VAL:RR:IT:VA 548332 jsj
U.S. Customs and Border Protection
Field Director
San Francisco Field Office
Regulatory Audit Division
555 Battery Street
San Francisco, California 94111
Re: Request for Internal Advice; Transaction Value; Price Actually Paid or Payable; 19 U.S.C. 1401a (b)(4)(A); Interest Payments; T.D. 85-111.
Dear Field Director:
The purpose of this correspondence is to respond to your request for Internal Advice of May 12, 2003. The correspondence in issue requested Internal Advice concerning the inclusion in the transaction value price actually paid or payable of alleged interest payments, in whole or in part, made by L. Kee and Company, Inc. (Keeco) to foreign vendors.
This decision is being issued subsequent to the following: (1) A review of Result Sheet 4, pages 10 and 11, of the Regulatory Audit, Compliance Assessment Report dated: October 17, 2002; (2) A review of Result Sheet 4, Attachment J, of the Regulatory Audit Compliance Assessment Report; (3) A review of Result Sheet 4, Attachment K, pages 1 through 6, of the Regulatory Audit, Compliance Assessment Report; (4) A review of an “interest invoice” dated May 17, 1999; (5) A review of a statement prepared and signed by a representative of Keeco and also signed on August 21, 2002 by the representative of Gong Peide, a vendor of Keeco; and (6) A review of Keeco’s submission dated August 6, 2003 which included the Compliance Assessment Report dated October 17, 2002, an addendum to a prior disclosure dated July 8, 2002, an audit request form dated July 15, 2002 with a Keeco response dated July 26, 2002, a second addendum to a prior disclosure dated August 7, 2002, and an audit request form dated July 15, 2002 with a Keeco response dated September 10, 2002.
Customs and Border Protection is extending confidential treatment in accordance with 19 C.F.R. 177.2 (a)(7) to information determined to be privileged or confidential, commercial or financial information. Information for which confidentiality is being accorded will be denoted in brackets in the confidential I.A. response and will be redacted in any public version.
FACTS
Customs and Border Protection, during a compliance assessment audit in July of 2002, learned that Keeco made payments to foreign vendors from 1997 through 2002 in addition to payments for the invoice price of merchandise it imported into the United States. These additional payments totaling [$xxxxxxx] were billed separately on invoices that noted “INTEREST CHARGE.”
The “interest invoices” contain an identification number under the “Article No.” column and the “TOTAL AMOUNT” of the initial invoice in United States dollars. The “interest invoices” then have a the sum identified as the “interest” charge in United States dollars. The “interest invoice” does not provide any information concerning the relationship between the “total amount” figure and the corresponding “interest charge” figure. The “interest invoice,” specifically, does not include any information addressing how the “interest charge” was calculated, payment terms or interest rates.
Keeco advised Customs and Border Protection’s auditors that the payments alleged to be interest, which were billed to Keeco separately from the merchandise, were to reimburse the vendors for shipping terms “D/A 90.” These terms, according to Keeco, provided for the payment of goods within ninety days, rather than the customary thirty days. The interest rate charged, [xxx %] per month or [xxx % or xxx%] annually, depending on how the annual rate is calculated, according to Keeco, was the same for all of Keeco’s vendors and did not change during the period examined, 1997 through 2001.
Keeco, subsequent to requests from CBP’s auditors, provided CBP with written agreements from eight companies dated from November 12, 1999 to May 28, 2001. The importer also provided CBP with ten documents, all dated August 14, 2002, each noted to be a “Declaration Of Agreement For Payment Of Finance Charges For Sales Made To L. Kee & Co., Inc.” The Declarations state that L. Kee & Company (HK) Ltd. is the buying agent of Keeco and that they confirm the agreement concerning the payment of finance charges between Keeco and the vendor that executed the declaration. The declaration is on the letterhead of L. Kee & Company (HK) Limited. The monthly interest rates are stated to have been [xxx %] for the years 1997 through 2001.
ISSUES
(1) Are the “interest” payments made by Keeco to its vendors for which no written arrangement was provided to Customs and Border Protection included in the price actually paid or payable pursuant to the transaction value method of appraisement ?
(2) Are the “interest” payments made by Keeco to its vendors for which “declarations,” purporting to confirm an unwritten arrangement between the importer and the vendor, and “interest invoices” were provided to Customs and Border Protection included in the price actually paid or payable pursuant to the transaction value method of appraisement ?
(3) Are the “interest” payments made by Keeco to its vendors for which agreements were provided to Customs and Border Protection included in the price actually paid or payable pursuant to the transaction value method of appraisement for entries that were made prior to the dates of the agreements ?
LAW AND ANALYSIS
The federal agency responsible for interpreting and applying the United States Code and the regulations of the Bureau of Customs and Border Protection, as they relate to the final appraisement of merchandise, is Customs and Border Protection (CBP). Customs and Border Protection, in accordance with its legislative mandate, fixes the final appraisement of imported merchandise in accordance with Section 402 (b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979.
The preferred method of appraisement is transaction value. The transaction value of imported merchandise is:
the price actually paid or payable for merchandise when sold for exportation to the United States, plus amounts equal to –
(A) the packing costs incurred by the buyer with respect to the imported merchandise;
(B) any selling commissions incurred by the buyer with respect to the imported merchandise;
the value, apportioned as appropriate, of any assist;
any royalty or license fee related to the imported
merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
(E) the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. 1401a (b)(1).
The “price actually paid or payable,” as defined in the Trade Agreements Act, is:
the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C. 1401a (b)(4)(A).
Customs and Border Protection, in Treasury Decision 85-111 and as clarified in the “Statement of Clarification,” set forth the position of CBP concerning the “Treatment of Interest Charges in the Customs Value of Imported Merchandise.” Customs and Border Protection, following the decision of the Committee on Customs Valuation of the General Agreement on Tariff and Trade, stated that interest payments, whether or not included in the price actually paid or payable, should not be part of the dutiable value of imported merchandise provided the following criteria was met:
The interest charges are identified separately from the price actually paid or payable for the goods;
The financing arrangement in question was made in writing;
Where required by Customs, the buyer can demonstrate that
The goods undergoing appraisement are actually sold at the price declared as the price actually paid or payable, and
The claimed interest rate does not exceed the level for such transaction prevailing in the country where, and at the time, when the financing was provided.
The request for Internal Advice received from the Regulatory Audit Division, San Francisco Field Office, requires this office to initially address whether the additional payments made by Keeco to its vendors for which no written agreement exists should be included in the price actually paid or payable pursuant to the transaction value method of appraisement. Treasury Decision 85-111 expressly states that financing arrangements must be in writing. Written financing agreements, as required by T.D. 85-111, will contain “specific information regarding interest rates or a guide for determining the interest rate.” HQ 546056 (Mar. 22, 1996). The “interest invoices” in this matter do not provide information that enables CBP to understand how the alleged rate of interest was calculated.
Keeco suggested to CBP that the “rate of interest” could be determined by undertaking a simple calculation involving the amount alleged to be the total invoice price and the amount alleged to be the interest charge on the “interest invoices.” The calculation proposed by Keeco would enable CBP to determine a percentage rate for the “interest payments,” but would not meet the requirements of the Treasury Decision. Employing the formula proposed by Keeco fails to enable CBP to confirm that the alleged “interest” is actually interest and not part of the price actually paid or payable.
The Office of Regulations and Rulings was also requested to determine whether the “interest invoices,” in conjunction with the “declarations,” satisfied the Treasury Decision requirement for a written financing arrangement. The declarations, drafted on L. Kee & Company (HK) Limited (Keeco (HK)) letterhead, were signed by a representatives of Keeco (HK) and individual Keeco vendors. The declarations allegedly “confirm the agreement” between Keeco and the vendors. The declarations were all executed on the same day in August of 2002 and aver the rates of interest applicable between the parties for the years 1996 through 2002.
It is the determination of this office that the “interest invoices” in conjunction with the “declarations” do not meet the criteria of Treasury Decision 85-111. Criteria “B” of T.D. 85-111 states in plain, straight-forward language: “The financing arrangement in question was made in writing.” Customs and Border Protection has not been provided with written documentation produced contemporaneously with the relevant transactions from which the financing arrangement may be confirmed. The declarations were executed subsequent to the transactions in issue and do not constitute documents from which a written financing agreement may be verified. The declarations constitute only post-transaction allegations, unsubstantiated by written documentation, of the terms, conditions and rates of interest alleged to constitute the financing understanding. The Treasury Decision mandates that the financing arrangement be in writing. This criterion has not been satisfied.
Keeco directed the attention of Customs and Border Protection to Headquarters Ruling Letter 546396 (Nov. 29, 1996). CBP, in HQ 546396, concluded that an unsigned Memorandum of Intent which set forth the amount involved, the payment terms and the rate of interest, in conjunction with other evidence that the parties agreed to the terms of the Memorandum was sufficient to establish a written financing arrangement, however informal that agreement may have been. CBP does not believe that HQ 546396 supports Keeco’s position. The alleged financing arrangement between Keeco and its vendors does not have a contemporaneous writing that may be supported by additional evidence or actions on the part of the buyers. The “interest invoices” in the instant situation, unlike the Memorandum in HQ 566396, do not provide payment terms or rates of interest. The “interest invoices” simply indicate the amount due the particular vendor.
Customs and Border Protection in researching this memorandum reviewed the decision of the Court of Appeals for the Federal Circuit in Luigi Bormioli Corp. v. United States, 304 F.3d 1362 (Fed. Cir. 2002). The Court of Appeals in Luigi Bormioli affirmed a decision of the Court of International Trade addressing a situation in which the buyer and seller of imported merchandise had a written financing arrangement that was encompassed in a series of three letters. The trial court and the court of appeals held that although the financing arrangement between the buyer and the seller was evidenced by the series of letters, “the parties’ repeated violations of the salient terms of the arrangement must remove it from coverage under T.D. 85-111.” Id. at 1372. The concern expressed by the court was that deviation from the written arrangement on terms that were more than “de minimis” resulted in a “manipulation of the transaction by setting up a ‘written financing arrangement’ without adhering to any of its terms.” Id. Customs and Border Protection, as was lacking in Luigi Bromioli and as is lacking with Keeco, “must have some way of making determinations as to whether extra charges are interest or simply late or other charges unrelated to the prevailing interest rates.” Luigi Bromioli v. United States, 118 F. Supp 2d 1345, 1352 (Ct. Int’l Trade 2000).
The Office of Regulations and Rulings was additionally requested to advise the Regulatory Audit Division of the effect on Customs transactions of financing agreements executed subsequent to the relevant transactions. Treasury Decision 85-111, as previously stated, mandates a written financing arrangement, in addition to other criteria, in order for interest payments not to be part of the price actually paid or payable. If a written financing arrangement did not exist at the time of the relevant transaction, the payments alleged to constitute interest must be included in the price actually paid or payable. Payments made by an importer to a vendor will only be excluded from the price actually paid or payable as “interest” payments pursuant to criteria “B” of T.D. 85-111 for the time period during which a written financing arrangement was in effect. Written financing arrangements have no effect prior to the date of their execution nor subsequent to their termination.
Criteria “C” of T.D. 85-111 mandates that “[t]he claimed rate of interest does not exceed the level for such transaction prevailing in the country where, and at the time, when the financing was provided.” The Office of Regulations and Rulings will address this issue, although it is not necessary based on the issues previously addressed in this Internal Advice response.
Customs and Border Protection’s regulatory auditors determined that the rate of interest charged by all of Keeco’s vendors for the period 1997 through 2001 was [xxx %] per month or [xxx %] annually. CBP’s auditors based their decision on their understanding that the shipping terms were “D/A 90” in which Keeco was permitted ninety days to pay its vendors, rather than the customary thirty days. Keeco suggests that CBP’s auditors misunderstood the financing arrangement and “excluded the initial 30 days of payment terms to arrive at an annualized rate of [xxx %].” The importer suggests that the effective annualized rate of interest paid to its vendors over the ninety-day terms was [xxx %]. Customs and Border Protection notes that a written financing arrangement would have eliminated any discussion concerning the correct rate of interest.
Keeco suggests that whether the rate of interest was [xxx % or xxx %] the rate did “not exceed that charged for similar transactions in China” at the time the alleged financing was provided. The burden of establishing that the rate of interest in issue does not exceed the level for such transactions prevailing in China at the time of the Keeco transactions is on the importer, as criteria “C” of T.D. 85-111 states that “[w]here required by Customs the buyer can demonstrate…” the necessary interest rate relationship between the market rate and the rate paid by the importer / buyer. The T.D. provides that criteria “C” may be satisfied “inter alia, if the claimed charges for interest and principal are consistent with those usually reflected in sales of identical or similar merchandise.”
Keeco provided CBP with interest rate information from the Industrial and Commercial Bank of China indicating that short-term interest rates, loans of 6 months or 1 year, were 5.85 % in June of 1999. A schedule of short-term loan interest rates quoted by the Bank of Communications, Shanghai Branch, indicated rates of 8.415 % through 6.138 % from October of 1997 through December 2001.
Customs and Border Protection notes that the interest rate charged by Keeco’s vendors in 1997 was [xxx %], the same as the highest rate charged by the Bank of Communications. CBP further notes that although interest rates declined during the relevant period, as indicated by the Bank of Communications rate schedule, the interest rates charged by Keeco’s vendors remained the same. Since the rate of interest allegedly paid by Keeco to its vendors for the five years relevant to this inquiry remained the same while bank interest rates decreased, Customs and Border Protection calls into question whether the payments alleged to be interest were actually wholly or partially for interest.
Keeco suggests that the “nature of transactions involving a financial institution and a private party are vastly different than financing provided between two private parties.” The importer further suggests that financial institutions can diversify risk in ways not available to its vendors thereby explaining why bank interest rates would be lower than that charged by its vendors. Customs and Border Protection cannot accept this argument, since the importer has provided CBP with no basis or foundation for accepting it. The burden of bringing forward proof, as CBP notes from T.D. 85-111, is on the importer.
HOLDING
(1) Payments alleged to be “interest” and made by L. Kee and Company, Ltd. to its vendors for which no written financing arrangement was provided to Customs and Border Protection should be include in the price actually paid or payable pursuant to the transaction value method of appraisement.
(2) Payments alleged to be “interest” and made by L. Kee and Company, Ltd. to its vendors for which only “declarations,” purporting to confirm an arrangement between the importer and a vendor, and “interest invoices” were provided to Customs and Border Protection should be included in the price actually paid or payable pursuant to the transaction value method of appraisement.
(3) Payments alleged to be “interest” and made by L. Kee and Company, Ltd. to its vendors for which written financing arrangements were provided to Customs and Border Protection should be included in the price actually paid or payable pursuant to the transaction
value method of appraisement for all transactions made prior to the effective date of the arrangements.
You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date, this office will make a public version of the ruling available to Customs personnel and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act and other methods of public distribution.
Sincerely,
Virginia L. Brown, Chief
Value Branch