In ruling H313988 (February 18, 2022), Customs and Border Protection (CBP) addressed whether certain costs should be added to the customs value as assists when using the transaction value method in situations where the products are imported from related parties. For this case, there are two entities, which are referred to as the U.S. Entity and the Foreign Entity. These two entities make up a larger, global hygiene and health company. The two entities import into the United States goods from other foreign related parties. Under this scenario, the entities declare the related party sales price under the transaction value method. For the ruling, the entities requested that CBP determine if the following costs should be added as assists or other additions under the transaction value:
- Global research and development,
- Global marketing, advertising, and promotion;
- Global brand, innovation, and sustainability costs; and
- Sales commissions for domestic sales of orthopedic products after importation to the United States.
In its analysis, CBP noted that “the primary method of appraisement is transaction value, which is defined as ‘the price actually paid or payable for the merchandise when sold for exportation to the United States,’ plus amounts for certain statutorily enumerated additions, to the extent not otherwise included in the price actually paid or payable.” Per 19 CFR §152.103(b)(1), the other enumerated statuary additions include:
- The packing costs incurred by the buyer with respect to the imported merchandise;
- Any selling commission incurred by the buyer with respect to the imported merchandise;
- The value, apportioned as appropriate, of any assist;
- Any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
- The proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.
CBP first determined that Cost 4 – the sales commission cost – would not be added to the price payable because it is a selling commission to a domestic sales agent that takes place after importation. CBP then noted that despite the fact that Costs 1 through 3 are not under the enumerated statuary additions list, it is not to say that the costs should not be considered for determining the transaction value in the context of related party sales. This occurs because special rules apply when there is a sale between related parties. CBP notes that as defined under 19 U.S.C. §1401a(b)(2)(B), the transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale, or (2) test values. Under the circumstances of sales test, CBP looks for evidence that shows that the parties’ relationship did not impact the price paid or payable of the imported goods.
To demonstrate that the relationship did not impact the price paid or payable, the two entities note that in their transfer pricing policy the “pricing of the transfer of goods between enterprises belonging to an international Group can be made in different ways. The method chosen is the Cost Plus Method.” The transfer pricing policy also states that the purpose of sharing the aforementioned costs “in an arm’s length way and establishing an overall arm’s length transfer pricing policy is that each participant in the cost sharing arrangements bears their fair share of expense and all legal entities enjoy profits commensurate with their business functions, risks and assets.”
In its ruling CBP determined that while it has previously accepted transfer prices based on the Cost Plus Method (CPM), it is not their role to determine which costs should be included in the transfer pricing policy of a company. Furthermore, though CBP Regulations do not define what profit may be considered under the CPM (either gross profit or operating profit), CBP in this ruling stated that it is its “view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses, such as marketing, have been paid.” As such, when CPM is used, CBP determined that it is its preference to include the above related costs of research and development, marketing, advertising, promotion, innovation, and sustainability costs, though it is not a requirement.