CBP to Allow Transfer Pricing Adjustments in Transaction Value Appraisement Method

On May 30, 2012, U.S. Customs and Border Protection (CBP) announced the revocation of an administrative ruling (Headquarters Ruling Letter (HRL) 547654, dated November 8, 2001) that sought to prohibit an importer from using the transaction value method of appraisement for related party sales involving a retroactive transfer pricing adjustment.  

Based on CBP’s amended policy, effective July 30, 2012, companies who import merchandise from related parties pursuant to a written transfer pricing formula may utilize a transaction value method of appraisement where appropriate, and report any post-importation transfer price adjustments to CBP, preferably through participation in CBP’s Reconciliation Prototype program.

In HRL 547654, CBP held that transaction value did not apply to the transaction at issue because the price was not fixed or determinable pursuant to an objective formula prior to importation since the import price remained within the control of the buyer and/or seller.  However, it is now CBP’s position, as outlined in HRL W548314 (May 16, 2012), that importers can utilize a transaction value method of appraisement for related party transactions, even if the transfer price is adjusted post-importation pursuant to a formal transfer pricing policy related (directly or indirectly) to the declared value of the merchandise. 

The revised list of factors provided by CBP as guidance for determining whether an objective formula was in place prior to importation for purposes of determining the transaction value within the meaning of 19 CFR § 152.103(a)(1) include the following: 

• A written Transfer Pricing Policy is in place between the parties prior to importation and has been prepared taking IRS Code Section 482 into account;
• The U.S. taxpayer uses its transfer pricing policy when filing its income tax return, and reports any adjustments resulting from the policy when filing its return;
• The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the policy for which the value will be adjusted; 
• The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the U.S.; and
• No other conditions exist that may affect the acceptance of the transfer price by CBP.  

CBP also stated in HRL W548314 that in order to apply a transaction value appraisement method under the this proposed new policy, no other factors can exist that would otherwise affect the acceptance of the transfer price under the customs laws, and all required statutory additions must still be captured and reported to CBP.  In effect, importers should continue to follow the related party transaction guidelines contained in 19 CFR § 152.103(l)(1)(i)-(iii) in order to confirm that their transfer prices are acceptable upon examination of the circumstances of the sale or test values related party tests.  

CBP strongly recommends that importers participate in CBP’s Reconciliation Prototype program as the mechanism to report post-importation transfer pricing adjustments that are unknown or unknowable at the time of entry.  Reconciliation allows importers to, using reasonable care, file entry summaries with CBP using the best available information with the mutual understanding that certain elements, such as the declared value, remain outstanding.  Entries can be flagged for subsequent adjustment on an entry-by-entry or blanket basis.  Any adjustments to the declared values must be reported to CBP within a Reconciliation entry no more than 21 months from the entry date, providing any requisite adjustments to the declared value.