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CBP Formally Proposes More Flexibility for Post-Importation Adjustments

Monday, January 09, 2012
Sandler, Travis & Rosenberg Trade Report

U.S. Customs and Border Protection has formally proposed changing its policy on the applicability of transaction value in the context of post-importation adjustments. This change would make it easier to make transfer pricing adjustments after importation and could result in some duty savings as well. Comments on the proposed change, which would be effected through the revocation of ruling HQ 547654, are due no later than Jan. 27.

Merchandise imported into the U.S. is appraised under 19 USC 1401a and the primary method of appraisement is transaction value, or the price actually paid or payable for the merchandise when sold for exportation to the U.S. plus certain additions. The term “price actually paid or payable” means the total payment (whether direct or indirect) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. Transaction value is normally fixed at the time of importation but may be arrived at by using a formula. Rebates, or any other decreases 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.

However, importations that involve transactions between related parties may involve adjustments to initial transfer prices after importation in accordance with the company’s formal transfer pricing policy or formula. In some cases that policy may provide for year-end compensating adjustments to comply with the requirements of an advance pricing agreement between the U.S. party and the Internal Revenue Service. Such adjustments could affect whether the price is considered fixed or determinable by objective formula at the time of importation.

CBP’s current policy on the treatment of post-importation adjustments is set forth in ruling HQ 547654, dated Nov. 9, 2001, in which the price for the goods was arrived at pursuant to a methodology that included an initial sum subject to adjustments. Although there was a formula that determined the price prior to importation and allowed for certain post-importation adjustments, CBP found that the transfer pricing policy was not fixed and could not be considered an objective formula because the parties could control whether and to what degree the prices would be adjusted. 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) to CBP through reconciliation.

CBP is now proposing to change this policy so that that even if the parties are related and certain costs may be within their control the transfer pricing policy may be considered an objective formula, thus allowing the use of transaction value for post-importation adjustments. However, the following additional criteria would have to be met: (1) there is 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 U.S. taxpayer and uses its transfer pricing methodology in filing its corporate income tax returns, (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, and (5) there is an absence of other circumstances that may indicate that the compensating adjustments do not result in an arm’s length price between the parties. CBP appears to have excluded the following additional criteria that it had initially proposed to require: the adjustments, although to a certain extent within the control of the parties, do not result in value manipulation; and if adjustments are made the company provides detailed explanations and calculations of the adjustments incurred in the U.S. and claimed after the importation.

CBP notes that no single one of these factors is determinative and that its finding with respect to whether an objective formula exists would be made on a case-by-case basis. In addition, companies would still have to be prepared to show that transaction value is acceptable under the circumstances of the sale test or the test values test.

CBP also finds that downward adjustments in the transfer price made pursuant to the valid 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. Instead, post-importation adjustments would represent an element of the determination of the price actually paid or payable, in which case post-importation adjustments made pursuant to the transfer pricing policy would simply reflect what should have been reported as the invoice price upon entry had the exact price information been available at the time.

Finally, under the proposed policy change the reconciliation program would have to be used 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.

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