OT:RR:CTF:VS H310087 AP
Center Director
Automotive and Aerospace Center of Excellence and Expertise
U.S. Customs and Border Protection
477 Michigan Avenue, Rm. 281
Detroit, MI 48226
Attn.: Russell R. Morris, Entry Chief
RE: Application for Further Review of Protest Number 1303-19-100276; Transaction Value; Related Parties; Post-Importation Adjustments
Dear Center Director:
This is in response to the May 29, 2019 Application for Further Review (“AFR”) of Protest Number 1303-19-100276, timely filed by counsel on behalf of the importer [X] (“protestant”), addressing whether certain post-importation adjustments in the amount of $[X] (“TP adjustments”) reducing the transfer price of the imported vehicles should be accepted.
Protestant, through its counsel, has asked that certain information submitted in connection with this AFR be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this AFR, forwarded to our office, will not be released to the public and will be withheld from published version of this decision.
FACTS:
The protestant purchases motor vehicles and spare parts from its related [X] parent company [X] (“parent” or “seller”), and other related and/or unrelated parties, and resells them to authorized dealers and other related parties in the U.S. market. Protestant states that “unforeseen disruption” in the supply of vehicles from the parent to the protestant, arising from governmental vehicle certification delays, resulted in shipment delays in wholesale deliveries to retailers and a depressed return on sales (“ROS”) for the protestant.
The parent’s Transfer Price Policy states, in relevant part:
Transfer prices (based on planned sales revenues, cost of sales and operating expenses) shall be determined once a year in advance of the transactions and might be adjusted … during the year if the [market performance center’s (“MPC”)] profitability falls outside the range of reasonable profits due to major unforeseeable changes in the market environment (these changes might include for example unforeseen drop in demand, new competitors or aggressive pricing strategies of competitors). Instead of a price adjustment the supplier might also make a one-time payment, e.g. for additional marketing support … The determination and documentation of all transfer prices is subject to approval by [X] Tax/Customs Department in [X].
According to section 6.3 of parent’s Accounting and Financial Reporting Policy, the pricing method used to arrive at the transfer price is calculated based on “the resale price method … based on the wholesale price to dealer (WSD) for which the vehicles and spare parts are resold to Retailers … reduced by a reasonable gross margin … to ensure that the MPC covers its operating expenses including a reasonable profit in the light of its functions, risks and assets employed.” Transfer prices are determined once a year in advance of the transactions based on sales revenues, cost of sales, and operating expenses and might be adjusted.
The price adjustment made on November 29, 2018, resulted in a payment by the parent company to the protestant in the amount of $[X], reducing the transfer price of the vehicles and offsetting the net income loss. The protestant did not flag the entry for reconciliation. The $[X] credit note adjustment by the parent to protestant was made as a reimbursement for certain costs that should have been borne by the manufacturer and to restore protestant’s profits to an appropriate margin for distribution activities.
Price Waterhouse Coopers’ (“PwC”) 2018 annual transfer price study of the protestant for the fiscal year ending on December 31, 2018 (“2018 PwC Study”) revealed that protestant’s three-year weighted average ROS in the period FY 2016-2018 and the ROS in FY 2018 amounted to [X]% and [X]%, respectively, and was within the calculated inter-quartile range of [X]%-[X]%. Without the TP adjustment, the protestant’s minimum ROS would have been [X]%. PwC determined that the protestant’s ROS after the TP adjustment was within the arm’s length range of comparable results. PwC identified ten functionally “comparable” companies distributing a variety of products ranging from building materials and wood products to rail products and personal computer systems.
Protestant advises that the transfer price between the parent company and the protestant has not been challenged by the Internal Revenue Service (“IRS”). The importer was not involved in any Advanced Price Agreements (“APAs”) with the IRS during fiscal years 2017 and 2018.
Protestant states that it takes possession of the vehicles on a Cost Insurance and Freight (“CIF”) basis (risk of loss passes to protestant when the vehicles are loaded on a vessel at the foreign port) and that it conducts significant inspection and vehicle preparation prior to its sale of the vehicles to unrelated retailers. For instance, invoice no. [X] from the parent to protestant in the amount of $[X] for a [X] was issued in response to purchase order no. [X] on October 17, 2018 and payment was due by November 15, 2018. The invoice included freight costs, handling, and transport insurance. The invoice states that the delivery terms corresponded to Carriage and Insurance Paid To (“CIP”) meaning the parent paid freight and insurance to deliver the goods to the protestant at the foreign port of lading and the risk of loss/damage to the goods transferred from the parent to the protestant when the goods were delivered to the carrier. The application for foreign-trade zone admission and/or status designation indicates that the port of unlading was [X], Georgia and the foreign port of lading was [X], Germany. The entry date was filed on November 8, 2018. The protestant’s account payable reconciliation shows that a payment was posted on October 17, 2018. The payment matches the invoice amount and purchase order number.
Invoice no. [X] from the parent to protestant in the amount of $[X] for a [X] was issued in response to purchase order no. [X] on September 18, 2018. The invoice included freight costs, handling, and transport insurance. The invoice states that the delivery terms corresponded to CIP. The invoice amount was due by October 15, 2018. The application for foreign-trade zone admission and/or status designation indicates that the port of unlading was Los Angeles, California and the foreign port of lading was [X], Germany. The entry date was November 8, 2018. Protestant was listed as the importer of record. The protestant’s account payable reconciliation shows that a payment was posted on September 18, 2018. The payment matches the invoice amount and purchase order number.
Invoice no. [X] from the parent to protestant in the amount of $[X] for a [X] was issued in response to purchase order no. [X] on July 13, 2018. The invoice included freight costs, handling, and transport insurance. The invoice states that the delivery terms corresponded to CIP. The invoice amount was due by July 25, 2018. The application for foreign-trade zone admission and/or status designation indicates that the port of unlading was [X], Georgia and the foreign port of lading was [X], Germany. The entry date was November 15, 2018. Protestant was listed as the importer of record. The protestant’s account payable reconciliation shows that a payment was posted on July 13, 2018. The payment matches the invoice amount and purchase order number.
According to the Distribution Agreement between the parent and the protestant effective January 1, 2013, the protestant is a non-exclusive distributor of the parent in the U.S. and Puerto Rico. It is wholly owned by [X]. The prices for the vehicles are the parent’s standard prices in Euros exclusive of value-added tax (“VAT”). The protestant is an independent contractor and buys/sells as an independent business on its own account. The protestant maintains its own books and records to reflect the transactions.
According to the parent’s Terms and Conditions, unless otherwise agreed, the parent covers forwarding and transport insurance Delivered at Frontier (“DAF”) German border or Free on Board (“FOB”) North Sea Port. Incoterms 2010 apply. The merchandise remains the property of the parent until the claims accruing to the seller by virtue of the contract of sales have been settled. Reservation of title applies to claims acquired by the seller against the buyer arising from ongoing business relations until claims have been settled. The contract is governed by German law. The purchase price comprises the export list price valid on the delivery date plus any VAT applicable on the delivery date.
Protestant has submitted: (1) Credit note from the parent company to the protestant;
(2) Adjustments to the specific per unit vehicle base models; (3) Transfer Pricing Policy;
(4) 2017 PwC Study; (5) Summary of the protestant’s financials showing the ROS for the involved period with and without the November 29, 2018 TP adjustment; (6) 2018 PwC Study including the benchmarking appendix and appendix 3 (financial transactions and Treasury Services); (7) The protestant’s corporate tax return (IRS Form 1120) for fiscal year 2018 showing the cost of goods sold (“COGS”) reported to the IRS; (8) Accounting details from the protestant’s books and/or financial statements to support the 2018 TP adjustment in the U.S.;
(9) The 2018 entries, invoices, proof of payment, and contracts to establish how to the parties dealt with one another January 1-November 30, 2018; (10) the Distributorship Agreement between the protestant and the parent in effect in 2018; and (11) the parent’s Accounting and Financial Reporting Policy.
ISSUES:
Is it acceptable to take the subject post-importation price adjustments into account for purposes of determining transaction value?
Do the circumstances of sale establish that the price actually paid or payable by the protestant to the parent is not influenced by the relationship of the parties and is acceptable for the purposes of using transaction value?
LAW AND ANALYSIS:
Initially, we note that the matter protested is protestable under 19 U.S.C. § 1514(a)(1) as a decision on the value of merchandise. The protest was timely filed, within 180 days of liquidation. See Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429,
§ 2103(2)(B)(ii)-(iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further Review of this protest is properly accorded to protestant pursuant to 19 C.F.R. § 174.24(b) because the issues protested involve questions of law or fact, which have not been ruled upon.
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979, codified at 19 U.S.C. § 1401a. The preferred method of appraisement is transaction value. Transaction value is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutorily enumerated additions under 19 U.S.C. § 1401a(b)(1)(A)-(E). Unless there is a bona fide (good faith) sale of merchandise for exportation to the United States, the transaction value method cannot be used.
Title 19, CFR § 152.103(a)(1) provides, in pertinent part:
In determining transaction value, 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 ….
Is it acceptable to take the subject post-importation price adjustments into account in determining transaction value?
U.S. Customs and Border Protection (“CBP”) strongly encourages importers, who may anticipate post-importation adjustments, to use its Reconciliation program. In any event, importers are expected to demonstrate that the price is at arm’s length and to provide supporting information when requested.
The customs value of the imported merchandise is affected every time related parties reduce or increase their profitability pursuant to transfer pricing studies, which cover the imported goods, resulting in payments, transfer of funds, or credit/debit transactions between the related parties. See Headquarters Ruling Letter (“HQ”) H204329, dated Aug. 18, 2014. Post-importation adjustments must be reported to CBP since they directly relate to the imported goods. To claim post-importation adjustments to the value of the imported goods, the protestant must satisfy five criteria. See HQ W548314, dated May 16, 2012. These five criteria are:
A written transfer pricing policy is in place prior to importation and the policy is prepared taking section 482 of the Internal Revenue Code (26 I.R.C. § 482) into account;
The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax 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 transfer pricing policy for which the value is to be adjusted;
The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and,
No other conditions exist that may affect the acceptance of the transfer price by CBP.
If the related parties meet all the above referenced factors, CBP will accept the adjusted values, provided these adjusted values meet the circumstances of the sale (or test values) test, because the prices would be established pursuant to a “formula,” even though the prices were not fixed at the time of the importation.
In the instant matter, protestant has provided sufficient information to satisfy the above-referenced criteria. The entry was filed on January 18, 2018. The importer claimed adjustments for fiscal year 2018, and the written transfer pricing policy has been in effect since July 1, 2012. The 2018 PwC Study indicates that the company takes the Organization for Economic Co-operation and Development (“OECD”) transfer pricing rules and 26 I.R.C. § 482 into account. The 2018 PwC Study confirms that section 482 and the corresponding OECD guidelines are the basis of PwC’s analysis of the appropriateness of transfer pricing practices between the importer and its related party suppliers.
The goal of the parent’s Transfer Pricing Policy is “to support the entities in the creation of transfer prices for goods and services within the [X].” The importer follows the transfer price policy in filing its tax returns and adjustments resulting from the transfer pricing policy are used by the importer in filing its income tax returns. These results are used to prepare the importer’s tax returns. The 2018 PwC Study was prepared for tax purposes.
The Transfer Pricing Policy specifies how the price and adjustments are determined for all products subject to the adjustment. According to the Transfer Pricing Policy, transfer prices are determined once a year in advance of the transactions and might be adjusted during the year if the U.S. importer’s profitability falls outside the range of reasonable profits due to major unforeseen changes in the market environment. Instead of a price adjustment the supplier might also make a one-time payment.
The company has provided accounting details from its books to support the claimed adjustments. Protestant has 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 November 29, 2018 TP adjustment, as well as 2018 tax returns. The credit note for $[X] from the parent company was recorded as a reduction of COGS in November 2018 and was reflected in protestant’s calendar year 2018 financial statements/operating profits. The calendar year 2018 financial statements were the basis for protestant’s 2018 corporate income tax return, including all adjustments required for taxable income. The effect of the November 2018 credit note was reflected in protestant’s Form 1120 (Corporate income tax return), Schedule M-3. The COGS was reported to the IRS and included in the TP adjustment.
Upon our review of the information provided by protestant, we find that the adjustments at issue are not subject to any other considerations or conditions that may affect transaction value.
Therefore, the subject post-importation adjustments may be taken into account in determining the transaction value under 19 U.S.C. § 1401a(b), but only if the adjusted values meet the circumstances of the sale or test values tests.
Do the circumstances of sale establish that the price actually paid or payable by the protestant to the parent is not influenced by the relationship of the parties and is acceptable for the purposes of using transaction value?
To use transaction value, there must be a bona fide sale for exportation to the U.S. In VWP of Am., Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999) (citing J.L. Wood vs. United States, 62 CCPA, 25, 33, 505 F.2d 1400, 1406 (1974)), the court found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of title from one party to another for consideration. No single factor is decisive in determining whether a bona fide sale has occurred. See HQ 548239, dated June 5, 2003. CBP considers whether the purported buyer assumed the risk of loss for and acquired title to the imported merchandise. Evidence to establish that consideration has passed includes payment by check, bank transfer, or payment by any other commercially acceptable means. Payment must be made for the imported merchandise at issue. See HQ 545705, dated Jan. 27, 1995.
Based on the invoices from the parent, entry summaries (CBP Form 7501), applications for foreign-trade zone admission and/or status designation (CBP Form 214), accounts payable reconciliations of the protestant showing a payment to the parent for the invoices issued as described above, and the Incoterms 2010, the risk of loss passes from the parent to the protestant when the goods are loaded onboard the ship at the foreign port [X]. According to the Terms and Conditions, the protestant receives title to the goods upon payment of the invoices to the parent. The submitted invoices were paid timely before the importation of the merchandise into the United States. Further, the documentation demonstrates that at the time of the sale between the protestant and the parent, the goods were clearly destined for the United States. Thus, we find that there was a bona fide sale between the protestant and the parent.
In addition, there are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. § 1401a(g). Transaction value between a related buyer and seller is an acceptable basis of appraisement only if the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” See 19 U.S.C. § 1401a(b)(2)(B); 19 C.F.R. § 152.103(l). In this case, there are no “test values” available to us and protestant has not submitted supporting evidence that the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time.
Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The CBP regulations in 19 C.F.R. Part 152 provide illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. CBP examines how the buyer and seller organize their commercial relations and how the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 C.F.R. § 152.103(l)(1)(i)-(ii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well.
Unlike in HQ H256363, dated Jan. 29, 2015, the protestant had not entered into a bilateral APA with the IRS and the foreign tax authority. The mere fact that an importer provides CBP with a 2018 transfer pricing study is not sufficient to establish that a related party transaction value is acceptable. The “functionally comparable” companies selected in the 2018 PwC Study distribute a variety of products ranging from building materials and wood products to rail products and personal computer systems. The protestant, on the other hand, is an exclusive distributor of motor vehicles and parts and, therefore, a member of the automobile industry. CBP does not consider the industry in question to consist of “functionally equivalent” companies if those companies do not sell goods of the same class or kind. Under these circumstances, the comparison between the protestant and these other ten companies cannot be considered consistent with the market as a whole.
Nonetheless, the 2018 PwC Study detailing the pricing practices of the auto industry is relevant for our overall analysis of the protestant/parent’s pricing structure. The study discusses the competitive landscape and pricing practices in the U.S. auto industry in 2016-2018. A fall of [X]% in vehicle sales was expected in the U.S. for 2018. See also 2017 PwC Study. The passenger car production decreased from [X] million (“mn”) units in 2016 to [X] mn units in 2017 and was expected to decrease to [X] mn units in 2018. The passenger car sales decreased from [X] mn units in 2016 to [X] mn units in 2017 and were expected to decrease to [X] mn units in 2018. The year-over-year (“y-o-y”) percentage change in passenger car sales for the key competitors in the market was in the range from [-X] to [X] with a [-X] percentage change for protestant. The commercial vehicle production on the other hand was [X] mn units in 2016 and [X] mn units in 2017 and was expected to go up to [X] mn units in 2018. The commercial vehicle sales increased from [X] mn units in 2016 to [X] mn units in 2017 and were projected to go up to [X] mn units in 2018. The y-o-y percentage change in commercial car sales for the key competitors in the market ranged from [-X] to [X] with a [X] percentage change for protestant.
Protestant purchased vehicles and spare parts from the parent and other related and/or unrelated parties to resell to third-party authorized dealers and other related parties in the U.S. The PwC 2018 Study explains that before the beginning of each fiscal year, there is a comprehensive budgeting process, which occurs to target a reasonable ROS for the local wholesale division in the fiscal year. The wholesale distributor considers all the operating costs and risks. The targeted ROS is based upon an analysis performed by the parent each fiscal year, based on comparable external companies’ returns, functions, risks and assets of the wholesale distributor, prior year results, and current and expected market situation. The wholesale distributor and the parent negotiate a sales volume target and price based on budgeted growth and current market situation. The transfer price is the result of the target revenue, the planned operating costs (fixed and variable), and the target ROS. The transfer price determination process of the wholesale distributor and the parent involves comprehensive comparison of competitor pricing and analysis of current market conditions to arrive at a transfer price for the duration of the fiscal year. The resale price of spare parts to related parties corresponds to the purchase price. The price setting is based on local market conditions such as transactions with third parties and competitor pricing. Possible yearly inflation and discount budgets are based on local market conditions, life-cycle situation, and inventory levels, and are agreed with the parent. The TP adjustment was recorded as a reduction of COGS in November 2018 and was reflected in protestant’s calendar year 2018 financial statements/operating profits.
Pursuant to the Distributor Agreement and the parent’s Terms and Conditions, the prices of vehicles and parts delivered to the protestant were the parent’s standard prices in Euros (exclusive of VAT) valid on the date of delivery. The projected sales volume for each category of vehicles was the number of vehicles for such category sold during the preceding sales period adjusted by a percentage decrease or increase equal to the average percentage decrease or increase of the projected sales for the vehicles for the sales period in the United States. Transfer prices were determined once a year in advance of the transactions based on sales revenues, cost of sales, and operating expenses and might be adjusted. According to section 6.3 of the Accounting and Financial Reporting Policy, the pricing method used to arrive at the transfer price was calculated based on the wholesale price to dealer for which the vehicles and spare parts were resold to retailers reduced by a reasonable gross margin to ensure that the protestant covered its operating expenses including a reasonable profit. The protestant’s general ledger indicates that resale prices to the unrelated dealers were set to ensure that the protestant covered its operating expenses (including delivery and advertising expenses) and a reasonable profit.
Accordingly, we find that the adjusted sales price is not influenced by the relationship for purposes of the circumstances 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 and the way in which the price in question is arrived at. As a result, we determine that transaction value is the proper method of appraisement.
HOLDING:
This protest should be GRANTED. The merchandise may be appraised based on transaction value of the merchandise and the subject post-importation adjustments may be considered.
You are instructed to notify the protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and
the public on the Customs Rulings Online Search System (CROSS) at https://rulings.cbp.gov/, or other methods of public distribution.
Sincerely,
for Craig T. Clark, Director
Commercial and Trade Facilitation Division