In the Customs context, things would seem to be a bit different. Importers have the legal obligation to exercise reasonable care. That means the importer is the surgeon. The patient is Customs & Border Protection. The trouble for importers is that CBP also has an important role is determining what constitutes reasonable care. It's like the patient telling the doctor what constitutes negligence.
I'm thinking about this because Customs recently published a new Informed Compliance Publication on transfer pricing. Transfer pricing, as you probably know, is the price in a sale between related parties. Customs is always suspicious of related party prices because there is the possibility that the price was affected by the relationship and, therefore, does not reflect the true value. Since customs duties are almost always based on a percentage of the value of the merchandise, Customs wants to get the value right.
Yes, importers have to exercise reasonable care in reporting value. I get that. The statute requires it and Customs has the job of at least initially interpreting the law it enforces. But, is it asking too much?
The new ICP on value puts a lot of obligations on an importer in the name of reasonable care. According to CBP:
When the import transaction is a related party transaction, the importer must use reasonable care to determine whether transaction value is acceptable based on either the application of the circumstances of sale test or the test value method. This determination is necessary so that the importer can declare the proper value upon entry.
What that means is that before an importer makes a related party entry using transaction value, it needs to investigate and confirm that the relationship did not affect the price. The ways an importer can do that vary depending on the circumstance. They include:
- Showing records of arms length negotiations
- Proof that the price is adequate to recover all cost of production plus a reasonable profit
- Proof that the price approximates the price in transactions to unrelated parties for identical or similar merchandise
By itself, that is pretty hard. The realities in bigger businesses is that this sort of information probably exists but is not readily apparent to the customs compliance staff before entry. The information is usually there because many companies pay a lot of money to consultants to establish a transfer pricing policy to make sure the valuation passes muster with the IRS for tax purposes. Some companies go further and enter into an Advanced Pricing Agreement with the IRS to get prior governmental approval of the transfer price. In the past, companies relied on the studies or APAs to give them confidence that transaction value is applicable. And, as a result, import compliance people didn't worry too much about proving the applicability of transaction value. After all, it seems reasonable to assume that a million dollar study by a fancy accounting firm to satisfy IRS transfer pricing issues, should also cover you for customs purposes.
Seems reasonable--except that Customs is making the rules. The ICP notes that there are different statutory considerations between tax and customs valuation. Also, the tests applied by each agency differ. From this, Customs posits that a transfer price study or APA is not enough to establish reasonable care for transaction value purposes. Further, it may only be useful for the underlying data the accountants used because some of that data might be applicable under the customs laws. Now, with this ICP, Customs has told the trade that it needs to engage in independent and possibly separate analysis of transfer pricing prior to entry or for there to be any demonstrable evidence that transaction value in not applicable.
Other parts of the ICP are surprising including the notion that a reasonable profit is to be judged by the profit earned by the parent company, not necessarily the seller. There are plenty of corporations where the parent might be highly profitable or losing money like a drunk in Vegas while a subsidiary is doing exactly the opposite.
Another issue raised in the ICP relates to test values. One way to prove that your transfer price is acceptable is to compare it to the value in other transactions of similar or identical merchandise to unrelated buyers. In the ICP, Customs is reminding people that a test value is only useful if it has actually been applied by Customs. At a minimum, that would mean that an entry was made and liquidated.
Don't get me wrong here. Customs has read the statutes, regulations, and its prior rulings. It has a sound legal basis on which to make these statements. The issue is that it did not have to do so. It could have exercised some discretion and said that although an APA or transfer pricing study is not directly applicable and is not proof that transaction value is applicable, it will consider it as strong evidence.
This strikes me as further evidence of the creeping movement back toward strict commercial enforcement. That's fine; it is part of Customs' job. But, what I hate is that "reasonable care" has turned into a tool by which Customs seems to get to define reasonable care as what it wants importers to do. That means importer might have to do their own transaction value studies. It also means you can't take a NAFTA CO at face value. And, the place where this all started is that you can't accepted the representation of a seller as to the GSP status of goods. What used to be the subject of post-entry audit is now, under the guise of reasonable care, a pre-entry obligation on importers. I'm not sure this is a good turn of events for importers.
The last aspect of this problem is that ultimately, only the courts can tell Customs that it has overstepped. At some point, a case will come along in which the Court of International Trade or the Court of Appeals for the Federal Circuit tells Customs that its interpretation of "reasonable care" is unreasonable. That is going to be a tough case to win, but it is going to happen.