly welcomed by customs valuation specialists. The ICAEW Duties Committee would welcome input from members and UK importers, to take forward with HMRC’s Valuation policy team in developing this proposal. To share your views, please email Ed Saltmarsh.
Ian Worth, Customs Director, Menzies LLP.
