Comments Due Jan 27 on Broader Use of Transaction Value for "Related Party" Sales & Post-Import Adjustments
In the December 28, 2011 issue of the U.S. Customs and Border Protection Bulletin (Vol. 46, No. 1), CBP requested comments by January 27, 2012 on its proposal to more broadly allow transaction value to be used when related party sales are subject to post-importation adjustments, if five factors are met.
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The five factors that CBP is proposing must be adhered to are:
- Written policy prior to import. There is a written “Intercompany Transfer Pricing Determination Policy,” which sets out how the transfer price is to be determined prior to the importation;
- 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;
- Policy covers adjusted products. The company’s transfer pricing policy specifically covers the products for which the value is to be adjusted;
- 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
- 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 is also proposing that any post importation adjustments be made using Reconciliation, and that its decisions to allow the use of transaction value for related party transactions and post importation adjustments would be made on a case-by-case basis.
(See ITT's Online Archives 11123025 for more detailed summary of CBP's proposed revocation of HQ 547654 in order to allow transaction value for related party sales and post-importation adjustments to be used more broadly.
Background. In HQ 547654, CBP had ruled that transaction value did not apply because the price was not considered to be fixed or determinable pursuant to an objective formula in place prior to importation.
In its proposal to revoke HQ 547654, CBP states that based on the five factors, transaction value can be allowed as the importer’s transfer pricing policy is an objective formula that was in place prior to importation for purposes of determining the price within the meaning of 19 CFR 152.103(a)(1).
CBP's proposal states 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 are 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.
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.
In addition, CBP is proposing 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.)