Customs can’t claim an importer’s dividends: Borenius attorneys defend precedent-setting position
The Northwest Circuit Commercial Court has put an end to a two-year dispute between a customs authority and a Borenius client who is a major importer of industrial products.
In 2015-2017 a limited liability company that is a wholly-owned subsidiary of a European company acquired industrial products from the European company to sell on the EAEU domestic market. In 2018 the European company decided that the subsidiary would distribute all of its profit for 2015-2017 to the sole participant as dividends.
Customs took the position that the dividends paid by the subsidiary to the European company should be included in the customs value of the goods imported in 2015-2017. This position of the customs authorities was very dangerous for European companies because their subsidiaries regularly pay dividends. We are aware of a wave of customs inspections of major importers with foreign ownership in various regions of Russia. If the courts encouraged such a practice would it result in huge amounts being added to the customs value of imported goods.
Having been defeated in the lower courts, customs filed an appeal in cassation. However, the circuit court listened to the Borenius attorneys’ arguments and the court judgment reiterated the legal position that we argued:
…dividends may be included in the price actually paid or payable for imported goods only if the goods were sold on the condition that those dividends would later be paid to the seller (payment of dividends must be a condition for selling specific imported goods).
In this instance, no evidence was submitted to the case file that the Company’s payment of the disputed dividends was one of the conditions for selling the imported goods. Customs did not find signs that the relationship between the seller and the buyer affected the price actually paid or payable. Customs did not cite any data that the value of the imported goods was deflated.
Considering the importance of the problem of paying dividends for the entire import-export market, we believe this case will serve to shape uniform judicial practice.
Based on the practice that is forming, we recommend considering the following approaches when handling disputes with customs over including dividends in customs value:
— Article 39 of the EAEU Customs Code provides that “the price actually paid or payable for imported goods shall refer to the goods moved across the customs border of the Union, and therefore dividends and other payments made by the buyer to the seller shall not be included in the customs value of imported goods, unless they are related to the imported goods.” Therefore, in order to justify including dividends in customs value, customs must prove there is a “link” between the dividends and the goods as that term is defined by the customs laws (NB! A review of similar WTO legal provisions makes it possible to put the question even more radically and assert that the drafters included dividends in that article as an example of a payment that is a priori unrelated to the imported goods; however, it is useful to demonstrate to the court that the test for a “link” is also not met in a specific situation).
— The customs authorities see a “link” in the fact that the declarant receives net profit as a result of activity to sell imported goods on the domestic market and this profit is later paid out as dividends. However, in customs laws the criterion for a “link” between the payment and the goods has a specific legal meaning: only those payments that act as a “condition or obligation of sale” are linked to goods. In other words, there would be no import without an obligation to pay: the seller would refuse to supply the goods, the goods would not be delivered to the customs territory, would not go through customs clearance, etc. As the court said it, “the term ‘transaction value’ used for customs valuation is special and relates only to those payments that act as consideration for the goods being acquired (the price of the goods), which is not equivalent to the totality of any monetary obligations.”
— In term of dividends, the question cannot be put this way. On the date the goods are sold there is neither an obligation to pay dividends nor any reasonable expectation that a certain amount of dividends would be generated. Net profit is determined by financial year performance as a whole, as all of the importer’s actions for the reporting period; the contribution of individual goods cannot be reliably determined. Thus, dividends are not a “condition and obligation of sale,” but merely a consequence that is its remote and not guaranteed.
— When it delivers a decision, the court could also consider accompanying factors:
- Import-export contracts not having conditions obligating the buyer to pay dividends in a certain amount;
- The group of companies not having a corporate policy envisioning a link between the amount of dividends generated and volumes of goods sold within the group;
- The presence of an economic justification for payment of dividends unrelated to the goods being imported (reinvestment of profit, intragroup financing, etc.);
- The existence of statistical data confirming that the prices in the transactions are arm’s-length prices could boost the certainty that the importer has no scheme to use dividends to reduce customs payments.