CBP Allows for Post-Import Price Adjustments Due to Shipment Delays, Reduced Sales

Some circumstances allow for post-importation price adjustments when determining transaction value, CBP headquarters said in a March 18 ruling, released May 23. The HQ ruling was sent to CBP's Automotive and Aerospace Center of Excellence and Expertise in response to a May 29, 2019, application for further review by an unnamed automotive importer. The importer buys motor vehicles and spare parts from its related parent company and resells them to authorized dealers and other related parties in the U.S.

The importer told CBP that “unforeseen disruption” in the supply of vehicles from the parent to the protestant resulted in shipment delays in wholesale deliveries to retailers and a depressed return on sales (ROS), and asked whether CBP should accept post-importation adjustments reducing the transfer price of the imported vehicles. In its analysis, CBP found that the protestant satisfied all five criteria required to claim such adjustments as laid out in 2012 ruling HQ W548314. The written transfer pricing policy had been in effect since 2012 and CBP found that it took the transfer pricing rules and Section 482 into account during its creation. The policy covered the January 2018 entry at issue and the importer claimed adjustments for fiscal year 2018.

The company provided accounting details to support the claimed adjustments and submitted copies of the credit note from the parent company to the importer; the adjustments to the specific per unit vehicle base models; the importer’s financials showing the ROS for the involved period with and without the Nov. 29, 2018, transfer price adjustment; and 2018 tax returns. The credit note from the parent company was recorded as a reduction of cost of goods sold in November 2018 and reflected in the protestant’s calendar year 2018 financial statements/operating profits. The calendar year 2018 financial statements were the basis for the protestant’s 2018 corporate income tax return, including all adjustments required for taxable income. CBP found the adjustments at issue were "not subject to any other considerations or conditions that may affect transaction value." CBP concluded that it will accept the adjusted values if they meet the circumstances of the sale test, even though the prices were not fixed at the time of the importation.

However, because the protestant bought vehicles and parts from a related company, CBP also examined whether these transactions consisted of "bona-fide sales" for exportation to the U.S. CBP concluded there were bona fide sales between the importer and the parent company. "There are special rules that apply when the buyer and seller are related parties," CBP said. Transaction value between related buyer and seller is acceptable "only if the relationship did not influence the price actually paid" or when the transaction value of the merchandise closely approximates certain “test values.” In this case, CBP found no “test values” were available and the protestant didn't submit supporting evidence that the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit.

To determine whether the relationship influenced the price, CBP examined how the buyer and seller organized their commercial relations and how the sale price was derived. CBP found that the Distributor Agreement and the parent’s Terms and Conditions set prices of vehicles and parts delivered to the protestant were the same as the parent's standard prices in euros and determined annually in advance of the transactions. The pricing method was calculated based on the wholesale price and "reduced by a reasonable gross margin to ensure that the protestant covered its operating expenses including a reasonable profit."

CBP found the adjusted sales price wasn't influenced by the relationship for purposes of the sale test. "Based on the totality of the information considered and our review and examination of the relevant aspects of the transaction, including the way in which the protestant and its parent organize their commercial relations," CBP concluded the transaction value was the correct appraisal method and post-importation price adjustments could be taken into account during its calculation.