CBP May Broaden Use of Transaction Value for "Related Party" Post-Import & Downward Adjustments

If CBP decides to go forward with this change in approach, it will publish a notice in the Customs Bulletin to revoke HQ 547654 (2001). Public comments on this advance notice should be sent to EarlyInputMailbox@dhs.gov, and are due by approximately October 22, 2011.

(In HQ 547654, the price for the goods was arrived at pursuant to a methodology that included an initial sum subject to adjustments. 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 because at least one of the elements for determining the price was within the control of the buyer and/or the seller. Nonetheless, following the hierarchy of the valuation statute, CBP found that the goods could be appraised using the “fallback” method of valuation based on the related party price and that the adjustments could be reported (and claimed) by CBP through reconciliation.)

More Flexibility to Use Transaction Value for Post Import Adjustments

The conditions under consideration in this advance request for comments, for using transaction value for the type of post importation adjustments between related parties described in HQ 547654, are listed by CBP as:

(1) a written “Intercompany Transfer Pricing Determination Policy,” which sets out how the transfer price is to be determined prior to the importation;

(2) the importer/buyer is the U.S. taxpayer, and it uses its transfer pricing methodology in filing its corporate income tax returns and in determining the transfer price for the products covered by the transfer pricing policy;

(3) the company’s transfer pricing policy specifically covers the products for which the value is to be adjusted;

(4) the policy specifies what adjustments must be made to the transfer price, and how those adjustments are to be determined;

(5) the adjustments, although to a certain extent within the “control” of the parties, do not result in value manipulation;

(6) if adjustments are made, the company provides detailed explanations and calculations of the adjustments incurred in the U.S. and claimed after the importation;

(7) the relevant transfer pricing policy, pursuant to which adjustments are claimed is in effect prior to the importation; and,

(8) there is an absence of other circumstances which may indicate that the compensating adjustments do not result in an arm’s length price between the parties.

According to CBP, no single factor is determinative, and its finding with respect to whether an objective formula exists will be made on a case-by-case basis.

More Flexibiity to Adjust Transfer Price Downward as Part of Price Paid or Payable

Furthermore, CBP is considering that downward adjustments in the transfer price made pursuant to the transfer pricing study are not rebates of, or other decreases in, the price actually paid or payable that are made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the U.S. Instead, the post-importation adjustments represent an element of the determination of the price actually paid or payable. Therefore, the post-importation adjustments made pursuant to the transfer pricing policy in the proposed revocation 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.

(CBP notes that as with any other transaction, in addition to the foregoing, companies must be prepared to show that transaction value is acceptable under one of the two tests: (1) circumstances of the sale, or (2) test values.)

Requirement to Use Reconciliation Process

CBP states that in order for companies to claim such post-importations adjustments, it is contemplated that importers must use the reconciliation program to properly apply transaction value and account for the total “price paid or payable for” imported merchandise where a formal transfer pricing study or policy, or an Advance Pricing Agreement (APA), provides for upward or downward post-importation adjustments that directly (or indirectly) relate to the value of the merchandise.

(Reconciliation allows companies to provide CBP with information not available at the time of entry summary filing and which is necessary to ascertain the final appraisement of imported merchandise. Furthermore, reconciliation allows for the information to be filed up to 21 months from the date of the first entry summary with extensions of time as available to importers. CBP believes this flexibility makes reconciliation an ideal tool to declare all adjustments (upward and downward) within the time frame allowed by an APA or transfer pricing study or policy.)

¹Such adjustments have been allowed in certain instances, but under the fallback method of appraisement if the price was not determined using an objective formula. In other instances, CBP disallowed the adjustment because it considered a decrease in the transfer price to be a post importation rebate or decrease.

(Rebates, or any other decrease in the price actually paid or payable made or effected after the date of importation are to be disregarded for the purposes of determining transaction value.)