CBP OKs Transaction Value, Post-Import Adjustments for Flash Drive Importer

Company B imports flash memory devices for distribution in the U.S. from “Company A,” a related foreign contract manufacturer that arranges for production of flash memory devices by third-party and related suppliers around Asia. Both are owned by the parent “Company C.” Business between Company B and Company A is conducted under the terms of a distribution agreement that has been in place since 2005. There are three types of transactions between them:

• Sales Orders: goods bought by Company B, which in turn are sold to unrelated U.S. consumers.
• Distribution Orders: goods bought by Company B for the purpose of replenishing its inventory
• Consignment Orders: goods imported by Company B and stored in the U.S., but not actually bought from Company A until purchased by one of Company B’s U.S. customers.

For the Sales Orders and Distribution Orders, the value declared at the time of entry is based on the commercial invoice between Company B and its U.S. customer, plus a percentage increase called the “agreed margin” to allow for cost recovery and profit. The values are flagged for reconciliation so they can be adjusted to make sure they adhere to the agreed margin. In transfer pricing analyses used for tax purposes, accounting firm KPMG found that in recent years, when compared to nine other electronics distributors of comparable size, Company B’s average operating margins ranged between the 25th percentile and the 75th percentile. KPMG also found that Company B’s operating margins were consistent with other companies that imported their goods at arm’s length.

In order for transaction value to be used as a method of appraisement, there must be a bona fide sale. CBP found that for the Sales Orders and the Distribution Orders, a bona fide sale occurred. Company B provided sample documentation to CBP, including invoices that showed that the sale was “ex works,” an air waybill that indicated the goods were shipped “freight collect,” and records that showed payment by wire transfer. The sales were for exportation, and the payments were for the exact amount listed on the invoice, said CBP.

CBP also found that the price paid or payable by Company B to Company A for the Sales Orders and Distribution Orders was not influenced by their relationship. For CBP to find that the relationship between the parties didn’t affect price, the price must be set in accordance with normal industry practice, and the price has to ensure recovery of all costs plus a profit margin equivalent to the company’s overall profit. The transfer pricing studies conducted by KPMG, which were given more weight by CBP because they were used by the Internal Revenue Service (IRS), showed that Company B’s operating margins were close to those of similar companies, said the agency. Other reports from KPMG showed that companies in the flash memory industry tend to be vertically integrated like Company C, and Company C’s profits were also in line with industry norms, said CBP.

Finally, Company B is allowed to take post-importation price adjustments in reconciliation into account in determining transaction value, said CBP. The company meets all of the requirements to do so, including: a written transfer policy; use of the transfer policy for filing income tax return, and reporting of any adjustments; a transfer policy that covers all products for which value is to be adjusted; and the maintenance of accounting records to support claimed adjustments.

For the last category of transaction, CBP said Company B should value its Consignment Orders under transaction value of identical and similar merchandise. The goods are identical in all respects to the other goods purchased by Company B from Company A, and the sales include about the same quantity and take place as the time as the other purchases, said CBP.

(HQ H176775 EE, 03/06/14)