Saturday, September 24, 2011

Value Change Up for Comment

Customs is floating an idea to reinterpret the value law with respect to transfer pricing to give related party importers more flexibility with respect to post entry adjustments. Here is the notice asking for comments.

This is a long-awaited notice, but it is just a request for comments rather than an actual proposal.

The issue this notice seeks to address has to do with the application of transaction value in cases where the related parties have a transfer pricing policy that requires periodic adjustments to the sales price of the goods. Usually, this is done to ensure that the selling entity earns the appropriate amount of profit over the fiscal year or other period. Hitting that target is often an important consideration for tax planning. Consequently, companies spend a lot of time and effort working with accounting firms to establish an acceptable transfer pricing policy that meets their tax needs. In some case, these policies can be validated by one or both of the governments involved in what is called an Advanced Pricing Agreement.

The problem from a Customs standpoint is that post-entry adjustments to sales prices may impact on the correct entered value of the merchandise. There are a number of legal consequences to these adjustments. For example, if the amount of the adjustment is fixed or can be calculated based on a set formula at the time of entry, then the adjustments can be taken into consideration as part of a transaction value. In other words, if there is an acceptable formula, transaction value applies and the value can be updated--typically via reconciliation. Also, while the law requires that increases in price be taken into consideration, decreases and rebates are ignored. [No one ever said the law is fair.] Thus, post-entry price adjustments may not be evenly applied.

The biggest question has been whether a transfer price policy that relies on post-entry price adjustments is compatible with transaction value as the basis for appraisal. In some rulings, Customs and Border Protection has held that the transfer price policy did not create an acceptably fixed formula for appraisal. As a result, Customs has ruled that transaction value was not applicable and relied on the so-called "fall back" method of appraisal. In those cases, the adjustments were applied and the valuation ended up at essentially the same place.

Which brings me to the question of whether this is really important? Is this really just substituting one label for another? If the "transaction value" and the "fallback method" get to the same amount by taking into consideration the adjustments, does it really matter. You either have Customs accepting your policy as a formula for transaction value or rejecting transaction value and calling the same analysis a fall back.

One critical point is that if this proposal gets adopted, Customs will take price reductions into consideration because the reductions will not be discounts or rebates. Rather, they will be treated as applications of the policy and, therefore, the agreed price for the goods. That might produce some duty savings for importers who engage in downward price adjustments.

Another point is that the factors listed in the notice to support the finding that a transfer price can be considered a formula should inform the drafting of transfer price policies going forward if the proposal is ever adopted.

None of that strikes me as earth shaking, but I seem to be in the minority on that front. At least one lawyer I know and respect, my soon to be published co-author, has already labeled this the most important development in value law since the adoption of the current WTO code in 1979. Personally, I would give that title to the Federal Circuit decision in Nissho Iwai, which started the modern practice of using first sale valuation. I also know that the ABA Section on International Law, Customs Law Committee is interested in this.

So, you customs compliance and tax people out there, tell me whether this proposed change would significantly impact your business one way or the other. Comments are open.

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