Importer Alert: APA Prices May Not Be Applicabe To Customs Valuation Process
Stricter customs rules can require different related-party pricing methodology
By David J. Levine and Robin J. Bowen of McDermott, Will & Emery
Multinational companies set the prices for transactions between affiliates based principally on international tax considerations. McDermott tax attorneys have assisted many clients with transfer pricing matters, including advance pricing agreements (APAs), before the U.S. Internal Revenue Service (IRS) and the tax authorities of other countries. The IRS and other tax authorities have well-established, if complex, rules concerning “arm’s length” pricing, i.e., pricing that is unaffected by the involved parties being affiliated.
Companies are well-advised to pay close attention to the valuation of imported goods entering under U.S. Bureau of Customs and Border Protection (CBP) rules, as these rules impose an arm’s length standard for related company transfer pricing that differs from the standard applied by the IRS. Therefore, pricing that satisfies business objectives and tax rules may raise serious questions from CBP if used for customs valuation purposes.
Well over 90 percent of the merchandise imported into the United States today is properly appraised according to its “transaction value,” as preferred by CBP under U.S. law. The transaction value of imported goods is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States” (typically, the invoice price) plus certain additional amounts.
For sales between a related buyer and seller, U.S. customs law imposes stricter requirements for imports to be appraised according
to transaction value. Transaction value may be used to appraise related company imports if either:
- the circumstances of sale indicate that the relationship between buyer and seller did not influence the price (“circumstances of sale” or COS method), or
- the transaction value closely approximates the value of identical or similar merchandise sales to unrelated U.S. buyers (“test values” method)
In order to satisfy the COS method to show arm’s length pricing (test values are typically not available), regulations and rulings by CBP dictate that importers must be able to show either that the pricing was set consistent with sales to unaffiliated customers or with “normal pricing practices of the industry,” or that the pricing covers all costs plus a profit.
For multinational companies with transfer pricing policies based on relevant tax rules, affiliated importers have argued that the tax standards satisfy the COS method for customs valuation. To the dismay of many importers, CBP has rejected these arguments. In a series of rulings, CBP has been reluctant to rely on tax compliance, or even on specific pricing terms under APAs negotiated with tax authorities, as objective proof that a related importer’s transaction value reflected arm’s length pricing.
Thus, for example, for multitiered sales among affiliates (manufacturer to distributor to U.S. importer), U.S. customs law allows appraisal of the imports at the “first tier” value, but only if that sale meets, among others, the transaction value test.
In today’s tax-based world, some have argued that U.S. customs valuation laws and rules are outdated relics that must be amended.
Unless and until this occurs, related-company importers of goods into the United States must carefully consider their customs valuation. McDermott tax and trade lawyers have worked seamlessly with several clients to ensure that the benefits derived from careful tax planning are not compromised by inattention to customs consequences, and vice versa.
About the Authors:
David J. Levine is a partner at McDermott Will & Emery LLP in the Washington, D.C. office. He practices before international trade organizations, federal agencies and courts regarding international trade and related regulatory matters. David can be reached at +1 202 756 8153 or email@example.com. Robin J. Bowen is an associate in the Regulatory & Government Affairs Department of McDermott Will & Emery LLP in the Washington, D.C. office. She handles customs and trade matters, as well as alcohol beverage regulatory and distribution issues. Robin can be reached at +1 202 756 8139 or firstname.lastname@example.org.