May 21, 2007
Customs and Border Protection recently issued an Informed Compliance Publication (ICP) entitled: Determining the Acceptability of Transaction Value In Related Party Transactions. This is an important publication, and one that all customs or trade managers for companies that import from related parties should be familiar with, and share with their tax, finance, and legal departments.
The new publication reviews the basic rules relating to Customs valuation found under 19 USC §1401a, and its effect on the Customs value of related party import transactions. Under §1401a, related-party importers may use transaction value as the basis of their reported value, provided the relationship does not affect the price.
The publication devotes a significant amount of attention to the difference between IRS intercompany transfer pricing rules (Section 482 IRC) and Customs valuation. While noting that Section 482 and 1401a have some similarities, they are not the same. CBP reiterates the position it has taken in several of its rulings that even if an importer's transfer pricing methodology satisfies one of the IRS methods, it will not be determinative of whether that transfer price is an acceptable transaction value for customs purposes, stating "[t]he mere fact that an importer provides CBP with an APA or transfer pricing study is not sufficient to establish that a related party transaction value is acceptable."
The publication reviews the methods that are acceptable, under Customs law, to determine if the relationship affects the price -- notably, the "circumstances of sale test" and the "test value" method. With respect to the use of the "test value" method, CBP clarifies a mistake that importers often make with respect to the use of the test-value method:
Importers often mistakenly believe that transaction value is acceptable for the imported goods when it is the same as the value calculated by the importer under the deductive value or the computed value method for those same imported goods. This is not the case. If there are no previous importations of identical or similar merchandise that were appraised under the transaction, deductive or computed value methods, there are no test values that can be applied. [Emphasis added.]
CBP also reviews the three "circumstances-of-sale" tests, and whether the price:
- Was settled in a manner consistent with the normal pricing practices of the industry in question;
- Was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it; or
- Is adequate to ensure recovery of all costs plus a profit, that is equivalent to the firm's overall profit, realized over a representative period of time in sales of merchandise of the same class or kind.
With regard to whether the transfer price was settled in a manner consistent with the normal pricing practices of the industry in question, CBP notes that if the importer is relying on this methodology, then it must have objective evidence of the normal pricing practices of the industry in question and present evidence that the transfer price was settled in accordance with that industry pricing practice.
The second method applies in situations where the foreign seller sells the same merchandise to both related and unrelated parties, and determines the price in a consistent way. Although CBP generally requires that the comparison sales to unrelated buyers be sales to buyers in the U.S., CBP will consider evidence regarding sales to unrelated buyers in other countries, provided the importer presents an adequate explanation as to why it is relevant to the transactions at issue.
Finally, with regard to the "all costs plus a profit" method, CBP notes that to substantiate use of this method, the importer should be prepared to provide records and documents related to costs and profit; such as financial statements, accounting records including general ledger account activity, bills of materials, inventory records, labor and overhead records, relevant selling, general and administrative expense records, and other supporting business records.
CBP also reminds importers that when the import is between related parties, it is the importer's responsibility to use reasonable care and determine whether declared value is an acceptable transaction value, based on either the application of the circumstances of sale test or the test value method, including sufficient information available to demonstrate how it meets the particular test upon which it is relying before a declaration is made. Customs reminds importers that the mere fact that it has satisfied the requirements of Section 482 IRC, it does not mean that the reported value is acceptable for Customs purposes under 19 U.S.C. §1401a, and that it is still necessary for the importer to analyze whether the related party sale satisfies the circumstances of sale test or the test value method. Finally, Customs reminds importers that although it does not examine all related party transactions, importers should be prepared to provide information supporting the declared value to CBP when requested.
A copy of the new publication can be downloaded by selecting the following link: Determining the Acceptability of Transaction Value In Related Party Transactions (www.tuttlelaw.com/customs_material/related_party_pricing.pdf).
Other CBP informed compliance publications can be viewed and downloaded by going to: https://www.cbp.gov/trade/rulings/informed-compliance-publications.
Finally, a recent PowerPoint presentation on the acceptability transaction value in related party transactions may be viewed by selecting the following link: Intercompany Transfer Pricing & Customs Valuation (www.tuttlelaw.com/seminar/ic_pricing_valuation.ppt), a presentation by Tuttle Law Offices to the Customs Brokers and Forwarders Association of Northern California (CBFANC) on April 24, 2007.
If you have questions on any of the issues raised in this newsletter, please contact George R. Tuttle, III at (415) 288-0428 or via email at firstname.lastname@example.org.
George R. Tuttle, III is an attorney with the Law Offices of George R. Tuttle in San Francisco. The information in this article is general in nature and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
Copyright © 2007 by Tuttle Law Offices.
All rights reserved. Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.