Tax Messenger

A ray of light in the dark world of disputes over the inclusion of dividends in the customs value of goods

27.04.2024

On 25April 2024 the Twelfth Arbitration Appellate Court, ruling on Case No. 06-3555/2023, amended the trial court’s decision and partially upheld the importer’s claims for decisions to include dividends in customs value to be overturned.

The circumstances of the case and the court’s conclusions are summarized below.

Brief overview of the case

Information on the Company, the inspected goods and the distribution of dividends
The Company’s main activity	Wholesale of agricultural machinery, equipment and implements.
Founder (shareholder) of the Company	A foreign legal entity (ownership share – 100%) (“the Shareholder”).
Suppliers of the inspected goods	Two suppliers: The Shareholder; A foreign related supplier.
Information on the distribution and payment of the dividends at issue	Dividends distributed and paid in 2021 out of profit earned in 2020 and previous periods.
Did the terms of the supply agreement include an obligation to pay a part of dividends / income received?	No.
Information on the customs audit
Form of customs control	Desk customs audit.
Goods declarations examined	Goods declarations from 2020.
Did the Company file objections to the customs audit report?	Yes. The Company submitted additional documents and information together with the objections. Following a review of the objections a new desk customs audit was carried out to examine the additional information. Following the repeat audit the customs office reduced the amount of dividends to be included in the customs value in light of information provided by the Company on the amount of revenue and the calculated amount of profit earned from the sale of inspected goods in 2020.
Basis for including dividends in customs value	Subsection 3 of clause 1 of Article 40 of the EAEU Customs Code, i.e., as a portion of income resulting from the resale of imported goods which directly or indirectly accrues to the seller.
Methodology used by the customs authority for the inclusion of dividends in customs value	The customs authority: determined the proportion of revenue from the sale of inspected goods in 2020 to the Company’s total revenue for 2020; applied the identified proportion (43%) to the Company’s total net profit for 2020. Thus, the customs authority found by calculation the amount of net profit earned from inspected goods in 2020 and included that amount in the customs value of goods imported under goods declarations from 2020.

The court’s reasoning

The trial court rejected the Company’s claims in full. However, the appellate court partially upheld the Company’s claims insofar as the following aspects were concerned:

Dividends should not be included in the customs value of goods imported from a supplier other than the Shareholder.
Penalties should not be charged on additionally assessed customs charges for the period from the date of submission of the goods declarations to the date on which dividends were paid to the Shareholder.

The court’s arguments are explained in more detail below.

The court supported the Company’s position that dividends should not be included in the customs value of goods imported from a supplier that was not the Shareholder in view of the following considerations:

The supplier is a separate legal entity and is not the founder.
The customs office’s contention that the supplier (not the founder) was a manufacturing plant/representative office of the Shareholder has no legal significance.
The customs office provided no evidence that dividends were distributed to the supplier in question. Dividends were paid to the Shareholder’s account.

After carrying out customs control, customs authorities assess not only additional customs charges, but also late payment penalties calculated from the day following the date on which goods declarations were submitted until the day on which the customs authority issued decisions to amend the goods declarations.

In customs law, late payment penalties are a special type of sanction for the non-fulfilment of obligations to pay customs charges on time. In this regard, the customs authorities fail to take into consideration the fact that the obligation to pay dividends may arise, and the payment of dividends may take place, much later than the submission of goods declarations.

In the Company’s situation, penalties were assessed in line with the above-mentioned approach, with no consideration given to the fact that the decision to pay dividends, as well as the actual payment of those dividends, took place in the year after the year in which the goods were imported.

After being the first to scrutinize the methodology for assessing penalties, the court declared it to be unreasonable on the grounds that the Company could not have known the financial result and amount of net profit on the date on which the goods were imported, since the financial result is determined solely on the basis of results for the entire financial year.

Thus, the court took the view that the assessment of penalties from the date of submission of the goods declaration to the date of payment of dividends was unlawful and in violation of the Company’s rights and legitimate interests.

We have seen from providing support on a large number of customs audits relating to dividends that the customs authorities frequently change the customs valuation method from Method 1 to Method 6, which is also now being challenged by importers.

In the dispute concerned, however, the court stated that there were no grounds to change Method 1: “Dividends paid on the basis of business results are not a component of the price actually paid or payable as determined in accordance with clause 3 of Article 39 of the EAEU Customs Code and cannot be regarded as a factor preventing the application of Method 1”.

Foreign trade companies have frequently sought clarifications from the regulator on problematic issues arising in audits relating to dividends, including the inconsistent approach of customs authorities to carrying out and completing such audits, and have received, if not perfunctory, then extremely “carefully worded” replies – like, for example, the recently published Letter No. 27-01-21/5737 of the Ministry of Finance of Russia of 25 January 2024.

The appellate court’s ruling does not yet close the book on the issues highlighted, as it can be (and probably will be) challenged by the customs authority in the cassation court, and possibly even in the Supreme Court.

However, it is our hope that the appellate ruling on this case will be upheld by the cassation court and will act as a turning point in the interpretation of the law by courts (and optimally by administrative bodies also) at least with regard to (a) the inappropriateness of including dividends in the customs value of goods imported from related suppliers (other than shareholders), and (b) the assessment of penalties.

In the meantime, to recap, the Twelfth Arbitration Appellate Court confirmed that:

Dividends should not be included in the customs value of goods imported from suppliers which are not shareholders of the importer unless there is evidence that the dividends were actually paid to that supplier.
Penalties should not be assessed on customs charges assessed as a result of the inclusion of dividends in the customs value of goods for the period up to the date on which the dividends were actually paid.

How can we help?

Full or partial support during customs audits (including the preparation of calculations needed to reduce assessments).
Formulating a legal position to defend the non-inclusion of dividends in customs value.
Assessing the appropriateness and risk of the inclusion of dividends in the customs value of imported goods. Providing recommendations and strategies to minimize risks (including in future periods).
Representing your company’s interests in the pre-litigation and litigation stages of appeals.
Arranging and participating in private meetings with customs authorities as part of familiarization with audit materials.