On Friday, Sept. 23, 2011, U.S. Customs and Border Protection (CBP) issued a prepublication proposal statement describing CBP’s proposed revocation of Headquarters Ruling Letter (HRL) 547654, which discusses CBP’s position concerning the application of post-importation price adjustments and their impact on the application of a transaction value method of appraisement.
CBP is considering modifying prior rulings that question application of a transaction value method of appraisement if certain post-importation adjustments are expected, so long as those adjustments are part of a pre-established transaction value formula, and as long as the importer uses CBP’s Reconciliation program for adjusting the value of the affected importations.
CBP has given importers and interested parties until Sunday, Oct. 23, 2011 to submit comments before making its final decision whether to submit a revocation letter for HRL 547654.
Proposed Change to CBP’s Interpretation
Transaction value is the primary method of appraisement and is the method most frequently used by importers. While transaction value is usually fixed at the time of exportation to the U.S., transaction value may be arrived at by using a formula. See 19 CFR 152.103(a)(1). Using transaction value in related party transactions presents certain appraisement issues because CBP wants to ensure that the companies’ relationship does not affect the declared value of the imported goods. This is especially true when the related party “transfer price” formula incorporates certain adjustments to value that may apply post-importation. Traditionally, CBP has allowed transfer price adjustments, but mostly under the guise of a fallback method of appraisement. This proposal is suggesting a change to that rule that would recognize such post-entry adjustments do not disqualify use of transaction value in a related party transaction.
One of the reasons CBP has been hesitant to allow transfer price adjustments under transaction value is that formulas used to determine transfer prices often contain certain costs that are within the control of the parties, putting into question the objectivity of any given formula. However, CBP is proposing that even if the parties are related and certain costs may be within the control of the parties, the transfer pricing policy may be considered an objective formula, if set before export to the U.S. Such a change would allow for the use of transaction value, provided that certain additional criteria are met with regard to the arm’s length nature of the related party value.
CBP proposes the following examples as important criteria to be considered when determining whether a transaction value method of appraisement is appropriate:
- the company maintains a written “Intercompany Transfer Pricing Determination Policy,” which sets out how the transfer price is to be determined prior to the importation;
- 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;
- the company’s transfer pricing policy specifically covers the products for which the value is to be adjusted;
- the policy specifies what adjustments must be made to the transfer price, and how those adjustments are to be determined;
- the adjustments, although to a certain extent within the “control” of the parties, do not result in value manipulation;
- if adjustments are made, the company provides detailed explanations and calculations of the adjustments incurred in the United States and claimed after the importation;
- the relevant transfer pricing policy, pursuant to which adjustments are claimed is in effect prior to the importation; and,
- 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.
These criteria are examples set forth by CBP and should not be considered determinative factors of whether an objective transfer pricing formula exists.
CBP also maintains that, given the provisional nature of any value potentially subject to post-entry adjustments, participation in CBP’s Reconciliation program remains the only viable way to make such post-importation adjustments. Therefore, companies looking to benefit from the proposed interpretation will want to ensure that they participate in Reconciliation and that they flag all relevant entries appropriately.
CBP’s full proposal can be reviewed here: http://www.cbp.gov/xp/cgov/trade/trade_ outreach/public_comment.xml
Although the proposed policy will likely be published as a revocation of HRL 547654 under 19 U.S.C. §1625(c), which provides a separate comment period, Customs is inviting comments at this early stage and we encourage interested parties to take advantage of this opportunity to engage CBP on this important issue.