Effects of CIT Decision on First Sale Valuations in NMEs Overblown, KPMG Says

Following a Court of International Trade opinion that appeared to question first sale import valuations from non-market economies, the court's observations may not be as disruptive as they first appear, KPMG said in an April 19 analysis. The judge's questioning of whether first sale could be used on non-market economies was non-binding and an issue only lightly explored at the agency level and during litigation, the firm said.

The CIT opinion ruled on cookware imported by Meyer from Thailand and China through a Chinese middleman (see 2103020040). The trade court found the involvement of Chinese companies made it difficult to determine whether the transaction was at arm's length and undistorted by non-market influences, as required for first sale valuation. Though he stopped short of saying imports originating in non-market economies (NMEs) could never receive first sale valuation, Senior Judge Thomas Aquilino called on the U.S. Court of Appeals for the Federal Circuit to clarify.

The analysis from KPMG also found it unlikely that the key Nissho Iwai decision establishing first sale criteria -- including that the transaction be free of “any distortive non-market influences” -- created a blanket prohibition on the valuation method in NMEs since that case didn't involve NME country participants. The case was more likely focusing on the types of non-market forces exhibited between parent company and subsidiary, not between foreign government and local supplier, said KPMG.

KPMG also released recommendations for U.S. importers who use the valuation practice to come into greater compliance with the practice in light of the decision. One recommendation in the tax firm's analysis is to establish a “reasonable care” file in which to file commercial documentation and financial statements to demonstrate compliance with first sale requirements. Importers should also determine which party can best represent the firm in the product's supply chain for the “all costs plus a profit” test for first sale valuations. The rationale for that decision should also be filed in the reasonable care folder, KPMG said.

Anticipating greater scrutiny of first sale valuations stemming from this decision, KPMG also recommended considering obtaining affidavits from vendors in NMEs confirming that government subsidies and assistance is absent from production. If the vendor cannot produce an affidavit, then the importer should consider a supply chain shakeup.

Additional screening of the comparability of NME suppliers should also be employed, KPMG said. Greater screening efforts include identifying comparable companies in market economies, vetting companies with sales to the U.S. that have similar functions, assets and risk profiles, and including public or private companies in the study to align with the company under review. Annual audits of a company's first sale program should also be conducted, KPMG recommended. Proactively addressing seemingly small administrative challenges can spare future headaches, it said.