Valuation
CBP Inches Closer to Accepting APA-Approved Transfer Prices
03/01/10 04:05 PM
On
December 8, 2009, U.S. Customs and Border
Protection (CBP) issued an Internal Advice Ruling
(Headquarters Ruling Letter
(“HQ&rdquo
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&rdquo 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:
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.
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&rdquo
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:
- 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;
- 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
- 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.
CBP Extends Comment Period for Proposed Interpretation re: "First Sale" Valuation
02/08/08 08:31 PM
On
February 7, 2008, the U.S. Customs and Border
Protection ("CBP") published a
notice in the
Federal
Register extending by 30
days the comment period for its proposed
interpretation of the phrase "sold for exportation
to the United States" for purposes of applying the
transaction value method of appraisement when a
series of sales exist prior to importation into the
U.S.
CBP is proposing that the transaction value (or price paid or payable) for imported goods in a series of sales is the price paid or payable in the last sale occurring prior to the goods' importation into the United States, rather than the price in the first or earlier sale. CBP states that this is based on its proposed revised interpretation of the phrase "when sold for exportation to the United States" such that CBP no longer believes that the first (or earlier) sale qualifies as a sale for exportation to the United States. CBP states that this proposed interpretation is in line with the conclusions of the Technical Committee on Customs Valuation as set forth in Commentary 22.1, entitled, "Meaning of the Expression 'Sold for Export to the Country of Importation' in a Series of Sale."
On January 24, 2008, CBP published a notice in the Federal Register setting forth its proposed interpretation with a comment period to expire on March 24, 2008. CBP received correspondence requesting an extension of the comment period. Accordingly, CBP has decided to allow an additional 30 days for comments. Comments are now due on or before April 23, 2008.
CBP is proposing that the transaction value (or price paid or payable) for imported goods in a series of sales is the price paid or payable in the last sale occurring prior to the goods' importation into the United States, rather than the price in the first or earlier sale. CBP states that this is based on its proposed revised interpretation of the phrase "when sold for exportation to the United States" such that CBP no longer believes that the first (or earlier) sale qualifies as a sale for exportation to the United States. CBP states that this proposed interpretation is in line with the conclusions of the Technical Committee on Customs Valuation as set forth in Commentary 22.1, entitled, "Meaning of the Expression 'Sold for Export to the Country of Importation' in a Series of Sale."
On January 24, 2008, CBP published a notice in the Federal Register setting forth its proposed interpretation with a comment period to expire on March 24, 2008. CBP received correspondence requesting an extension of the comment period. Accordingly, CBP has decided to allow an additional 30 days for comments. Comments are now due on or before April 23, 2008.
For further information, contact: Lorrie Rodbart, Valuation and Special Programs Branch, Regulations and Rulings, Office of International Trade; Phone: (202) 572-8740.