Dec 28 CBP Bulletin Proposes Broader Use of Transaction Value for "Related Party" Sales and Post-Import Adjustments

(Related party trade in 2010 accounted for 40.8% ($1,295 billion) of total goods trade. Related parties often have formal intercompany policies in place for setting the price of imports (i.e., the transfer price between related parties), and may provide for various adjustments to be made to the transfer price after importation.)

Comments on Proposed Guidance and Revocation Due Jan 27

CBP states that before taking this action, consideration will be given to any written comments received by January 27, 2012. In addition, any party who has received a ruling or decision on the merchandise that is subject to the proposed revocation, or any party involved with a substantially identical transaction, should advise CBP by the date that written comments on the proposed ruling is due. (An importer's failure to advise CBP of such rulings, decisions, or substantially identical transactions may raise issues of reasonable care on the part of the importer or its agents for importations subsequent to the effective date of the final decision in this notice.)

Persons who provided comments in response to CBP’s Website notice on this proposed guidance do not need to resubmit them, unless there are additional points they would like CBP to consider. (See ITT’s Online Archives 11092605 for summary.)

Five Factors Proposed for Transaction Value and Adjustments

CBP is proposing to issue HQ W548314 to state that subject to meeting five factors, the transaction value method of appraisement will be allowed when a related party sales price is subject to upward and/or downward post-importation adjustments that are made pursuant to formal transfer pricing policies and specifically related (directly or indirectly) to the declared value of the merchandise. The post-importation adjustments are to be reported using Reconciliation.

The following five factors that must be adhered to are:

1. Written policy prior to import. A written “Intercompany Transfer Pricing Determination Policy,” which sets out how the transfer price is to be determined prior to the importation;

2. Importer is U.S. taxpayer. The importer/buyer is the U.S. taxpayer, and it uses its transfer pricing methodology in filing its corporate income tax returns;

3. Policy covers adjusted products. The company’s transfer pricing policy specifically covers the products for which the value is to be adjusted;

4. Specifies U.S adjustments. The policy specifies what adjustments must be made to the transfer price, and the company provides detailed explanations and calculations of the adjustments incurred and claimed in the U.S.; and

5. Adjustments maintain ‘arm’s length’ price. There is an absence of other conditions which may indicate that the compensating adjustments do not result in an arm’s length price between the parties.

(CBP also states that its decisions to allow the use of transaction value for related party transactions and post importation adjustments will be made on a case-by-case basis. In addition, any post importation adjustments must be made using Reconciliation.)

Ruling Would be Revoked to Allow Transaction Value as Factors Met

In HQ 547654, CBP determined that transaction value did not apply because the price was not considered to be fixed or determinable pursuant to an objective formula prior to importation.

However, CBP is now proposing to revoke HQ 547654 and rule that transaction value applies, because based on the five factors, the importer’s transfer pricing policy is an objective formula in place prior to importation for purposes of determining the price within the meaning of 19 CFR 152.103(a)(1). CBP states that no single factor is determinative of its opinion, and findings with respect to whether an objective formula exists will be made on a case-by-case basis.

Five factors met. CBP is proposing that the five factors were met as the importer provided it with documentation showing, variously (partial list): (a) that the transfer pricing policy was written before the goods were imported, and it, and thus its formula, had an impact on the reported customs values; (b) that the transfer price adjustments indirectly relate to the originally-reported price paid; (c) what adjustments are made on an entry-by-entry basis; (d) that they were not subject to antidumping (AD) or countervailing (CV) duty proceedings or type 03 entries; (e) it does not allocate the compensating adjustments and claim such adjustments for good partially damaged at time of importation; (f) how the adjustments are calculated and claimed; specifically, only the budgeted fixed costs (and not the variable costs, absorbed by the importer) are adjusted after importation, with (i) the fixed costs set in advance and later simply allocated to the individual imports and (ii) a procedure is in place to quarterly verify the actual versus budgeted fixed cost amounts as well as an explanation as to any possible variances; (g) that the related party sales are bona fide and eligible to use transaction value as the appraisement method, by providing CBP with confidential information regarding the circumstances of its global sales.

Using post import adjustments to determine transaction value. CBP is also proposing that post-importation adjustments (both downward and upward), to the extent they occur, may be taken into account in determining the transaction value. In this particular case, the post-importation adjustments made pursuant to the transfer pricing policy simply reflect what should have been reported as the invoice price upon entry, had the exact price information of the imported merchandise been available at the time. Any such changes in the transfer price should be immediately reported to CBP.

Reconciliation for reporting. Also in this particular case, the importer uses reconciliation to report downward and upward post-importation adjustments to the value initially declared upon the importation of the merchandise. CBP finds that the reconciliation program must be used to properly apply transaction value and account for the total value for the imported merchandise where a formal transfer pricing study, policy, or an Advance Pricing Agreement (APA) allows for upward or downward post importation adjustments that directly (or indirectly) relate to the value of the merchandise.

Ruling based on facts presented. According to CBP, this proposed ruling assumes that all of the information furnished in connection with the consideration of this matter, including the internal advice and reconsideration requests, is accurate and complete in every material respect. CBP notes that if the importer’s circumstances change, its decisions to allow transaction value and post importation adjustments via Reconciliation may no longer be valid.

Further, the application of this decision is subject to the verification by the Office of Regulatory Audit should an audit be conducted.