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Transfer Price and Customs Value

Dr. Thomas Möller, Dipl.-Finanzwirt, Dipl.-Kaufmann (FH)

In the realm of international trade more than half of business transactions are conducted between related enterprises. Big companies get goods from all over the world through their complex networks of suppliers. For business reasons transfer prices are used for such transactions. The relatedness of the supplying enterprise to the one buying entails a danger that the transfer price may not reflect the real economic value of the transaction. Since there is no global procedure for apportioning expenses, the transfer price also helps in the determination of taxable income. It serves in the calculation of due taxes for each party to the business transaction. In order to effect a fair expense allocation settlement in the use of transfer prices for taxation purposes, the OECD member countries opted for the arm’s length principle.

In the OECD transfer pricing guidelines, the calculation of customs value so as to judge its conformity with the arm’s length standard within intra-company transfer prices is deemed advantageous. The OECD asks for collaboration between tax and customs administrations in the auditing of transfer prices. The same conclusion was reached by the European Court of Auditors in 2000 in its special report concerning valuation of imported goods for customs purposes. The general assumption within German administrations, literature and jurisprudence is that in the calculation of the appropriate transfer price, there is legally no connection of the amount calculated by tax administrations to that arrived at by customs valuation administrations and vice-versa. Against this background, the work picks out as central theme: the relationship between transfer price and customs value. The aim of the research is to analyse the basic principles of tax and customs law for the valuation within intra-company supplies from foreign countries into Germany. The gist of the analysis revolves around the possibilities and limits of a uniform use of transfer price for both tax and customs.

Chapter seven (pp. 237 ff.) gives the real analysis of the relationships between transfer price and customs value. In the author’s view, there exists an identical target for the transfer price for taxation purposes and the transfer price to be accepted for customs valuation (I).  The author notes similarities also for valuation itself. Hence he asks whether there is, and if yes, which relationship between transfer price and customs value there is. The author introductorily discusses the international developments at the OECD level and in individual countries (II). He observes that in the USA there is an extensive connection between the valuation of imports both for tax and for customs purposes.

It is very important to note that according to the author’s diagnosis, the judgements of the European Court of Justice indulge in a totally different customs valuation system, which is: customs valuation on the basis of “normal price” concept instead of “transaction value”. The same applies to a decision of the German Federal Fiscal Court of the year 1967, I 220/64. Also the Federal Fiscal Court decided directly neither on issue of relationships between transfer price and customs value nor on the no more valid valuation system of the “normal price”.

In the special report of the European Court of Auditors concerning customs valuation of the year 2000, the European Commission gave its opinion about the relationship between what it refers to as corporate transfer price (transfer price) and what it refers to as transaction value (customs value). The Commission sees no customs problem in overvaluation and it bases this on the out-dated case law of the European Court of Justice of the year 1980. The same view is sustained in Germany by the tax administration. In it administrative principles, the Federal Ministry of Finance merely points out that transfer price can differ from customs value. In doing so, it also bases itself on the out-dated judgement of the Federal Fiscal Court of 1967. The German customs administration responsible for customs valuation is of another opinion. In its published record of a customs valuation meeting held in the year 2000, the Federal Ministry of Finance maintained the view that there exists a relationship between transfer price and customs value (2).

The relationship between transfer price and customs has been up to now very loosely treated in literature. The author asserts hereunto (3) that transfer price has a general relevance for customs valuation but with a different objective target for tax on the one hand and for customs on the other. Concerning the question whether customs value and appropriate transfer price are ultimately the same, or whether customs value (optimised customs value) is a more suitable market price for tax auditing, the author does not find any convincing answer in the so far existing literature.

A focal point of the analysis builds up from the comparison undertaken by the author (IV). This comparison includes not only legal provisions but also business perspectives particularly tax audit and customs valuation methods. His comparison of the provisions and the resultant methods of both tax and customs laws shows a fundamental concordance. Given that there are different misgivings in the literature about the acceptance of the respective values, the author analyses the corresponding special regulations of both tax and customs laws. As a result, he has logically and in an integrative manner enfeebled these concerns.

In a short summary of his analysis, the author observes that he has not found a conclusive answer to the relationship between transfer price and customs value (V). Because of the importance of transfer price in the taxation realm and in search of a fiscal market price, the author considers it meaningful to use to exploit his cognitions of customs valuation for transfer price. For imports from foreign countries into Germany, the author offers his own solution by developing the concept of market price for taxation purposes basing on the customs valuation system of the customs code. He visualises his concept in a diagram.

The examination ends in the eighth chapter with a concluding appraisal of the findings of the author’s analysis (p.p. 268 ff.). The author poses concretely 22 theses. They contain proposals which are orientated towards financial/economic principles for both tax and customs practices regarding transfer prices as well as impulses for the European as well as national legislators.

With the presented work – which was accepted by the Faculty of Economics and Behavioural Sciences at the University of Freiburg (Albert-Ludwigs-Universität Freiburg im Breisgau) - the author undertook to comprehensively analyse the specification of international transfer prices both from tax and customs law perspectives and to deduce a concept for the uniform determination of transfer prices for both tax and customs purposes. A positive side effect of this approach is the production of a new additional criterion for the verification of tax transfer prices.


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