Consider a situation where an importer brings goods into Israel at a discounted price that includes a conditional discount from the supplier. This discount is contingent on the importer meeting an agreed future purchase target, and if this target is not met, the importer must return the discount amount to the supplier.. In this case How should the value of the goods be determined for import tax calculations: according to the price incorporating the conditional discount, or according to the full price without the discount?
This question was recently settled in the Supreme Court’s ruling in the Delek Motors case (5142/20), which dismissed the State’s appeal against the ruling of the Lod District Court.
The core principle in determining value for import tax purposes is the price actually paid for the goods. As the District Court stated, “import taxes should be imposed according to the price actually paid for the importation of the goods.” On the other hand, the international agreement on the valuation of goods, which was adopted into Israeli legislation, sets out exceptions to this principle, and one of the exceptions is that the sale of the goods or their price shall not be subject to any condition or consideration that cannot be valued for the purpose of determining the value of the goods.
In the Delek Motors case, the importers of Mazda vehicles received a discount on spare parts purchases, subject to meeting annual targets. The agreement that set out the entitlement to the discount stipulated that failure to reach the purchase targets, would require the importer to return the discount to the supplier. In later agreements, no provision was included for the return of the discount in case of failure to reach the target.
The Tax Authority issued a deficiency notice to the importer, stating that this conditional discount was inadmissible. According to the Tax Authority, this position was based on Section 132(b)(2) of the Customs Ordinance, which states that a transaction value is unacceptable if the sale of goods or their price is subject to conditions or considerations that cannot be valued when determining the goods’ value. The Tax Authority argued that since at the time of clearance (the relevant time), it was not known whether the importer would meet the sales targets, the conditional discount received by the importer should not be recognized, and the value of the goods should be their full price without the discount.
The importer argued, on the other hand, that this was a fixed discount that was not contingent on the target, and contrary to the agreements with the supplier – the discount amount was never returned to the supplier, even in cases where the importer did not meet the purchase target. The importer claimed that this clearly demonstrated that the parties’ intention was for the discount to ultimately be granted regardless of whether the target was met or not. The importer further argued that the Tax Authority’s position contradicted the provisions of international agreements and that this position also leads to a paradox: if it was a quantity discount received upfront – Customs would argue that it was an inadmissible conditional discount; and if the discount was granted retroactively, Customs would argue that retroactive price adjustments could not be made, thereby preventing any importer from benefiting from quantity discounts.
The District Court conducted a detailed analysis of both the factual aspect – whether there was a conditional discount or not, and the legal/principled aspect – what is the legal status of a conditional discount. On the legal/principled aspect, which is the important analysis for our purposes, the importer prevailed, and the court ruled that even if it was a conditional discount, which the importer would have had to return in case of failure to meet the purchase target – still this discount should still not be included in the value for import tax purposes.
And why is that? After analyzing various sources and relying on the Supreme Court’s ruling in the Amcor case, the court concluded that the aim should be to impose import taxes according to the price actually paid for the importation of the goods, even when a discount is subject to a condition, and even when there is uncertainty at the time of import as to whether that condition will be met. All of this subject to the condition the discount ” was determined and granted upfront according to a fixed and known formula.” The reason being to adhere to the World Trade Organization’s fundamental premise that the value of imported goods should be determined according to their actual transaction price.
The court criticized the Tax Authority for attempting to apply two contradictory provisions simultaneously. While the Tax Authority argued that the condition’s value could not be assessed and should therefore be disregarded, it simultaneously charged the importer an import tax differential equal to the exact discount amount, implying the value could indeed be precisely calculated..
The Tax Authority appealed to the Supreme Court, arguing that since this was a conditional discount, it constituted a condition whose value could not be assessed, and therefore in this case, import taxes could not be imposed according to the price actually paid. And even if it is claimed that the value of the condition could be assessed – it should be incorporated into the transaction price for the purpose of calculating the value of the goods.
However, the Supreme Court dismissed the appeal and rejected the Tax Authority’s position.
The Supreme Court affirmed the District Court’s ruling and ruled that the price incorporating the discount should be accepted, even if the discount was subject to a condition whose fulfillment was uncertain at the time of import, provided that it was granted upfront according to a fixed and known formula. This is because import taxes should be imposed according to the price actually paid.
The court was aware of the difficulty the Tax Authority might encounter in cases where the discount is returned to the supplier at a later date after the importation of the goods. However, the court saw no special reason to deviate from the rule that customs assessments are determined based on the importer’s declaration, assuming truthfulness. Of course, if it turns out that there is a deficiency in the case of the discount being returned, the Tax Authority can issue a retroactive deficit notice. It has full authority to do so.
In conclusion, this ruling adds to a series of recent decisions regarding the valuation of goods for import tax purposes. These rulings follow a common-sense approach: import taxes should be based on the actual price paid for the product, rather than on theoretical valuations.5142/20 State of Israel Tax Authority v. Delek Motors. For the State – Att. Hirschberg. For the importer – Att. Abramowitz
It is important to note that over a decade ago, the Tax Authority issued a directive requiring discounts to be fixed, final, and unconditional to be acceptable. The legal discussion in the Delek Motors case directly challenged and ultimately rejected this directive. Understandably, this discussion has great principled importance. Following the Supreme Court’s ruling, it would be appropriate for the Tax Authority to amend the part of the Goods Valuation Procedure that relates to the admissibility of discounts and to implement the provisions of this ruling.
This ruling continues the principled direction expressed by the Lod District Court (in a panel of three judges) in the Pelephone case, where the court ruled that goods supplied without charge for warranty services or sales promotion purposes are not be subject to import taxes, contrary to the Tax Authority’s position, and this when it could be proven that their value was incorporated into a comprehensive commercial framework transaction accepted in that industry, which involved the supply of devices in full consideration and alongside relatively small quantities of goods without charge for warranty and sales promotion purposes. In this case as well, it would be appropriate for the Tax Authority to issue an amended instruction.
The content is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis.
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