On April 2nd, U.S. President Donald Trump, as part of his self-proclaimed “Liberation Day” announced the introduction of retaliatory tariffs targeting trading partners of the United States. Whether this move will lead to economic prosperity for the U.S. or contribute to global instability remains to be seen. What is clear, however, is that in an era marked by trade wars and rising protectionist sentiment, participants in international trade must exercise heightened vigilance with regard to tax risks.

This article explores two seemingly different areas: (i) transfer pricing and settlements with related entities, and (ii) customs duties and settlements with suppliers, regardless of ownership structure.
The common thread uniting these areas is international trade and the growing risk of transaction reclassification by tax authorities, alongside increasing scrutiny over potential license fees, even where such payments are not contractually stipulated.

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Transfer pricing: Australian Tax Authorities seek reclassification of payments and the true substance of transactions

Key issues in dispute

This case concerns the Pepsi Group and the taxation of payments made by the Australian company SAPL to related entities. SAPL paid for concentrate, which it used to produce the final beverage. The contract referred to the product and specified payment for the concentrate.

However, the Australian Tax Office (ATO) deemed that the transaction involved intellectual property (IP), and thus part of the payment should be classified as royalty fees and subject to withholding tax. Otherwise, local anti-avoidance rules might apply if the transaction was seen as designed to avoid tax.

Pepsi challenged this position, contending that the concentrate purchase agreement did not expressly provide for IP-related payments. Nevertheless, the ATO inferred that the use of IP necessitated payment, thereby reclassifying the transaction. This led to a legal dispute.

Judicial proceedings

The first-instance court, considering the contracts, market practice, and commercial context, found that part of SAPL’s payments did indeed constitute compensation for the use of IP.

In 2024, Pepsi appealed the decision, challenging both the classification of the payments as royalties and the valuation method. The appeal court ruled in Pepsi’s favor, stating that the payments were not for trademarks or other intangibles.

The judges emphasized the importance of contractual language and legal form in assessing the nature of payments. The appeal court found that SAPL’s rights were mainly limited to selling beverages made from Pepsi-controlled concentrate. The contract explicitly granted Pepsi the right to inspect, report, and test the production process.

Based on these findings, the appeal court ruled the payments related solely to the concentrate, with no royalty component for IP usage. However, it’s important to note that the ruling was not unanimous.

The Australian Tax Office has appealed the decision to a higher court and, according to media reports, continues to pursue legal remedies available within the Australian judicial system.

Significance of the judgement

This judgement confirms the increasing trend among tax authorities to assess the economic substance of transactions — regardless of what contracts stipulate.

Similarly in Poland, tax regulations allow authorities to determine transfer pricing outcomes based on the actual nature of transactions, not just written agreements. This can lead to reclassification and related tax consequences, including additional liabilities.

Thus, when entering into transactions with related parties, it is vital to analyse the economic substance and properly document it. In a knowledge-based economy, IP and DEMPE functions must be considered – even in seemingly ‘standard’ trade transactions — to reflect the full business context.

Implications for customs duties

From the perspective of EU customs regulations and the practice of EU customs authorities: royalty payments may be subject to duty if they meet specific conditions for inclusion in the customs value of imported goods. These include:

  1. Application of the transaction value method to determine customs value.
  2. Exclusion of royalties from the price paid or payable for the goods.
  3. A clear link between the royalty payment and the imported goods.
  4. The royalty payment being a condition of sale of the imported goods.

It is irrelevant whether the royalty is paid directly or indirectly (e.g., to a third party rather than the seller).

Consequently, under EU rules, a situation similar to the one described could be customs-neutral — provided the royalty is incorporated into the transaction value. That said, customs authorities actively investigate whether additional payments can be added to the declared customs value.

This was affirmed by the Court of Justice of the European Union (CJEU) in the BMW case (C-509/19), where it held that customs value could include intangible contributions, such as software provided free of charge by the importer to a third-country manufacturer.

BMW imported control modules containing software developed in the EU and provided to third-country producers. Customs authorities ruled that the value of the software – not included in the invoice – should be added to the customs value.

The CJEU upheld this view, stating that:

  • Customs value must reflect the true economic value of goods.
  • Article 71(1)(b) of the Union Customs Code (UCC) allows inclusion of both tangible and intangible inputs used in production.
  • Software can be a component of imported goods.
  • Contractual terms between parties cannot limit customs value adjustments — what matters is the economic substance of the transaction.

This judgement supports a broader trend of customs authorities seeking to add intangible or service-related components to customs value. Importers must carefully analyse all services related to production, including those not invoiced.

How we can assist?

In light of the foregoing, we offer comprehensive support in import risk analysis and management, including:

  1. Reviewing supply chain structures and non-EU contracts to identify services that may impact customs value.
  2. Assessing intangible / service elements that may need inclusion in customs value.
  3. Developing / updating customs procedures to minimize the risk of customs value disputes.
  4. Representing clients in disputes with customs authorities where declared customs value is challenged.

As for transfer pricing, it’s worth analysing how trade wars impact financial settlements. Questions worth exploring include:

  1. Is the benchmark still reliable?
  2. Does the transfer pricing policy account for customs duties?
  3. Can transfer prices be adjusted?
  4. Do contracts address customs implications?

 

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