AAEI 2008 Winter Regional Conference & Expo Recap

The American Association of Exporters and Importers (AAEI) held it's 2008 Winter Regional Conference and Expo in Newport Beach, California on January 20-22, 2008. The conference was entitled, "Reaching Optimum Balance - A Return to Trade Facilitation" and focused largely on security issues. 

Global Trade Expertise attended the conference and will give recap some of the most interesting issues that were brought up (in our opinion).

Trouble for Transfer Pricing?

Monika Brenner, Chief, Valuation and Special Programs Branch, Customs and Border Protection, gave a presentation entitled, "Determining Transaction Value in Related Party Transactions" as part of a panel presentation called, "Walking the Transfer Pricing Tight Rope." In her presentation, Ms. Brenner set out the differences between Customs and tax laws in determining an arm's length price and stated that an "APA or Transfer Pricing Study by itselfis not sufficient to show that a related party transaction value is acceptable for Customs purposes." This information should not be news to importers.

However, Ms. Brenner went on to discuss the effect of post-importation adjustments on the application of transaction value for transfer prices. Ms. Brenner stated that compensating adjustments to transfer prices that occur post-importation may have the effect of making the transfer price unacceptable as transaction value. She stated that for a price to be acceptable as transaction value, the price would need to be either: (1) fixed prior to importation or (2) set by an "objective formula." 

Although the requirement of an "objective formula" is not found in the Customs regulations or the valuation statute, CBP has implemented the requirement in their rulings. Ms. Brenner set forth the definition of an "objective formula" in her presentation as follows:

Under CBP's current policies as reflected in rulings, it is necessary for the formula to be fixed so that the final sales price can be determined at a later time on the basis of some event or occurrence over which neither the seller nor the buyer has any control.

Ms. Brenner stated that a Federal Register notice modifying some existing rulings will likely be issued in February that will set forth further guidance or "tests" to determine whether an "objective formula" exists. She stated that the tests will likely include factors such as: whether the formula is in writing and signed by both parties, whether the post-importation (or compensating) adjustments are clearly set forth in writing and the written formula was actually used.

Ms. Brenner stated in her presentation that the Reconciliation program "is simply a process for reporting certain information to CBP after importation. It does not cure impediments that relate tot he application of transaction value." Privately, we have heard that CBP auditors believe importers have been abusing the Reconciliation program by making large compensating adjustments to transfer prices. Finally, Ms. Brenner's presentation states, "Stay tuned for further information about possible changes to the treatment of certain post-importation adjustments." 

OFAC Enforcement/Audits

As part of a new push for outreach to the international trade community, Jessica Brinkmann, Compliance Officer/International Trade Outreach, Treasury Department, stated that she asked to present at the AAEI Conference this year. In her presentation, she outlined who is OFAC, the legal authority for U.S. sanctions, described the sanction programs generally, OFAC licnensing, penalties and consequences, and discussed effective compliance strategies. 

Finally, and of most interest to the audience was Ms. Brinkman's discussion about OFAC compliance audits. She stated that OFAC has recently started conducting compliance audits of companies, giving selected companies prior warning of the audit of as little as 1 hour or as much as a couple of weeks. In response to questions, Ms. Brinkman stated that she selects companies for compliance audits based on internet searches of companies that do business in sensitive areas of the world such as the Middle East or Latin America. She stated that companies are not necessarily selected based on prior problems or identified OFAC issues. Instead, she stated that she will often select a company that is in the general area where she is visiting for speaking engagements, etc.

To prepare for such a surprise visit by OFAC, companies should have written OFAC procedures and policies in place that have been actually implemented.

The Proposed "10+2" Rule

Much discussion was had regarding the proposed "10+2" rule. Richard DiNucci, CBP's point of contact for the "10+2" rule, gave a presentation on the new rule and stated that CBP is awaiting comments from the trade. Mr. DiNucci stated that CBP has received about 6 comments so far and look forward to received more. The deadline for comments is March 3, 2008.