Changes Customs and impact on transfer pricing and logistics previous message

Changes Customs and impact on transfer pricing and logistics

Many multinational companies will have to pay more EU customs as per May 1, 2016, as the result of the abolishment of the First Sale for Export principle. In particular companies that apply order to build or pre-ordering business models are likely to be negatively exposed to these regulatory changes. Companies may consider changing their operational and transactional model if the increase in customs is substantial and the transitional regime cannot be applied (sunset clause). This may have an impact on the applied transfer pricing model if there is a change in functions and risks.

Custom changes in a nutshell

The new custom code will require that the custom duty is based upon the sale occurring immediately before the goods are entering the European Union. If the imported goods are already sold or pre-ordered before they physically enter the European Union, customs may be based upon the last transaction which often results in a higher transaction value for custom purposes.

The ‘old’ regime can still be applied until December 31, 2017 if the strict conditions of the so-called “sunset clause” are fulfilled. 

Example impact and changes to the operational set up

  • US manufacturer produces and sells good X for USD 100 to its central European distribution and sales hub (“Central Hub”)
  • The affiliated European sales subsidiaries (or third party client) of Central Hub have already placed purchase orders with Central Hub before good X enters the European Union
  • The pre-ordering price is USD 120
  • Under current legislation the custom value should be USD 100. As from May 1, 2016 this will likely to be changed into USD 120.
  • Therefore US manufacturer considers changing its business model and move inventory to Europe to increase time to market for clients and reduce the increase in customs. In this example the US remains the legal owner of the goods until they are sold in the European market.

Transfer pricing considerations

Moving the inventory and/or warehouse activities from the US to another EU country may have several implications inter alia:

  • Most tax treaties will not qualify local warehousing or inventory activities as a so-called permanent establishment. A permanent establishment status would normally require the US factory to register for corporate tax purposes in that particular country. 
  • Nevertheless, there is a trend that countries will sooner require corporate tax registration if the warehousing activity has in their view not a supportive or auxiliary nature.
  • If corporate tax registration is required, companies need to determine the result to be allocated to this warehousing activity. This requires a transfer pricing review and substantiation.
  • If the European warehousing activities are outsourced to a third party provider, it is subject to debate if additional result needs to be allocated on top of the fees to be paid to local service provider. This depends per country.

Way forward

Local custom authorities seem to apply a literal interpretation of the new EU custom regulation. If companies consider changing their business model, also transfer pricing should be considered. Given the short time left, urgent action is required.

If you have questions or comments, please contact Guido van Asperen ( or +31 615041623)

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