CBP Rules that Importer Cannot Claim Post-Pricing Sales Adjustments

In an August 18, 2014 ruling, U.S. Customs and Border Protection ("CBP") determined that a pharmaceutical product importer cannot claim post-import pricing adjustments without first meeting the standards CBP has set for related party transactions and post-import adjustments.  The redacted ruling, HQ H204329, stemmed from a 2012 request for internal advice regarding the treatment of extra payments the importer made to its related supplier for tax purposes.  

The importer contends that it used the proper transaction value method for appraisement, but CBP stated that the company cannot claim post-import adjustments unless it produces the documentation necessary to satisfy the five-factor criteria CBP says is applicable in these kinds of cases involving adjustments related to the value of imported goods.  

Counsel for the importer argued that the criteria did not apply in this case; they further argued that even through the post-import adjustments the importer declared were assigned to certain products, the payments submitted were made only for tax purposes and did not have any bearing on the customs value of the merchandise.  CBP disagreed and put forth this explanation in the ruling:

The ultimate selling price (operating profit) of Company A in the United States takes into account the costs of the product throughout each step, in sale from the manufacturer to the consumer.  Thus, by working back from the arm’s length net margin (or profit) of Company A, the arm’s length COGS (or price actually paid or payable for customs purposes) can be deduced.  Accordingly, we find that the customs value of the imported merchandise is affected every time the related parties reduce or increase their profitability pursuant to the APAs or transfer pricing studies, which cover the imported goods, resulting in payments, transfer of funds, or credit/debit transactions between the related parties.  We also note that even though in this case, Company A’s complex APA covers tangible and intangible transactions between the parties, as well as services, the related parties made the adjustments to their profitability, which resulted in the transfer of funds between the parties, the adjustments booked to COGS, and the revised supply Agreements.  Therefore, these adjustments must be reported to CBP since they directly relate to the imported goods; however, in order for Company A to claim post-importation adjustments to the value of the imported goods, Company A must satisfy our five-factor criteria, specified in HRL W548314, dated May 16, 2012, which is applicable to cases that involve compensating (post-importation) adjustments made to the profitability of related parties pursuant to APAs or transfer pricing studies.

A second point at issue was whether or not the price actually paid for the imported merchandise was influenced by the relationship of the parties.  CBP maintains that the importer did not successfully demonstrate that the adjusted prices were not influenced by the relationship for purposes of the circumstances of the sale or test values tests.  

In conclusion, CBP ruled that in the absence of the required information needed to meet the five-factor criteria called for in W548314, the importer cannot claim the downward adjustments.  Therefore, transaction value was not the proper method of appraisement in this case, and to the extent that the value of the goods has increased, the importer will be required to submit payment for any duties owed.

by Suzanne DeCuir