On December 8, 2009, U.S. Customs and Border Protection (CBP) issued an Internal Advice Ruling (Headquarters Ruling Letter ("HQ") H029658) approving the use of import values based on prices set pursuant to a bilateral Advance Pricing Agreement (APA).
In HQ H029658, the importer was an exclusive distributor of motor vehicles and parts imported from a foreign parent company and the affiliate of the parent company. To establish the proper basis of appraisement for motor vehicles and parts, the importer provided CBP with a detailed description of its sales process. In 2003, the importer applied for and received a bilateral APA that was approved by the Internal Revenue Service (IRS) the foreign tax authorities that covered all of its imported items for 5 years.
In its APA, the importer selected the comparable profits method (CPM) as the best method for evaluating its related party, or controlled, transactions. Pursuant to the CPM, an arms' length price range was selected by comparing the profitability of the importer (or "tested party") to that of a set of unrelated companies that performed similar functions and assumed similar risks as the importer. However, none of the 21 selected companies were automobile distributors or manufacturers because pricing data for sales from such companies to unrelated distributors did not exist.
In considering whether or not the import values declared to CBP based on the APA-approved transfer prices were acceptable transaction values under the Customs Regulations, CBP first considered whether the prices were based on bona fide sales. After determining that the underlying transactions were based on bona fide sales, CBP considered whether or not the price actually paid or payable by the buyer to the seller was influenced by the relationship between the parties. CBP did so by examining the circumstances of sales (COS) between the parties.
Under the COS test, CBP focused on:
1 Whether the sales prices of the transactions were settled in a similar manner to the way the seller settled prices with unrelated parties or with the normal pricing practices of the industry;
2 Whether the sales prices were adequate to ensure the recovery of all costs plus a profit equivalent to the company's overall profit realized over a representative period of time; and
3 Whether there were any other factors that indicated that the relationship between the buyer and seller did not influence the sales prices.
CBP found that pricing data for independent distributors of the same vehicles in other regions of the world was not helpful due to differing volumes, consumer preferences, and government regulations. CBP then looked to whether the sales prices were set in a manner consistent with the normal pricing practices of the automotive industry. CBP stated that the importer had submitted evidence that the sales prices were set in a manner consistent with the automotive industry, but CBP would not address the validity of the CPM selected and approved by the IRS and the foreign tax authority.
CBP next examined whether the sales prices were adequate to ensure the recovery of all costs plus a profit equivalent to the company's overall profit realized over a representative period of time. To prove that the sales prices were adequate in this regard, the importer relied on the approved bilateral APA and claimed that the IRS' approval of its profitability range would ensure that the company recovered all costs plus a profit as required by the Customs regulations.
While CBP acknowledged that the APA's comparison between the importer's profitability and that of other companies "may provide some evidence that the price is adequate to ensure recovery of all costs plus a profit," CBP found this kind of information to be "less valuable since the companies are not engaged in the sale of the same class or kind of merchandise." HQ H029658 at 9.
Finally, CBP looked to whether any other factors indicated that the relationship between the parties did not influence the sales price. CBP noted that whether IRS reviewed and approved importer's transfer pricing methodology was a significant factor. Here, he importer's transfer pricing analysis was reviewed and accepted by the IRS and the foreign tax authority. In addition, all of the buyer's imports were covered by the APA, thus reducing the possibility of profit manipulation.
The importer also provided CBP with a waiver that enabled CBP to access the documents that were submitted to the IRS in the APA process. The fact that foreign tax authorities had approved the APA mandated profit levels was another factor in establishing that the relationship between the parties did not affect the price. Finally, CBP made note of the negotiations between the buyer and seller to determine an FOB price that permitted the importer's operating profit to fall within the interquartile range established by a reference to unrelated comparables.
Thus, although CBP did not allow the importer to rely solely on the bilateral APA transfer pricing agreement, CBP held that the importer had showed that the sales price was not influenced by the relationship for the purposes of circumstances of sale test, and, as a result, transaction value was the proper method of appraisement for the related-party import transaction.