Customs and tax cooperation in the EU - Amazon S3...Customs valuation versus transfer pricing...

Customs and tax cooperation in the EU

Prof. Walter de Wit Erasmus University Rotterdam, partner EY (Ernst & Young) Global

Trade

27 September 2017

walter.de.wit@nl.ey.com

1

Program

• Areas of cooperation;

• Customs and VAT, introduction;

• Procedure 42, enhanced cooperation between

customs and VAT authorities;

• E-commerce, challenges for VAT and customs;

• Cooperation between customs and tax

authorities: transfer pricing and customs

Overview

Three areas where cooperation can be

enhanced:

- Legislation;

- Exchange of information;

- Data sharing;

Introduction to the EU customs and

VAT system

• Customs duties, uniform base (Union Customs

Code), but national customs authorities;

• EU is a customs union (revenue flows to EU);

• VAT is harmonised within the EU, but VAT

remains a national tax;

• Revenue is for EU Member states;

• No borders between Member states;

Customs and VAT in the EU

• Customs duties and VAT collected

simultaneously;

• Customs authorities responsible for collection

of VAT on import;

• VAT on import suspended while goods still

under customs suspension;

• As soon as suspension end, customs duties

and VAT on import become due.

Customs and VAT in the EU

• VAT is levied at import according to

customs rules, so far so good…

• However, mismatches occur: Procedure

42, exemption of VAT on import if products

are intra-community supplied to another

Member-state than the Member-state of

import.

Customs and VAT in the EU (II)

• Procedure 42:

• Not always exchange of information

between customs and VAT authorities;

• No firm legal obligation to cooperate;

Customs and VAT: e-commerce

• Currently low value consignments (below 22

Euro) exempted from VAT;

• Consignments below 150 Euro exempted from

customs duties;

• Abuse of 22 Euro threshold (under valuation

etc);

• Distortion of competition with EU businesses

EU Commission proposal:

One Stop Shop

• Removal of VAT exemption (22 Euro

threshold);

• Introduction of so called One stop Shop

(OSS), also for non EU businesses;

• Filing VAT returns in one Member State

for all Member States where goods are

sold to private individuals (e-commerce)

EU Commission proposal:

One Stop Shop

• Imports of low-value goods covered:

goods of a value below EUR 150;

• Businesses not established in the EU

must appoint an intermediary/agent, – (unless authorized by MS of identification or established in country with

mutual assistance agreement (see next slide))

EU Commission proposal:

One Stop Shop

• Businesses using OSS: – Exemption from import VAT, pay VAT of MS of

destination (where customer is establised) via OSS

– Platforms and marketplaces made responsible for

VAT remittance of traders using the platform or

marketplace?

• Non identified non-EU vendors: – VAT on import via postal and courier companies

against the standard rate

Consequences for customs

2021, Entry Summary Declaration (advance

declaration) for safety and security

purposes will become fully applicable to:

express consignments (includes low

value, below 22 Euro currently

exempted) and

postal consignments (also currently

exempted).

Consequences for customs

• Removal of 22 Euro threshold of VAT;

• Biggest problem with non identified non-

EU established vendors (substantial rise

in number of imports to be checked);

• How to determine that the correct value

will be reported?

• Need for data sharing and exchange of

information.

Consequences for customs

• Security & safety checks need to be

carried out;

• Make use of information available on or

made available by platforms and

marketplaces to cross check data, such as

value (price actually paid);

Customs & Transfer Pricing

• Customs value based on transaction value

method is preferred method;

• When transaction takes place between two

related parties, relationship may not influence

the transaction value (transaction value must

be at arms’ length);

• If not, alternative valuation method;

Customs valuation versus transfer

pricing methods

Different starting points / different fundament:

• Customs Valuation:

– Customs valuation on a transaction by transaction basis

– Six strict methods, with obligatory sequence

– Main elements relevant for Customs Valuation:

• Costs of individual goods plus profit

• Add on costs: Royalty – R&D – Assists

– Test values for verifying “arm’s length nature” related party

transactions

Customs valuation versus transfer

pricing methods

Different starting points / different fundament

• Transfer Pricing:

– Transfer Pricing governed by economic principles

– Transfer Pricing models focus on Value Chain, wide variety of methods which are relatively freely applicable

– Transfer Pricing models look at periods

– Elements relevant for Transfer Pricing:

• Nett profit

• Application of Capital / Costs factors

• Product price is less important, is more an instrument for allocation, overall product cost

Valuation methods

Customs valuation to TP methods:

Transaction value -No similar method

Transaction value (identical goods) -> CUP

Transactions value (similar goods) -> CUP

Deductive method -> Resale price method

Computed method -> Cost plus

Reasonable means (fall-back method) No similar

method

No similar method

No similar method

Transactional Profit methods

TNMM

Profit split method

WCO Guide on transfer pricing and

customs

Pragmatic approach to utilizing transfer pricing

documentation to support customs value

A list of ”good practices” for customs

administrations, including the encouragement to

customs administrations to consider information

derived from transfer pricing studies when

examining related party transactions

WCO Guide on transfer pricing and

customs

A list of ”good practices” for international business,

including:

• Coordination among tax and customs departments and advisors on

transfer prices

• Consider the needs of customs authorities when preparing transfer

pricing documentation or developing Advance Pricing Agreements

• With appropriate consideration of local requirements, provide customs

administrations with advance notification that post importation

adjustments may occur

• Work with customs authorities to provide interpretation into a customs

framework of transfer pricing analyses and data

Customs and Transfer pricing in the EU

• No legislative basis in Union Customs Code

to make use of transfer pricing as the basis

for the customs value (= transaction value);

• Acceptance may differ from Member state to

Member state;

• If accepted, often consultation between tax

and customs authorities.

Customs and Transfer pricing in the EU:

transfer pricing adjustments

Simplified declaration:

• Art. 166 UCC

• Three years time limit to complete declaration

Revision of import declaration

• Art 173 UCC (request for refund in case of downward

adjustments?)

• Unclear, pending case before EU Court of Justice:

Hamamatsu Photonics

Customs and Transfer pricing in the EU:

conclusions

• No firm legal embedding of transfer

pricing within customs legislation;

• Cooperation between customs and tax

authorities needed to better understand

both sides

Overall conclusions

• Cooperation between customs, VAT and tax

authorities is necessary more than ever;

• Legislative measures are lacking;

• Data and information exchange is crucial,

legislative measures can help to enforce this, but

a substantial part of these information flows

should be taking place between authorities.

Thank you for your attention!