Sunday, May 15, 2005

Relatively Speaking

We already know that transaction value is the price paid or payable for the merchandise. That seems appropriate. After all, people tend to sell things at a profit and pay what the merchandise is worth to acquire it. Your law and economics types call that acting rationally. Customs knows, however, that not all transactions fit Adam Smith's market forces model.

The obvious place this breaks down is where there is no sale. If someone sends you 10 pounds of Vegemite as a gift, at least two things are going on. First, you are not going to pay for it so there is no price paid or payable. Second, the sender probably does not really like you much. Where there is no sale, the customs laws say there is no transaction value.

If it is your Australian Mum sending the Vegemite but she expects you to pay for it, there may be a sale. Also, she definitely does not like you. Customs, however, is going to assume that the relationship between you and your Mum affected the price. In this case, she may have inflated the price but in most cases, a related party transaction will be below the normal selling price.

All of this applies to companies as well as disfunctional families. The statute says:

The transaction value between a related buyer and seller isacceptable for the purposes of this subsection if an examination ofthe circumstances of the sale of the imported merchandise indicatesthat the relationship between such buyer and seller did not influence the price actually paid or payable; or if the transactionvalue of the imported merchandise closely approximates -

(i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or

(ii) the deductive value or computed value for identical merchandise or similar merchandise;

but only if each value referred to in clause (i) or (ii) that isused for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise.

Remember, at the time of entry, the importer (or its customhouse broker) reports whether the buyer and seller are related. So, Customs is on the look out for these transactions.

Importers with lots of related party transactions usually avoid this problem by establishing a corporate transfer pricing policy. For example, the policy may state that all intra-company transfers must be at the fully loaded cost of production (i.e., including labor and overhead) plus a profit of 5%. This will get you a long way towards a usable transaction value.

Another way to get there is to make sure that related parties are treated just like everyone else. If there is a price list or catalog, the related party price should approximate the prices for goods sold to third parties (on approximately the same terms). It can also help if there is evidence of price negotiations. If GiantMegaCorp, N.A. simply tells its U.S. sub that the price will be $2 and not one penny more, that is a bad piece of evidence when it comes to transaction value.

If there is no way to get around the fact that the relationship affected the price, you are not dead yet. The statute also allows for the use of transaction value if the sale price closely approximates the "test values." The test values include the transaction value of similar or identical merchandise and the deductive or computed value of the merchandise. These test values, however, are only good if the transactions occured at about the same time as the transaction in question.

The truth is that Customs likes transaction value. It is easy to deal with from an audit perspective: look at the invoice and the proof of payment. If you are forced to computed or deductive value, things get messy quickly. So, the vast majority of entries are appraised on transaction value. I'm sure I could find the actual statistic, but trust me, it is a very high percentage. But the law is the law and Customs is not shy about rejecting transaction value when it doesn't apply. A well planned transaction, however, will be structured to permit valuation on transaction value and avoid problems down the road.

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