U.S. Customs and Border Protection (CBP) recently published a notice requesting public comments in connection with its decision to reconsider the agency’s approach to handling post-import value adjustments made between related parties. CBP’s new proposal seeks to broaden the interpretation of what constitutes a “formal transfer pricing policy or formula,” which would thereby allow certain downward adjustments to the transfer price to be claimed by an importer. If your company currently purchases imported merchandise under a transfer price agreement, considerations should be made to determine the treatment of post-import value adjustments under CBP’s current and proposed policies.
Under current policy, CBP disallows claims for downward post-importation price adjustments because it considers a post-import decrease in the transfer price to be a rebate that is barred by the value statute. CBP has allowed these adjustments only in limited cases where a “fallback” method of appraisement has been applied. In order to reconcile the agency’s approaches, CBP is considering a broader interpretation of what is permitted under transaction value when transfer prices between related parties are involved.
Specifically, CBP is proposing that if a transfer price is established before importation and is calculated based on objective factors, price reductions can be considered under the transaction value method if certain additional criteria are met. CBP is also considering that downward adjustments in the transfer price made after the date of importation will no longer be considered rebates or decreases to the price paid or payable. The downward adjustment could then be claimed to CBP, provided the information concerning the adjustments had been available at the time of importation.
The additional criteria that CBP is considering in order for related parties to use transaction value in cases where a transfer price involves post-import adjustments are as follows:
- whether a written “Intercompany Transfer Pricing Determination Policy” exists that establishes how the transfer price is to be determined prior to the importation;
- whether the importer/buyer is the U.S. taxpayer and 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;
- whether the company’s transfer pricing policy specifically covers the products for which the value is to be adjusted;
- whether the policy specifies what adjustments must be made to the transfer price, and how those adjustments are to be determined;
- whether the adjustments, although to a certain extent within the “control” of the parties, result in value manipulation;
- if adjustments are made, whether the company provides detailed explanations and calculations of the adjustments incurred in the United States and claimed after importation;
- whether the relevant transfer pricing policy, pursuant to which adjustments are claimed, is in effect prior to the importation; and
- whether there is an absence of other circumstances which indicate that the compensating adjustments do not result in an arm’s length price between the parties.
No single factor is determinative. CBP will consider these factors on a case-by-case basis.
In order to claim post-import price adjustments, CBP would require importers 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 provides for post-import value adjustments. The reconciliation program would allow companies to provide CBP with information not available at the time of entry summary filing and the information could be filed up to 21 months thereafter.