As January 20, 2021 approaches and the advent of a new president and presidency emerges, what can we expect from a Biden administration and its Customs and Border Protection ("CBP" or "Customs") Transfer Pricing policy? What opportunities are available for global companies to manage and make retrospective inter-company Transfer Pricing adjustments? Different customs options and opportunities exist depending upon each companies' analysis and needs.
In addition, let us not forget the chaos COVID-19 caused to the international supply chains. Each company must analyze its profitability through the lens of the disruption this pandemic has caused and revisit its Transfer Pricing adjustments in the interim. Add to that issue the 25% tariffs on many goods and you have the perfect customs storm.
To conduct the proper diagnostic, you must remember that the preferred method of appraisement is the transaction value method. Transaction value is defined as "the price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions when applicable. The regulations further state that "the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market." However, rebates, or any other decrease in the price actually paid or payable made or effected after the date of importation, are to be disregarded for the purposes of determining transaction value.
The customs valuation statute directs that transaction value may not be used if (1) the buyer and seller are related, unless the relationship did not influence the terms and conditions of the sale, (2) the price includes non-cash consideration that cannot be valued, or (3) compensation is in whole or in part based upon the price realized upon the occurrence of a future event that cannot be qualified in a reasonable period. Thus, importers purchasing from related-party sellers must demonstrate through the "circumstances of the sale" test, that the relationship of the buyer and the seller did not influence the price paid or payable, or that it approximates certain "test values." The "circumstances of the sale" test is one of the two requirements required by the most recent CBP policy.
Most related-party transactions involve post-importation adjustments to the transfer price. Previously, CBP did not have a consistent policy regarding these adjustments and importers were subject to different CBP determinations. However, Customs regulations make clear that the primary method of appraisement, the transaction value, is the only methodology to use when transfer pricing adjustments form part of the customs valuation formula.
HQ W548314 sets out a new standard for importers involved in related-party transactions. Namely, when companies use inter-company transfer prices for purchases from related-party sellers, any post importation price adjustments may form part of the customs value and should therefore be reported to CBP if the adjustments meet the requirements of the new "five factor" test for formula pricing.
The "five factor" test the CBP outlined in its final determination policy are as follows:
- A written "Intercompany Transfer Pricing Determination Policy;"
- U.S. taxpayer uses its transfer pricing policy in its income tax return;
- The company's transfer pricing policy specifies how the transfer price and any adjustments are determined for products being adjusted;
- The company's books can support said adjustments;
- No other conditions exist that may affect the acceptance of the transfer price by CBP.
These factors will be handled on a case-by-case basis according to CBP. Most likely, a thorough analysis will need to be conducted prior to filing for an adjustment. CBP states that "the satisfaction of the factors set out above reduces the possibility of price manipulation and subjectivity in claiming post-importation adjustments," permitting an importer's transfer pricing policy to be considered an objective formula in place prior to importation for purposes of determining the price within the meaning of 19 CFR § 152.103(a)(1). In this scenario, CBP believes that "post-importation adjustments (both downward and upward), to the extent they occur, may be taken into account in determining the transaction value under 19 U.S.C. § 1401a(b)."
In addition, CBP has finally concluded with its new policy that any downward adjustments in the transfer price made pursuant to the valid transfer pricing study are not "rebates" for the purposes of transaction value but instead reflect an element of the price actually paid or payable. As stated in HQ W548314, "post-importation adjustments made pursuant to the transfer pricing policy...simply reflect what should have been reported as the invoice price upon entry, had the exact price information of the imported merchandise been available at the time. Any such changes in the transfer price should be immediately reported to CBP."
Therefore, importers must, based upon CBP's most recent rulings and the new Biden Presidency, conduct their own customs transfer pricing analysis and utilize the "formula" and the "five factors" test for claiming post-importation price adjustments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.