HQ H219515
OT:RR:CTF:VS H219515 YAG
[***]
Re: Related Parties; Transfer Pricing; Circumstances of Sale
Dear Mr. [***]:
This is in response to your request for a binding ruling, dated April 30, 2012, regarding the acceptability of transaction value for certain products imported by [***] (the “Importer”) from its related foreign manufacturers. Our decision in this matter takes into account your submissions and a conference at our offices with members of my staff on January 12, 2012.
On July 28, 2011, U.S. Customs and Border Protection (“CBP”) issued Headquarters Ruling Letter (“HRL”) H065024 with regard to the valuation of some of the products purchased by the Importer from its related parties. CBP determined that the Importer had demonstrated the acceptability of transaction value with regard to some, but not all, of the imported products. In light of this decision, the Importer is proposing to adopt a new pricing policy to be used on a prospective basis.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), your request for confidentiality is approved. The information contained within brackets and all attachments to your request for a binding ruling, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
[***] (Parent company) is a publicly traded U.S. corporation in the analytical instrument industry, which owns all of the outstanding common stock of the Importer, its U.S. subsidiary. The Importer purchases and imports certain products from a number of related companies, located in [***]. These products are organized into five product centers, which are groupings of products with similar characteristics and functions: chemistry products, data products, and mass spectrometry instruments [***].
There is one overall pricing model for products that are purchased and imported from related manufacturers. Under this model the transfer price is based on a stated U.S. list price, applying a standard percentage discount to that U.S. list price for sales of all products within each product center. The Importer’s product managers set U.S. list prices when the product is being introduced based on an evaluation of the market. [***************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************.] These considerations go into determining what the market will bear.
Once the U.S. list price has been established for an individual product, specific changes for that product are infrequent. Prices are typically only adjusted based on market conditions. A standard percentage discount to the U.S. list price for sales of all products within each product center is selected with the objective of allowing the Importer to recover its costs for sales and distribution of the imported product, and to make a reasonable return for its efforts as a distributor. The Importer submitted its transfer pricing matrix, illustrating its discounts by product center, in support of this statement.
It is stated that the company sets its prices in accordance with the normal pricing practices of the industry. The Importer further states that the elite companies dominating the analytical instruments industry are similarly structured and are faced with similar challenges and trends; and because these companies are similarly structured, they react similarly to these challenges and trends. As a result, analytical instruments produced by the industry are priced to allow the U.S. distributor to recover costs and receive a consistent and routine return appropriate for the limited risk taken. The balance of the overall profit from sales to end customers is paid by the U.S. distributor to the foreign manufacturer as the U.S. distributor’s purchase price for the product. As support, a paper, “Analytical Instrument Industry,” prepared by an independent accounting firm, Ernst & Young, LLP (“E&Y”), was submitted for our review.
Additionally, the industry study reviewed the financial results of the dominant industry players, such as Agilent Technologies, Inc., Life Technologies Corp., Becton, Dickinson and Co., etc., and found them stable and consistent over a period of time. The industry study indicated that the Importer’s gross profit on all product lines is fairly consistent with the gross profits of its main competitors in the analytical instruments industry. The gross profits compared represent the gross margins of entire enterprises, aggregating the gross margins from all value added activities.
Furthermore, the Importer engaged E&Y to analyze and document certain intercompany transactions, between the Importer and its related manufacturers. Subsequently, the Importer submitted a Transfer Pricing Study, dated September 7, 2012 for our review. This transfer pricing study is prepared for the tax year ended December 31, 2011. The transfer pricing study was conducted in compliance with Section 482 of the Internal Revenue Code. Pursuant to this transfer pricing study, for products manufactured by the Importer’s related manufacturers, the Importer acts only as a distributor and has no valuable intangibles in this capacity. As such, the Importer has the least complex functions and is selected as the tested party.
Moreover, Section 482 of the Internal Revenue Code (26 U.S.C. §482) requires that the arm’s length result of a controlled transaction be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm’s length result. The application of the best method establishes an arm’s length range of prices or financial returns with which to test controlled transactions.
As stated in the Importer’s transfer pricing study, the Comparable Profits Method (“CPM”) was determined by E&Y to be the best method to evaluate the inter-company tangible transactions between the related manufacturers and the Importer. The CPM examines whether the amount charged in a controlled transaction is an arm’s length price by comparing the profitability of the tested party to that of comparable companies. The profit level indicator (“PLI”) selected was the gross margin. Gross margin is defined as gross profit over sales.
This transfer pricing study separately analyzes manufacturing and distribution transactions performed by the Importer, as well as contract research and development of various products performed by the Importer on behalf of one its related manufacturers. The Importer produces intermediate and finished products for its related party in [***] and distributes finished products purchased from its foreign manufacturers. The cost of the intermediate products is incorporated in the value of the imported merchandise distributed by the Importer. With respect to the Importer’s distribution of [***], produced by its manufacturers in the [***] and [***], a set of North American distributors was used to benchmark the profitability of the Importer.
Furthermore, since the Importer sells integrated systems comprised of multiple components (such as [****]), the Importer determined under the proposed transfer pricing policy that a single transaction encompassing the distribution of all systems related products would produce the most reliable result of the Importer’s distribution margin. Thus, in selecting comparables for its analysis of the Importer’s distribution activities, E&Y searched the Compustat database and focused on companies under the following Standard Industrial Classification (“SIC”) codes: p504 (wholesale trade: professional and commercial equipment); p506 (wholesale trade: electrical goods); p508 (wholesale trade: machinery, equipment, and supplies); and, p7352 (rental and leasing: medical equipment). After eliminating companies that were bankrupt, no longer in business, lacking necessary financial data, or were subject to other financial criteria, the search identified eighty (80) companies for further review. In order to limit the search to unrelated companies with fact patterns most similar to the Importer, companies that distributed unrelated products such as IT products, mobile phones, performed dissimilar activities, provided dissimilar services, operated in different geographical markets, were not independent and derived significant portion of revenues from the government sector, were eliminated. Two companies were eliminated from the analysis because one company did not have sufficient financial data for the years 2009-2011 and the other company was acquired by another conglomerate. This search and selection yielded sixteen (16) comparable companies. It is important to note that even though E&Y tried to achieve the product comparability, these sixteen (16) comparable companies do not distribute the products of the same class or kind as the Importer. The comparable companies chosen for the analysis distribute medical and surgical supplies, dental supplies, pharmaceutical related products, healthcare supplies, and professional grade test and measurement instruments. The Importer earned a three-year average and single year gross margins above the three-year average and single year results, respectively for comparable third-party North American distributors. However, the Importer’s gross margins include both the distribution revenues and service revenues associated with the distribution of the analytical instruments. When the margins associated with service revenues are excluded from the distribution margins, the Importer’s single year and three-year gross margins are within the single year and three-year interquartile ranges established by the comparable companies. Therefore, these results do not require an adjustment from a U.S. perspective. Nonetheless, under the proposed methodology specified in the ruling request, adjustments will be made if needed to bring profits into the appropriate range.
According to the Importer’s submission, there is no Advance Pricing Agreement (“APA”) with the Internal Revenue Service (“IRS”). However, the Importer states that it applied for an APA and submitted its transfer pricing study for the IRS’ approval. The Importer is looking for a prospective ruling on the methodology set forth in this ruling and expects the methodology to remain the same during the discussions with the IRS.
Finally, when the pricing between companies has been established, the Importer issues a purchase order to its related overseas manufacturers through its acquisition system. In response to the purchase order, the overseas manufacturer creates sales orders and issues an invoice to the Importer either upon taking the product out of inventory or after it produces the products in response to the purchase order. Sales terms are Free on Board (“FOB”) or Ex-Works. Under the FOB term, risk of loss passes to the buyer when the goods are delivered on board the ship, and the buyer has paid the transportation costs and insurance to the destination port. Under the Ex-Works term, risk of loss passes when the seller delivers the goods to the buyer at the seller premises or other named place. The Importer provided Distributor Agreements with its related manufacturers, stating that the title passes simultaneously with risk of loss. The Importer also provided a sample purchase order, invoice, and the evidence of payment, which are representative of the Importer’s standard commercial documents for all imports.
ISSUES:
Do transactions between the Importer and the related manufacturers constitute bona fide sales?
Do the circumstances of sale establish that the price actually paid or payable by the Importer to the related manufacturers is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
Is it acceptable to take post-importation price adjustments (upward and downward) into account in determining transaction value?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. §1401a(a).
In order to use transaction value, however, there must be a bona fide sale for exportation to the United States. Several factors are relied on to determine whether a bona fide sale exists. See HRL 546067, dated October 31, 1996.
Furthermore, there are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. §1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale or (2) test values. See 19 U.S.C. §1401a(b)(2)(B). “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. HRL 543568, dated May 30, 1986. In this instance, however, there is no information available concerning the previously accepted test values. Consequently, the circumstances of the sale approach must be used in order to determine the acceptability of transaction value. The purpose of these rules is to ensure that the relationship between the parties does not affect the price.
Do transactions between the Seller and the Importer/Buyer constitute bona fide sales?
In order for transaction value to be used as a method of appraisement, it is essential that a “sale” between the parties is available. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed.Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. §1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood vs. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)).
No single factor is decisive in determining whether a bona fide sale has occurred. See HRL 548239, dated June 5, 2003. CBP will consider such factors as to whether the purported buyer assumed the risk of loss for, and acquired title to, the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HRL 545705, dated January 27, 1995.
In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL H005222, dated June 13, 2007.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
As noted in the FACTS portion of this ruling, the Importer provided a sample purchase order, invoice, and the proof of payment to substantiate its claim that there was a bona fide sale between the Importer and its related manufacturers. For the prospective transactions, the Importer intends to issue a purchase order to its related overseas manufacturers though its acquisition system. In response to the purchase order, the overseas manufacturer will create a sales order and issue an invoice to the Importer either upon taking the product out of inventory or after it produces the products in response to the purchase order.
The Importer stated that it intends to use FOB or Ex-Works terms of sale. The Importer provided Distributor Agreements with the overseas manufacturers, stating that the title passes simultaneously with risk of loss, which in turn passes in accordance with the term of sale. The parties negotiate an acceptable price, and based on the facts provided, the Importer provides instructions to the seller. The Importer is also free to resell the imported products at any price, selects its own customers, and imports merchandise delivered for its own inventory. Accordingly, we find that the transactions between the Importer and its related manufacturers are bona fide sales.
Do the circumstances of sale establish that the price actually paid or payable by the Importer to the related manufacturers is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
Under this approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The Customs Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. In this respect, Customs will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). In addition, Customs will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 CFR §152.103(l)(1)(iii). Nonetheless, these are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. See 19 CFR §152.103(I); see also HRL H037375, dated December 11, 2009; HRL H029658, dated December 8, 2009; and, HRL H032883, dated March 31, 2010.
In this case, the Importer argues for a general approach that takes into account every aspect of the transactions at hand to determine whether transaction value is adequate. The company submitted information regarding its own profitability versus that of its competitors and a study of the analytical instruments industry, commissioned by the parent company and prepared by E&Y. The Importer also submitted a range of information as to how it does business, from its transfer pricing study to the way it establishes prices with its subsidiaries. These factors speak to the circumstances of sale. The Importer argues that all of these factors should be taken into consideration in CBP’s determination that the prices were settled in a manner consistent with the normal pricing practices of the analytical instruments industry. Specifically, the company seeks to support the use of transaction value by: 1) providing an independent qualitative review of the analytical instruments industry to confirm that companies in the industry price products in a consistent manner; 2) verifying the results of the study annually against publically available quantitative date of other analytical instrument companies; and, 3) confirming that the prices charged by the Importer’s foreign manufacturers for products sold to the United States are set consistently with the current methodology described in the transfer pricing study.
CBP has noted that the Importer must have objective evidence on how prices are set in the relevant industry in order to establish the “normal pricing practices of the industry” in question, and present evidence that the transfer price was settled in accordance with these industry pricing practices. See HRL H029658, dated December 8, 2009; HRL 547672, dated May 21, 2002; HRL 548482, dated July 23, 2004; and, HRL 542261, dated March 11, 1981 (TAA. No. 19) (stating that where the transfer price was defined with reference to prices published in a trade journal (the posted price) and the posted price was commonly used by other buyers and sellers as the basis of contract prices, the transfer price was acceptable).
However, in HRL H029658, CBP held that the Importer showed that the sales price was not influenced by the relationship for the purposes of the circumstances of the sale test, based on the totality of the information considered, and, as a result, transaction value was the proper method of appraisement for the related-party import transaction. In HRL H029658, the Importer provided various evidence to show that the prices were at arm’s length, including: (1) a detailed description of its sales process and price negotiations; (2) a bilateral APA that was approved by the IRS (the Importer was a tested party under the APA, with CPM chosen as the best method to evaluate inter-company transactions); and, (3) a paper, prepared by their accountants, which provided details with respect to the pricing practices in the automotive industry. The evidence presented by the Importer did not fall strictly within a single illustrative example, specified in 19 CFR §152.103(l)(1)(i)-(iii), such as the normal pricing practices of the industry. Nevertheless, taken together, the documents provided by the Importer assisted CBP in reaching its conclusion that the relationship of the parties did not influence the price.
In the present case, the Importer explained how it sets its price, also called the “U.S. list price,” which is the customer selling price for a product. This price is set by product managers based on their research of market conditions, trends, reports, competing quotes from competitors provided by third parties, and what the market will bear. Prices are re-evaluated annually and adjusted based on a product’s life-cycle, technical specifications, demand, and competitive pressure. The transfer price to be paid by the Importer for the imported merchandise from its related manufacturers is based on a stated U.S. list price, with the transfer price being determined by applying a standard percentage discount to that U.S. list price for sales of all products within each product center. Thus, globally, transfer prices are managed via the parent company’s Transfer Price Matrix as a percentage of the U.S. List Price established by country and by product center. The percentage of the U.S. list price selected is based on estimated average discounts within a particular product center that will provide entities with sufficient gross margin to allow recovery of all costs plus a reasonable margin for a limited risk distributor for a particular market.
In support of this pricing structure, the Importer submitted a paper, prepared by their accountants that detailed pricing practices in the analytical instruments industry. The industry study paper explains that the analytical instrument industry is a mature and stable industry, dominated by a small number of large global companies with broad product portfolios and well-known brands. The industry leading companies are similarly structured and operated, producing relatively similar results over time. The study shows that the elite companies in this industry share a significant number of common business approaches, including globally managed research and design, global marketing, a global brand and global service/support.
The pricing in the analytical instruments industry is brand and reputation driven, and the Importer’s competitors react similarly to the industry trends. [****************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************.] For importations into the United States, the business model for the elite companies is structured so sales of products by the overseas manufacturers to a U.S. importer/distributor provide the importer/distributor enough return to recover costs and receive a routine return appropriate for the limited risk taken. The balance of the overall profit from sales to end customers is paid by the U.S. distributor to the foreign manufacturer as the U.S. distributor’s purchase price for product.
While this evidence provided by the Importer is not entirely objective, as determined by our previous rulings, we find that the report, detailing the pricing practices of the analytical instruments industry, is highly relevant for our overall analysis of the Importer’s pricing structure because it further substantiates the Importer’s practice of setting its prices.
Furthermore, the industry report compared the gross profit of the Importer to the gross profits of the dominant players in the analytical instrument industry, such as Agilent Technologies, Inc., Life Technologies Corp., Becton, Dickinson and Co., etc. The industry study indicates that the Importer’s gross profit on all product lines is fairly consistent with the gross profits of its main competitors, which demonstrates both stability and the maturity of the industry. The gross profits compared represent the gross margins of entire enterprises, aggregating the gross margins from all value added activities. Even though the gross margins of the competitors were not used in the Importer’s transfer pricing study presented to the IRS, this quantitative data serves as additional evidence that prices are set consistently in the industry.
The Importer also submitted a transfer pricing study, which was recently presented to the IRS as part of the company’s application for an APA. We note that the existence of a transfer pricing study does not, by itself, obviate the need for CBP to examine the circumstances of sale in order to determine whether a related party price is acceptable. See HRL H037375, dated December 11, 2009; HRL 546979, dated August 30, 2000. However, information provided to CBP in a transfer pricing study may be relevant in examining the circumstances of the sale, but the weight to be given this information will vary depending on the details set forth in the study. See HRL H037375; HRL 548482, dated July 23, 2004. A significant factor, by way of example, is whether the transfer pricing study has been reviewed and approved by the IRS. See HRL H037375; HRL 546979, dated August 30, 2000. Whether products covered by the study are comparable to the imported products at issue is another important consideration. See HRL H037375; HRL 547672, dated May 21, 2002. The methodology selected for use in a transfer pricing study is also relevant. See HRL 548482, dated July 23, 2004.
In this case, the Importer’s transfer pricing study has not been approved by the IRS as of the date of this ruling. The CPM performed in the transfer pricing study compares the gross profits of functionally comparable companies to that of the tested party – the Importer. If the transfer pricing results indicate that the gross profits of the Importer are within the interquartile range established on the basis of gross profits of comparable companies, the prices charged (based on the percent of the U.S. list price in the Transfer Pricing Matrix) are viewed as acceptable for income tax purposes. If the profits are outside the interquartile range of comparable companies, an adjustment to the price would be made. We note that CPM is the least relevant method for customs purposes.
Further, CBP Regulations do not define what profit we are to consider – gross profit or operating profit. However, CBP is of the view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses have been paid. Nevertheless, in certain circumstances, gross profit can be considered. See HRL H037375. As stated in the FACTS portion of this ruling, gross margin compares sales price with costs of goods.
In this case, for an importer/distributor, the cost of goods would include all product related expenses but exclude those expenses not related to product, such as rent and administrative expenses. The Importer also performs many functions in the United States in addition to acting as a distributor of imported product, including manufacturing, research and development and after sales services. Parent company’s expenses for human resources, finance, legal, and general administration are also attributable for all of the Importer’s activities in addition to the Importer’s function, which would not be captured. In order to avoid making assumptions about the appropriate way to allocate these expenses, the Importer is able to effectively make an appropriate allocation by using the gross margin as the profit level indicator. The comparable companies selected for the analysis are product distributors and each company should have non-product costs described above common to and appropriate for product distributors. By requiring that the Importer’s gross margin on the resale of imported products fit in the interquartile range of the gross margins reported by the comparable distribution companies, the Importer effectively achieves an appropriate allocation of non-product expenses that are common to independent distribution companies. Therefore, taking into consideration the above referenced factors and arguments, we agree with the Importer that in this particular case and in accordance with the facts presented by the Importer, gross margins provide a reliable and appropriate basis of comparison.
We also reviewed the comparable companies selected by the Importer’s transfer pricing study and conclude that the products sold by the comparable companies are not of the same class or kind as the imported merchandise. The comparable companies distribute a range of goods, from medical products and supplies to notebooks and desktops. Under these circumstances, the comparison between the Importer and these other companies cannot be considered consistent with the market as a whole. However, even though the Importer’s transfer pricing study by itself is not sufficient to show that a related party transaction value is acceptable for Customs purposes, the underlying facts and the conclusions reached in this transfer pricing study contain relevant information in examining the circumstances of the sale, since this transfer pricing study confirms the gross profit margins of the Importer, as set by the Importer and verified through the independent review of the analytical instruments industry and quantitative data of the Importer’s direct competitors.
Accordingly, even though none of the information provided strictly falls under the three illustrative examples under 19 CFR §152.103(l)(1)(i)-(iii), we find that the sales price will not be considered influenced by the relationship for purposes of the circumstances of the sale test, based on the totality of the information considered and our review and examination of all relevant aspects of the transaction, including the way in which the Importer and the related manufacturers organize their commercial relations and the way in which the price in question was arrived at. As a result, we determine that transaction value is the proper method of appraisement for the related-party import transactions.
Is it acceptable to take post-importation price adjustments (upward and downward) into account in determining transaction value?
As noted above, the annual transfer pricing study has been prepared using the CPM. Since the Importer does not anticipate any changes to the functions or risks of the parent company’s entities, the Importer foresees that this method will continue to be the “best method” for U.S. federal income tax purposes. As a consequence of utilizing the CPM approach, the Importer may be required to make retroactive price adjustments (downward and upward) to meet its federal income tax obligations and to show that its prices are arm’s length if the Importer’s profit margins fall outside the interquartile range specified in the transfer pricing study.
On May 30, 2012, CBP published a notice of HRL W548314 that revoked a prior valuation ruling concerning the treatment of post-import adjustments made pursuant to a methodology specified in the importer’s formal transfer pricing policies. This ruling became effective on July 30, 2012. See Customs Bulletin, Vol. 46, No. 23, dated May 30, 2012. Prior to this Customs Bulletin notice, CBP allowed the adjustments, but not under the transaction value basis of appraisement. CBP consistently held that transaction value in the transfer pricing context did not apply because the price was not fixed or determinable pursuant to an objective formula prior to importation. See HRL 547654, dated November 8, 2001 (revoked by HRL W548314). Nevertheless, sometimes these adjustments were allowed under the “fallback” method of appraisement. In other instances, CBP disallowed the adjustments completely because they were considered to be a post-importation rebate or decrease under 19 U.S.C. §1401a(b)(4)(B).
In HRL W548314, CBP reviewed this matter and proposed a broader interpretation of what is permitted under transaction value to allow a transfer pricing policy/APA to be considered a “formula” in the transfer pricing context provided certain criteria are met. HRL W548314 specifically referred to the adjustments made pursuant to a company’s formal transfer pricing policies or APAs. In order to claim the post-importation adjustments (upward and downward), all of the following factors must be met:
A written transfer pricing policy in place prior to importation and the policy is prepared taking IRS code section 482 into account;
The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return;
The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted;
The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and,
No other conditions exist that may affect the acceptance of the transfer price by CBP.
Therefore, if the Importer meets the above referenced factors, CBP will accept the adjusted values, because the prices would be established pursuant to a “formula,” even though the prices were not fixed at the time of the importation.
In this case, the Importer has a written transfer pricing study in place prior to importation and prepared in accordance with section 482 of the IRS code, confirming the gross profits which were verified by other substantiating information. The Importer also states that it will use its transfer pricing study in filing its income tax return and report any adjustments to the IRS. The transfer pricing study covers all of the imported goods and specifies the adjustments to be made. Under the CPM methodology, adjustments will be made annually if needed to bring profits into the appropriate range, so that the final values of the imported merchandise declared to CBP will be at arm’s length. Allocations of the adjustments will be proportionate for each product center so that each product center’s gross margin conforms to the adjusted overall gross margin of the Importer’s U.S. distribution. The same methodology will be utilized to further allocate the gross margin of each product center to the gross margin of individual products. The company will book its adjustments as cost of goods sold affecting the value of the imported products. Since these adjustments are adjustments to the profit and booked as cost of goods sold, the adjustments directly relate to the value of the merchandise. There are no intangibles associated with the U.S. distribution function of the Importer. Also, pursuant to our review of the provided documentation, there are no other conditions that may affect the acceptance of the transfer price by CBP. As long as the Importer maintains and provides accounting details from its books and/or financial statements to support the post-importation adjustments upon making a claim with CBP, the Importer may claim downward and upward post-importation adjustments.
Moreover, in W548314, dated May 16, 2012, we determined that the Importer in that case needed to show that the relationship of the parties did not influence the adjusted prices. In this case, even though we declined to rely solely on the Importer’s transfer pricing study in order to determine that the circumstances of the sale test is met, we note that this study further confirms that the prices are already at arm’s length since the Importer’s profit falls within the interquartile range, specified in the transfer pricing study. Thus, were the Importer to fall outside of the range of the acceptable gross profit margins (making the provisionally declared prices influenced by the relationship) and were the Importer required to make adjustments to get within the range, transaction value would still be an appropriate method of appraisement because the Importer already established that it meets the circumstances of the sale test based on the analysis in Section 2 above and which would be adjusted accordingly for the price to remain at arm’s length for customs valuation purposes.
Finally, the Importer already participates in the Reconciliation program and will flag for reconciliation the price declared at entry as provisional due to the potential of price adjustments. Thus, price adjustments, if any, should continue to be timely made through the reconciliation process.
HOLDING:
In conformity with the foregoing, transactions between the Importer and its related manufacturers constitute bona fide sales. We also determine that transaction value is the appropriate method of appraisement in this case. Finally, we find that the Importer may take into account downward and upward post-importation adjustments to the provisional values of the imported merchandise declared to CBP, provided that the Importer maintains and provides upon request accounting details from its books and/or financial statements to support the claimed adjustments.
Please note that 19 CFR §177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch