First Sale Claims Require Extensive Data Upkeep to Support, Expert Says
As seen in recent rulings and CBP audits on first sale, CBP is asking for more information supporting importers' claims of bona fide sales and arms' length sales, Kelly Nelson, managing director of tax, trade and customs at KPMG, said during a Sept. 25 webinar.
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"What they really want to do is make sure that all costs are being included in the price, and if there are any additions to the price paid or payable, [that] they are being included in that first sale price," Nelson said.
This additional attention has resulted in an increased request for middlemen's books and records, such as financial statements, journal entries and charts of accounts, which Nelson described as a detailed information list of all the different accounts and information and financials being booked within those accounts.
"Once the auditor receives that information, they generally look to see if there's any accounts that look like they could be housing any additional payments to the suppliers or the factories that may need to be included in your price. Some of the costs that they generally look for may be packing costs, selling commissions, assists, royalty licensing fees, etc.," Nelson said. "So, if you do have any of this costing information, or if your suppliers are saying they're providing any of this to the factories ... it's necessary to make sure that this is included in the first sale price."
CBP also may audit the records of the middleman about the supplier arrangement, such as the financial statements of the suppliers, Nelson continued.
"They may look to validate the cost of goods sold against the financial statements. So, we do want everything tied together," Nelson said. "In addition, they will look for any high-risk account identification. ... They're going to look for some key buzzword throughout those accounts to see if they think there's anything that could be considered in addition to the price, and to make sure that was included in the transaction value."
She continued, "It is important to make sure, if you are utilizing the first sale, that you are doing a detailed analysis of the valuation to make sure that all costs are included," as CBP appears to be requesting this kind of information.
Nelson advised webinar participants to keep documents for five years so that companies have it to provide documentation to CBP as needed to support claims. Types of documents may include supplier agreements, the middleman's purchase order to the factory, the factory's invoice to the middleman, the middleman's invoice to the factory and the importer, and the importer's payment of record to the middleman and the factory. Importers also should consider maintaining customs value and costs worksheets, especially when an assembly transaction is involved.
"We'll also collect financial statements audited for a one-year period, the same year of the transactions that are being reviewed and declared for first sale, as well as any transfer pricing policies that may be in place for the impacted entries that are being reviewed once you're on board the program," Nelson said, adding that companies should conduct audits with vendors on board with the program.
Companies should also review their arms-length arrangements, as the financials can be changed year-over-year, she said.