Determining the Value on an Importation Between Related Parties – Was There a Bonafide Sale?

US Customs collects duties on all imports that enter the U.S. As a general rule, Customs presumes that the price paid by the importer, which is typically the invoice total, is the appropriate basis for determining the import’s “transaction value” which in everyday language, essentially means, the amount upon which the duty to be paid will be calculated.

Customs generally presumes that a transaction between unrelated parties is conducted at “arm’s length.” This means that the price offered by a seller of goods is a “fair” price and not one offered under more favorable terms, i.e., a lower price, which would cause the amount of duty paid on an importation to be less than what would otherwise be under a “fair” price.

Questions arise however, in the case of related party transactions, as from US Customs point of view, it would not be unusual to give a related company what it would consider a preferred, i.e., cheaper price on goods.

There are 2 ways Customs determines if a bonafide sale took place –

(a) the sales transaction was conducted at arm’s length, or

(b) transaction details show that there were no non-market influences that affected the legitimacy of the sales price.

As the term “sale” has not been defined by Customs, it has relied upon the definition as articulated in J.L. Wood v. United States, 62 CCPA 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974) which defines it as the transfer of property taken from one party to another for consideration.

In general, for all sales whether between related or unrelated parties, Customs will look at a number of factors in its determination of a legitimate sales price, in addition to looking at the circumstances of a transaction as a whole. Specifically, Customs looks to the documents related to the sales transaction, including the shipping terms, in order to determine the following factors:

a. Whether the potential buyer has assumed the risk of loss

b. Whether the potential buyer acquired title to the imported merchandise

c. Whether the alleged buyer paid for the goods

d. Whether such payments are linked to specific importations of merchandise

e. Whether the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller.

Even where the parties are related, Customs Regulations provide a series of scenarios in which it can be shown that the price has not been influenced by the relationship of the parties. These include:

a) If it is shown that the buyer and seller buy and sell from each another as if they are not related, this indicates that the price is not influenced by the relationship between the parties and appraisement pursuant to transaction value is valid.

b) Where the price has been settled in a manner consistent with the normal pricing practice of the industry, or with the way the seller settles prices for sales to unrelated buyers, then it is considered not to have been influenced by the relationship between the parties.

c) If it is shown that the price is adequate to ensure recovery of all costs plus a profit which is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced.

There are further conditions as well, such as whether or not the potential buyer has assumed risk of loss for the cargo, which play a persuasive role in US Customs reasoning as to whether a bonafide sale took place.

Needless to say, the valuation of merchandise, especially when it comes to related party transactions can be tricky.

Questions/comments? Post below or email me at clark.deanna@gmail.com

U.S. Customs Newly Updated Valuation Encyclopedia!

I’m pleased to announce that US Customs recently made available the latest version of its Valuation Encyclopedia! This sort of news is fantastic (and exciting - I know that sounds nerdy…) because us members of the international trade community depend on updates from US Customs to maintain certain standards which the agency expects of us under our informed compliance responsibilities.

While a prior version of the Encyclopedia existed, it only went up to 2003 and there has not been an updated manual available for nearly 7 years.

Let me give you a little bit of background about importing.

Pursuant to the Customs Modernization Act, it is now the responsibility of the importer of record to use “reasonable care” to “enter,” “classify,” and “value” the goods and provide any other information necessary to enable US Customs to properly assess duties, collect accurate statistics, and determine whether all other applicable legal requirements are met.

When goods are imported into the Customs Territory of the United States (the fifty states, the District of Columbia and Puerto Rico), they are subject to certain formalities involving US Customs. In almost all cases, the goods are required to be “entered,” that is, declared to US Customs, and are subject to detention and examination by Customs officers to insure compliance with all laws and regulations enforced or administered by US Customs. As part of the entry process, goods must be “classified” (determined where in the U.S. tariff system they fall) and their value must be determined.

The Encyclopedia is therefore, a compilation of US Customs rulings on different valuation topics, such as the method for determining valuation, e.g., the "transaction value" or "deductive value" methods, as well as detailing which factors might make up the value of an importation.

In addition to this, there is a collection of US Customs rulings, grouped by category of a particular valuation issue, which may serve as a reference to one looking for guidance on how US Customs would treat a particular valuation matter.

The Encyclopedia is only for information purposes of course, and any binding determination sought by an importer can only be accomplished though a request for a ruling.

Questions/comments? Post below or email me at clark.deanna@gmail.com