On September 23, 2011, in a Friday posting to its website, US Customs and Border Protection (CBP) has invited advance public comment on a rule change that would make key changes in the treatment of transfer prices for customs purposes.

These potential changes could affect the declared value of imported goods (and, consequently, the import duties/fees paid on those goods) for companies with significant related party sales that are priced according to a transfer pricing formula.

The key changes are as follows:

  • In a change from its present position, CBP would recognize post-importation adjustments to transfer prices without casting doubt on the propriety of those prices being used under the transaction value method of appraisement.
  • Downward adjustments to transfer price (lowering duties and fees) would be recognized.
  • Adjustment (upward and downward) would have to be made via the Reconciliation Program.

The CBP Announcement

On September 23, 2011, CBP announced on its website that it is re-examining its approach to valuing imported merchandise from related parties. Specifically, CBP is considering whether to accept transaction values (generally invoice price) when transfer price is determined pursuant to an established transfer pricing policy and formula and the final entered value of the merchandise is based on post-importation adjustments applying that formula. CBP is asking the public to provide comments on this proposed policy at EarlyInputMailbox@dhs.gov.

The Significance of Transfer Pricing to Customs Value

Transfer pricing adjustments are often made to bring the value of imported merchandise into compliance with IRS arm’s length pricing standards. While most importers and tax authorities would view compensating adjustments as a normal and expected part of inter-company pricing, CBP policy on compensating adjustments in the customs valuation context has been complicated and often confusing.

CBP historically viewed retrospective adjustments to transfer prices as evidence that the importer was wrong to have relied on the invoice price (so-called transaction value) as the basis to declare a value for imported goods because that price was obviously not final. While a narrow exception was created for adjustments made pursuant to formal transfer pricing systems negotiated between and among companies, Internal Revenue Service (IRS), and foreign tax authorities, CBP’s view was that corporate transfer pricing systems that led to or allowed retrospective price adjustments were subject to manipulation and not sufficiently objective to support the use of transaction value to value imported merchandise.

The CBP Proposal

CBP is asking the public to provide comments on the broadening of CBP’s interpretation of what constitutes a “formula” for purposes of using transaction value, thereby allowing post-importation adjustments. According to CBP, in order to permit the efficient administration of upward and downward post-importation adjustments, it is considering modifying prior rulings to allow the transaction value basis of appraisement in these circumstances. A major condition is that the importers use CBP’s reconciliation program to declare the final value of the affected importations. See here.

CBP is now proposing that even though the parties are related and certain costs may be within the control of the parties, if the transfer pricing policy is set before importation and is used by the parties, it may be considered an objective formula, allowing the use of transaction value, provided that certain additional criteria are met.

New Factors that CBP May Consider

CBP is considering the following criteria for an importer to use the transaction value method of appraisement:

  1. A written “Intercompany Transfer Pricing Determination Policy” that sets out how the transfer price is to be determined prior to the importation;
  2. The importer/buyer is the US 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 United States 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 CBP’s finding with respect to whether an objective formula exists will be made on a case-by-case basis.

Downward Adjustments to be Permitted

As part of this policy change, CBP would allow downward adjustments in the transfer price made pursuant to the transfer pricing policy to represent an element of the determination of the price actually paid or payable in accordance with 19 CFR §152.103(a)(1). 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. Current policy treats such decreases as rebates and no change in value is allowed.


In order for companies to claim post-importations adjustments, importers will be required to 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 APA, provides for upward or downward post-importation adjustments that directly (or indirectly) relate to the value of the merchandise. Reconciliation allows for adjustments to price up to 21 months after entry; entries must be flagged at entry as “reconciliation entries.”

Public Comments Solicited

Public comments on this proposal are due within 30 days to CBP at EarlyInputMailbox@dhs.gov. After analyzing the comments, CBP will consider whether to proceed further with this action in accordance with 19 USC §1625(c) by publishing a proposed revocation of HRL 547654. All comments will be available to the public.