european customs & trade communiqu©

European Customs & Trade Communiqué

In this month’s Bulletin:• How a transfer pricing dream becomes a customs nightmare

• Diagonal cumulation - EU, Western Balkan countries and Turkey

• Textiles and footwear update

• Introduction of a new EU Common Military List

• Classifi cation Updates

• Anti-dumping Updates

• Other Network Updates

If any of the articles in this month’s edition are of interest and you would like further details, please contact the author or your local PwC contact - their details are listed at the back of this Communiqué.

Greetings from the EditorWelcome to the Forty First edition of our Newsletter on Customs and Trade issues. We have included topical articles on Customs and Trade matters from throughout our European network of PwC fi rms. This edition specifi cally covers an article on the customs consequences of implementing transfer pricing adjustments, along with EU classifi cation, anti-dumping and network updates.

Damian McCarthy, Editor

Edition 41, March 2010

First for business. First for people.

PricewaterhouseCoopers

European Custom & Trade Communique Edition 41

How a transfer pricing dream becomes a customs nightmareThe following is an extract from a recently published article by our Asian colleagues. A full copy of the article is available on request from the editor.

The story

WWM Company is a European manufacturer of quality widgets used in a wide range of industrial products. In 2007, following a business restructuring in Asia, WWM commissioned a transfer pricing study to determine appropriate intercompany profi t levels throughout its business units. Based upon the results of the comparables study, the company determined a gross profi t range of 5-7% for its manufacturers as appropriate to its industry and structure.

However, profi t margins earned on intercompany sales between WWM manufacturing and the WWM distribution companies in Southeast Asia fell well below the target 5-7% range.

WWM management made a transfer pricing adjustment between the manufacturing and distribution companies that had the effect of retroactively increasing the price paid by the distributors for the goods that had been sold to them by WWM manufacturing.

Customs made an assessment of back duties based upon an unfavourable blended duty rate, interest charges, and a penalty.

An increasingly common occurrence

Scenarios like this are increasingly common across the Asia Pacifi c region and transfer pricing adjustments are being increasingly questioned in Asian countries.

Transfer price adjustments - rationale

Companies that employ transfer pricing policies through the targeting of a specifi c arm’s length profi t margin will often fi nd it necessary to make transfer pricing adjustments when actual fi nancial results differ from the projected results.

Although these transfer pricing adjustments are generally intended to demonstrate pricing compliance and mitigate pricing risk from an income tax perspective, they can have the unintended effect of creating signifi cant risk from a customs perspective.

Customs valuation on related party transactions

Initiating a transfer pricing adjustment or changing transfer prices can indicate to Customs that the customs transaction value was subject to infl uence because of a special relationship. It can also raise doubts about whether the customs

transaction value originally declared upon import of the goods was an arms-length price.

It is unusual for companies to adjust transactional prices after the time of sale on sales to unrelated third parties. In Customs viewpoint, when a transfer pricing adjustment is made it may indicate that the transaction price declared at time of importation was incorrect and the relationship between buyer and seller has in fact affected the price. The burden then rests with the importer to prove that the transaction prices declared at time of import on each individual import entry of the transactions covered by the transfer pricing adjustment were, in fact, arms-length prices that should not be adjusted by Customs.

In the case of transfer pricing adjustments, it must be proven by the importer that the adjustment should not be considered an addition to the value that was declared at time of import.

Retroactive versus prospective adjustments

Companies may use either retroactive or prospective adjustments to meet their transfer pricing goals. Retroactive adjustments often take the form of service fees, royalties, or specifi c adjustments on the tax return. Prospective adjustments most often consist of an adjustment to the price of the goods sold going forward. From a customs valuation perspective, retroactive adjustments are typically more diffi cult to justify than prospective adjustments. Some Customs authorities in Asia go so far as to take the viewpoint that retroactive transfer pricing adjustments that increase price of goods are a form of fraud and may be criminally prosecuted.

A pricing adjustment that increases the import price of goods will generally not be challenged by Customs. However, it may well suggest to Customs that the former price may have been artifi cially low and trigger an investigation into past declared transaction values.

Reference to target profi t ranges suggested by transfer pricing studies and policies will in itself be insuffi cient to justify the decrease in price to customs.

Do your homework

As WWM found in this case, understanding of and planning for the customs consequences of transfer pricing adjustments is critical to avoid fi nding oneself in protracted confl ict with the customs authorities in Asia.

Damian McCarthy, PwC Ireland, ([email protected])

Network Leadership Team

Editor

Ruud Tusveld, PwC Rotterdam

[email protected]

Hubert Jadrzyk, PwC Warsaw

[email protected]

Tamas Locsei, PwC Budapest

[email protected]

Damian McCarthy, PwC Dublin (Editor)

[email protected]



Diagonal cumulation - EU, Western Balkan countries and Turkey. Stabilisation and Association Process

As part of the Stabilisation and Association Process, which aims to facilitate an eventual candidature to join the EU, engaged by the European Union and the Western Balkan countries, Stabilisation and Association Agreements (the so-called SAA’s) have been negotiated with these countries individually, the dates in which these SAA’s come into force differ by country.

The following countries are the participant countries in the Stabilisation and Association Process: Albania (AL); Bosnia and Herzegovina (BA); Croatia (HR); The former Yugoslav Republic of Macedonia (MK); Montenegro (ME); and Serbia (RS).

Cumulation

The SAA’s provide for preferential duty treatment upon importation of products originating from the EU and the Western Balkan partner country, the bilateral cumulation of origin.

In addition to this, originating materials from other Western Balkan countries may be regarded as originating materials for the purpose of conferring preferential origin to a specifi c product. This is known as diagonal cumulation of origin. Diagonal cumulation will only be allowed in the case where all countries involved (i.e. destination country, countries supplying originating materials, country of production) have concluded free trade agreements containing identical rules of origin.

In addition to materials originating from the Western Balkan countries, materials originating from Turkey covered by the EU/

Turkey customs union can be incorporated as originating materials for the purpose of diagonal cumulation between the EU and the countries participating in the Stabilisation and Association Process. Obviously this will only apply for those countries that have an origin protocol in force.

The table below shows an overview of the protocols on rules of origin providing for diagonal cumulation between the EU, the Western Balkan countries and Turkey as well as the date from which such cumulation becomes effective.

EU AL BA HR MK ME RS TR

EU 1.1.2007 1.7.2008 1.1.2007 1.1.2008 8.12.2009 EU/Turkey 27/07/2006

AL 1.1.2007 22.11.2007 22.8.2007 26.7.2007 26.7.2007 24.10.2007

BA 1.7.2008 22.11.2007 22.11.2007 22.11.2007 22.11.2007 22.11.2007

HR 22.8.2007 22.11.2007 22.8.2007 22.8.2007 24.10.2007

MK 1.1.2007 26.7.2007 22.11.2007 22.8.2007 26.7.2007 24.10.2007 1.7.2009

ME 1.1.2008 26.7.2007 22.11.2007 22.8.2007 26.7.2007 24.10.2007 1.3.2010

RS 8.12.2009 24.10.2007 22.11.2007 24.10.2007 24.10.2007 24.10.2007

TR EU/Turkey 27/07/2006

1.7.2009 1.3.2010

What should companies do?

Companies that import products in the above mentioned countries should review whether they can benefi t from these SSA’s. When the products are produced in those countries, we recommend that you check the table above and consult the applicable protocol to determine whether your products can confer the preferential origin as a result of which the preferential duty rates can be applied upon importation.

Should you require any further information regarding this topic, please address the editor.

Claudia de Anda, PwC Netherlands, ([email protected])

Textiles and footwear update The start of 2010 has not seen any signifi cant issues, with the exception of the Council’s vote in favour of withdrawing GSP+ from Sri Lanka (see below). However, it is worth noting that progress has been made on a number of free trade agreements (FTAs), some of which are of genuine interest to the clothing and footwear sectors.

As predicted, the Council duly approved the withdrawal of GSP+ from Sri Lanka and Council Regulation 143/2010 of 15 February was published on 20 February 2010. This confi rmed that the investigation found that Sri Lanka had not effectively implemented certain human rights conventions and that GSP+ would be withdrawn with effect from 15 August 2010, unless Sri Lanka is able to demonstrate that “the reasons justifying the temporary withdrawal no longer prevail”.



GSP+ could be reinstated at any time if the Council is satisfi ed that the reasons for the withdrawal have been addressed and rectifi ed. However, it seems unlikely that any such decision could be taken before 15 August, as Sri Lanka is not showing much appetite to engage with the Commission. This means that the GSP rate for eligible goods from Sri Lanka will rise from zero to the normal GSP rate (9.6% for most clothing). Assuming that this goes ahead, it should be noted that there will be no transitional arrangements and the reimposition of the normal GSP rate of duty will apply to all eligible goods entered to free circulation after midnight on 14 August 2010.

Meanwhile, it is worth noting that the EU has made good progress on a number of FTAs. Although negotiations on an FTA with member states of the Association of South East Asian Nations (ASEAN) have been suspended, it was agreed that FTAs should be agreed with the individual members. The new European Trade Commissioner, Karel de Gucht, was in Asia in early March and negotiations with Singapore were launched during Mr de Gucht’s visit and the fi rst round took place in early March. During the same visit, the EU and Vietnam agreed to launch negotiations, although there is no start date. Thailand is also understood to have requested negotiations but, as Mr de Gucht did not visit Thailand on his recent trip, it must be assumed that further groundwork needs to be done.

The EU concluded an FTA with South Korea in October 2009, which has yet to be ratifi ed by both parties but it is expected to enter force later in 2010. This will see the immediate reduction of duty on the vast majority of eligible

clothing and footwear products to zero. Negotiations between the EU and India had stalled but, again further to Mr de Gucht’s visit, appear to have got going again with a round in January and another planned for late March. The aim is to conclude the negotiations by the end of 2010 but this looks very ambitious as the parties are still a long way apart on a number of issues, particularly on rules of origin.

FTAs with Vietnam, India and Thailand, in particular, are potentially very interesting from a clothing and footwear perspective. They are currently all benefi ciaries of GSP, under which the duty rate for eligible clothing is 9.6%, so duty free access under FTAs will make them very attractive. However, it should be noted that negotiations are complex and can take a long time, so nobody should be costing on the basis of duty free access for any of these countries any time soon.

Closer to home, the Western Balkans are in the process of agreeing FTAs with each other and with Turkey. For example, an FTA between Serbia and Turkey is in the process of being ratifi ed and, once it enters force, garments made in Serbia from Turkish fabric will be eligible to enter the EU duty free.

Emma Ormond, PwC UK ([email protected])

Introduction of a new EU Common Military ListThe EU has published a new Common Military List (2010/C 69/03), adopted by the Council on 15 February 2010. The changes to the Common Military List include additions to the list of controlled goods, such as:

• Mountings specially designed for weapons such as guns, cannons, mortars, anti-tank weapons, projectile launchers, etc

• Detection equipment

• Fuel cells designed for military use

And deletions, for example of:

• Tyre infl ation pressure control systems, operated from inside a moving vehicle

Unlike dual use goods, export control legislation on military goods are not harmonised throughout the EU. Therefore, military goods, i.e. goods which are designed or modifi ed for military use, are controlled by national legislation. However, the EU Common Military List forms the basis of the national military lists. Therefore, we would expect to see updated national military lists, in line with the amended Common Military List, come into effect in the near future.

Claire Whelan, PwC Ireland, ([email protected])

Classifi cation Updates

• The Commission have issued a Regulation amending Regulation 989/89 as regards the classifi cation of padded waistcoats. The recent Regulation specifi es that padded waistcoats are to be classifi ed in headings 6101, 6102, 6201 or 6202. The reasoning behind the classifi cation is that, although padded waistcoats have no sleeves, they are generally worn over all other clothing for protection against the weather and are similar in function to anoraks, windcheaters, wind-jackets and similar articles given their design.



• The EU has published a Regulation clarifying the classifi cation of ‘anti-smoking’ products, i.e. products containing nicotine designed to assist users to quit smoking. The Regulation confi rms the duty-free classifi cation of nicotine patches (in Chapter 30), as they are considered a medicament. However, other anti-smoking products, such as chewing gum and tablets, are considered to be dutiable at rates of up to 12.8%


Anti-dumping Updates• Notice of the expiry of certain anti-

dumping measures applicable to imports of polyester staple fi bres originating in the Republic of Korea

• Implementing Regulation of the Council of 1 March 2010 amending a Regulation imposing a defi nitive anti-dumping duty on imports of furfuryl alcohol originating in the People’s Republic of China following a ‘new exporter’ review pursuant to Article 11(4) of Regulation (EC) No 1225/2009

• Notice of the expiry of certain anti-dumping measures applicable to imports of polyester staple fi bres originating in Saudi Arabia

• Notice of initiation of an expiry review of the anti-dumping measures applicable to imports of polyester staple fi bres originating in the People’s Republic of China

• Notice of the impending expiry of certain anti-dumping measures to imports of bicycles and certain bicycle parts originating in the People’s Republic of China and Vietnam

• Notice of the impending expiry of certain anti-dumping measures to imports of hand pallet trucks and their essential parts originating in the People’s Republic of China and Thailand

• Notice of the impending expiry of certain anti-dumping measures applicable to imports of castings originating in the People’s Republic of China

• Notice of the impending expiry of certain anti-dumping measures applicable to imports of certain compressors originating in the People’s Republic of China

• Commission Decision of 23 March 2010 amending a Decision by accepting three offers to join the joint price undertaking accepted in connection with the anti-dumping proceeding concerning imports of certain castings originating in the People’s Republic of China

• Notice of the impending expiry of certain anti-dumping measures applicable to imports of barium carbonate originating in the People’s Republic of China


Other Network UpdatesCustoms and business conference in Hungary

On 9 February 2010 a conference was held in Budapest, Hungary, which was organised for the fi rst time between the representatives of companies, international organisations and the customs authorities.

The slogan of the event was: “Customs and business: improving performance through partnerships”, which represents the aims of the World Customs Organization set for 2010. Communication and cooperation between the customs authority and the private sector should prove to be benefi cial for both sides.

The honorary guest of the conference was Mr. Walter Deffaa, Director General of the Taxation and Customs Union. Beside the representatives of the Hungarian Customs and Finance Guard, the leaders

of the customs authorities of Hungary’s neighbouring non-EU countries (Croatia, Serbia and the Ukraine) participated in the event as well. The Head of the International Customs Cooperation and European Integration Department of the Customs Administration of Serbia and the Assistant Director General for Customs System and Procedure of the Customs Directorate of the Republic of Croatia in their presentation demonstrated the steps they took in order to help the business activity of their clients.

Representatives of international organisations also held speeches at the conference, such as the Head of the TIR carnets Management and SafeTIR of the International Road Transport Union (IRU) and the Director of the International Federation of Customs Brokers Associations (IFCBA).

The President of the Hungarian Association of Customs Brokers and the Secretary General of the Hungarian Rail Association also participated in the event. The private sector was represented by numerous leaders of multinational companies. Representatives of PricewaterhouseCoopers Hungary also visited the conference.

According to Mr. Walter Deffaa we should concentrate on the cooperation between the business sector and the authorities in a way that both sides gain from the relationship. In order to realise this, we should use simplifi ed procedures and exploit the benefi ts of technical improvement in the fi eld of informatics – stated the Director General of TAXUD.

The message of the conference was that discussions between the customs authority and companies should be held more often.

Attila Környei, PwC Hungary, ([email protected])



Country Name E-mail Telephone

Austria Christine Weinzierl [email protected] (43) 1 501 88 3605

Albania Loreta Peci [email protected] (355) 4 242 254

Azerbaijan Movlan Pashayev [email protected] 99412) 497 74 05

Belgium Dirk Aerts [email protected] (32) 3 259 3214

Bulgaria Tania Pavlova [email protected] (359) 2 91 003

Croatia Iain McGuire [email protected] (385) 1 6328 807

Cyprus Chrysilios Pelekanos [email protected] (357) 22 555280

Czech Republic Nora Grymova [email protected] (420) 251 152 629

Denmark Winni Nielsen [email protected] (45) 3945 9454

Estonia Ain Veide [email protected] (372) 614 1978

Finland Juha Laitinen juha.laitinen@fi .pwc.com (358) 9 2280 1409

France Guy Le Gall [email protected] (33) 1 56 57 44 22

Germany Jochen Schmidt [email protected] (49) 40 63 78 13 90

GreecePanagiotis Tsouramanis [email protected]

(30) 210 6874 547

Hungary Tamás Locsei* [email protected] (36) 1 461 9358

Ireland Damian McCarthy [email protected] (353) 1 792 6203

IsraëlShay Shalhevet

[email protected] (972) 3 7954811

Italy Luca Lavazza [email protected] (39) 02 9160 5701

KazakhstanKristina Krišciunaite-Bartuseviciene

[email protected] (7) 327 298 06 19

Latvia Maris Juruss [email protected] (371) 6709 44 00

LithuaniaKristina Krišciunaite-Bartuseviciene

[email protected] (370) 5 2392 365

Luxembourg Anne Murrath [email protected] (352) 49 48 48 3120

Macedonia Katerina Carceva [email protected] (389) 02 3111 012

Malta Neville Gatt [email protected] (356) 2564 6719

European Contact Details



European Contact Details

The Netherlands Ruud GA Tusveld* [email protected] (31) 10 4075 669

Norway Yngvar Solheim [email protected] (47) 95 26 06 57

Poland Hubert Jadrzyk* [email protected] (48) 2 25 234 837

Portugal Mario Braz [email protected] 351 21 3599624

Romania Daniel Anghel [email protected] (40) 21 202 8688

Russia Marina Volkova [email protected] (7) 495 967 6223

Serbia and Montenegro

Nebojsa Jovanovic [email protected] (381) 11 3302 100

Slovakia Eva Fricová [email protected] (421) 2 59 350 613

Slovenia Marijana Ristevski [email protected] (386) 1 58 36 019

South Africa Gerard Soverall [email protected] (27) 11 797 5004

Spain Pilar Salinas [email protected] (34) 91 568 45 35

Sweden Kajsa Boqvist [email protected] (46) 8 555 338 24

Switzerland Simeon L. Probst [email protected] (41) 58 792 53 51

Turkey Cenk Ulu [email protected] (90) 212 326 64 24

United Kingdom Emma Ormond [email protected] (44) 207 804 51 35

Ukraine Igor Dankov [email protected] (380) 44 490 67 77

Uzbekistan Abdulkhamid Muminov [email protected] (998) 71 120 4879


Global Contact Details


Americas Domenick Gambardella [email protected] (1) 646 471 3791

Asia John Robinson [email protected] (65) 6236 7318

Middle East Jeremy Gray [email protected] (971) 4 304 3100 (ext.317)

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