Customs Valuation: Transaction Value And Related Parties

This Customs and International Trade Alert is the

second in a series examining developments pertaining to the

traditional role of U.S. Customs and Border Protection

("CBP") in managing imports, namely determining the

classification, value, and country of origin of those imports. With

respect to valuation, two specific issues have been the focus of

considerable attention at CBP: "First Sale" valuation and

related party pricing. "First Sale" valuation, which is

the subject of recent CBP proposals and legislative directives, was

discussed in our Customs and International Trade Alert,

"When it Comes to Imports, Companies Must Remember the Basics:

Valuation, Classification, and Country of Origin." Related

party pricing, a matter of some enduring concern, is discussed

here.

Transaction Value and Related Parties:

Transaction value, briefly "the price paid or payable for ...

merchandise when sold for exportation to the United States,"

remains the most common form of valuation for customs purposes.

When an import transaction is between related parties, CBP commonly

performs a "circumstances of sale" test to ensure that

the price was not influenced by the relationship between buyer and

seller. In administering this test, CBP has developed several

criteria, any one of which may be used to demonstrate that the

relationship did not influence the price. The test most frequently

used is whether the price is adequate to ensure recovery of all

costs plus a profit that is equivalent to the firm's overall

profit in sales of the same type of merchandise. While CBP is not

proposing to change these criteria, a recent Informed Compliance

Publication, Determining The Acceptability of Transaction Value

for Related Party Transactions (April 2007), may foretell an

increase in agency enforcement efforts, and a greater risk of

examination of importer records.

This area of customs valuation presents particular pitfalls for

the unwary, even the most sophisticated multinational operations.

Particularly problematic are transfer pricing studies, undertaken

by multinational companies to satisfy IRS requirements that

transfer prices reflect arm's length values, and Advance

Pricing Agreements ("APAs"), adopted to ensure that a

company's transfer pricing methodology results in sufficient

profit in the U.S. entity to avoid domestic tax compliance

issues.

The concern with transfer pricing studies and APAs is that, when

accepted by IRS, they may be viewed by the importer as...