February 24, 2015
HQ H260036
OT:RR:CTF:VS H260036 YAG
CATEGORY: Valuation
Mr. Damon V. Pike, President
The Pike Law Firm, P.C.
246 Sycamore Street, Suite 215
Decatur, Georgia 30030-3434
RE: Ruling Request; Deductive Value; Fallback; Post-Importation Adjustments
Dear Mr. Pike:
This is in response to your ruling request, dated October 10, 2014, seeking approval of the proper basis of appraisement of natural and biodegradable additives, imported from [***], filed by the Pike Law Firm, P.C. on behalf of [***] (the “Importer/Buyer”).[1]
The Importer/Buyer has asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The Importer/Buyer is a U.S. Corporation and is a leading Importer/Buyer in North America of natural and biodegradable ingredients made through fermentation technology. The core products handled by the Importer/Buyer are citric acid, gluconates, xanthan gum, special salts, specialties, and sweeteners. The Importer/Buyer also procures complementary or trading products from third-party manufacturers for distribution. Trading products include sweeteners, preservatives, and other organic acids not produced by the company’s [***] plants. The Importer/Buyer belongs to the food additive industry.[2] The Importer/Buyer’s major competitors include [***].
The primary function of the Importer/Buyer is to facilitate distribution of its products and, to a lesser extent, provide sales, marketing, and direct distribution of the imported products. The Importer/Buyer also provides sales and logistical support, and arranges shipping, invoicing, and technical assistance. The Importer/Buyer purchases products from related manufacturers in [***] through its related selling agent.[3] [***] (“Selling Agent”) is the agent as well as the sales and marketing representative for all products from the manufacturing companies of the [***] group. Both the Importer/Buyer and the Selling Agent are wholly-owned by [***], a [***] corporation. Once imported, the goods are either shipped directly to the end customer or are stored in one of eight warehouses in the United States until delivery to the end customer.
The Importer/Buyer purchases imported products from the foreign related manufacturers under the Carriage and Insurance Paid (“CIP”) Incoterm and takes title to the imported goods once they leave the dock of the related manufacturers. The related manufacturers arrange and pay for the delivery and insurance of the merchandise to the specified destination. The charges incurred for foreign inland freight, international freight, and insurance associated with the imported products are properly itemized as non-dutiable charges on the commercial invoice and billed to the Importer/Buyer. The Importer/Buyer’s selling price in the United States is determined by: 1) a U.S. purchaser asking the Importer/Buyer to submit a selling bid; or, 2) the Importer/Buyer searching the market for potential customers and offering the goods for a market price. The selling price in the United States is dictated by order volume and current market conditions. Hence, the Importer/Buyer states that the price of the goods varies by order quantity and timing. Therefore, the Importer/Buyer’s pricing for citric acid and similar commodities is backward integrated, with the pricing set by the negotiations with the ultimate customer in the United States. Under the first scenario, when the Importer/Buyer provides a selling bid to U.S. customers, the Importer/Buyer contacts the Selling Agent to offer to purchase the goods at the bid price, which factors in a [***]% operating margin, to compensate the Importer/Buyer for its overhead expenses, import costs, and reasonable profit. The Importer/Buyer states that the Selling Agent is free to accept or reject the Importer/Buyer’s offering price on behalf of the manufacturing companies, but has no direct control over the sale price.[4] Under the second scenario, the Importer/Buyer searches the market for potential customers. The Importer/Buyer’s U.S. management team is responsible for targeting customers and determining the price to those customers. In this situation, the Importer/Buyer contacts the Selling Agent to determine if they will accept the Importer/Buyer’s purchase price on behalf of the manufacturing companies. The Importer/Buyer states that if the Selling Agent determines that the price is too low, the parties will negotiate the final price, before the Importer/Buyer issues a final proposal to its potential end customer in the United States. This process is similar to the relationship the Importer/Buyer has with its third party vendors, in that the Importer/Buyer always gets a confirmation from its vendors that the quantity of material needed is available at a given price. The value declared to CBP reflects this negotiated backward pricing approach. Furthermore, during its conference with the Internal Revenue Service (“IRS”) on May 2, 2002, the Importer/Buyer stated that in 1995 [***] introduced a new system, in which the company’s key account managers, located primarily in [***], handle certain key accounts on a worldwide basis. These account managers are responsible for marketing the company’s products, maintaining relationships with key account personnel, and negotiating volumes and prices for the account globally.
On December 23, 2004, in accordance with Section 482 of the Internal Revenue Code (26 U.S.C. §482), the Importer/Buyer executed a unilateral Advance Pricing Agreement (“APA”) with the IRS, which covers the taxable years ending [***].[5] In this instance, the APA is unilateral in nature, meaning the APA is between the Importer/Buyer and the IRS only. There is no foreign tax authority involved. The APA covers all transactions between the Importer/Buyer and the foreign participants (including functions performed by the Importer/Buyer for the related Manufacturers/Sellers). The tested party is the Importer/Buyer.[6]
In its APA, the Importer/Buyer identified the Comparable Profits Method (“CPM”) as the best method for evaluating its related party or controlled transactions.[7] The Importer/Buyer sets its prices according to the CPM. The Profit Level Indicator (“PLI”) is an operating margin. According to the APA, the arm’s length range is between [***]% and [***]%.[8] The Importer/Buyer states that this arm’s length range was established on the basis of objective, third-pricing data for distributors (comparable companies), which perform similar functions and assume similar risks as the Importer/Buyer. In the original APA request covering fiscal years [***], the Importer/Buyer proposed to use the Berry ratio as the PLI. However, during the APA negotiations, the IRS demonstrated a strong preference to use the operating margin; therefore, the arm’s length range of operating margins was derived from a range of Berry ratios calculated from comparable companies. Additionally, the IRS APA team accepted the comparable companies, proposed by the Importer/Buyer in its initial submission. These comparable companies engage in distributing industrial chemicals, refrigerants, and bulk specialty chemicals.
Moreover, on December 31, 2007, the Importer/Buyer filed its APA Renewal Request with the IRS because the Importer/Buyer’s APA, submitted to U.S. Customs and Border Protection (“CBP”) together with its ruling request in June of 2006, expired on [***]. Therefore, this ruling also covers the Importer/Buyer’s APA applicable to the Importer/Buyer’s taxable years ending [***]. The Importer/Buyer’s APA was executed on April 26, 2011. Under this APA, the Importer/Buyer is also a tested party, and the transfer pricing method is the CPM. According to this APA, the profit level indicator is an operating margin, and the arm’s length range is between [***]% and [***]%, and the median of the arm’s length range is [***]%. The IRS APA team accepted the PLI and comparable companies, proposed by the Importer/Buyer in its submission; therefore, the final APA does not differ from the Importer/Buyer’s initial request for renewal of its APA. We note that comparable companies utilized in the IRS analysis distribute pharmaceuticals, chemicals, industrial, medical, and specialty gases, and consumer products. The Importer/Buyer’s second APA also covers the Importer/Buyer’s purchase of all goods (including current goods and future products)[9] from the related Manufacturers/Sellers and sale services provided by the Importer/Buyer to its related parties in connection with direct sales of its products to third party customers. Thus, this APA covers both goods and services.[10]
Furthermore, a new APA covering [***] was signed on December 28, 2013. A copy of this APA was also provided for our review. Under this APA renewal, the Importer/Buyer is a tested party, and the transfer pricing method is the CPM. The profit level indicator is an operating margin, and the arm’s length range is between [***]% and [***]%. The Importer/Buyer’s APA also covers all transactions between the related parties in question; however, we do not have information as to what comparable companies were used to achieve the arm’s length range in this APA.
If pursuant to these APAs, the Importer/Buyer’s profit is not within the range for any covered year, the Importer/Buyer must make compensating adjustments to bring its profit within the range for that year. Nonetheless, although the Importer/Buyer applied for participation in CBP’s Reconciliation program and was accepted into the program on October 31, 2007, the Importer/Buyer states that since it met all of the target profit margins in its previous APA, the Importer/Buyer was not required to make any compensating adjustments by amending its accounting books or by filing amended tax returns for any of the APA term years. The Importer/Buyer employs a “monthly margin and inventory roll-forward calculation” to ensure that each month’s invoice prices from its related suppliers allow the Importer/Buyer to earn an operating profit within the range mandated in its APAs with the IRS. Any price adjustments needed for the Importer/Buyer’s operating margin to remain within the required profit range are captured in the next month’s invoices and reported to CBP via Reconciliation; thus, no formal income tax compensating adjustments to the Importer/Buyer’s year-end financial statements are needed. In other words, direct compensating adjustments, pursuant to the APA, never take place. However, the Importer/Buyer’s “monthly margin and inventory roll-forward calculation” captures monthly invoice price adjustments via debits and credits to its Cost of Goods Sold (“COGS”); therefore, the Importer/Buyer reports indirect adjustments to the invoice prices to CBP via reconciliation entries. These upward and downward post-importation adjustments result from reconciling the estimated profits with the actual profits of the Importer/Buyer, once the final selling price of the merchandise to the unrelated end customer has been determined. Thus, even though the Importer/Buyer’s adjustments are not directly related to the APA, these adjustments are made to the value of the imported merchandise; hence, we must evaluate whether the Importer/Buyer can claim the adjustments at issue.
ISSUES:
1. Do transactions between the Manufacturers/Sellers and the Importer/Buyer constitute bona fide sales?
2. Do the circumstances of the sale establish that the price actually paid or payable by the Importer/Buyer to the Manufacturers/Sellers is not influenced by the relationship of the parties and is acceptable for purposes of transaction value?
3. Should post-importation adjustments to the value of the merchandise, resulting from the Importer/Buyer’s reconciliation of profit in accordance with its APAs, be taken into account for purposes of determining customs value?
LAW AND ANALYSIS:
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 (19 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes 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 enumerated additions. 19 U.S.C. §1401a(b)(1). In order to use transaction value, however, there must be a bona fide sale for exportation to the United States. Several factors are relied on to determine whether a bona fide sale exists. See Headquarters Ruling Letter (“HRL”) 546067, dated October 31, 1996.
1. Do transactions between the Seller and the Importer/Buyer constitute bona fide sales?
In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed.Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sale” for purposes of 19 U.S.C. §1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood vs. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. See HRL 548239, dated June 5, 2003. CBP will consider such factors as to 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; a general transfer of money from one corporate entity to another, which cannot be linked to a specific import transaction, does not demonstrate passage of consideration. See HRL 545705, dated January 27, 1995.
In addition, CBP may examine whether the purported buyer paid for the goods, and whether, in general, the roles of the parties and the circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL H005222, dated June 13, 2007.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
To substantiate its claim that there is a bona fide sale between the Manufacturers/Sellers and the Importer/Buyer in this case, the Importer/Buyer provides the following documents for our review: invoices and proof of payment, including bank statements, daily confirmation of wire transfers, and a list of invoices paid with particular wire transfers. According to the Importer/Buyer, the Importer/Buyer will assume title and risk of loss under the CIP terms of sale when the Manufacturers/Sellers deliver the goods to the carrier. The Importer/Buyer makes payments to the foreign subsidiaries via wire transfer on an invoice-specific basis, thus demonstrating the required linkage between import transactions and wire transfers.
Further, the Importer/Buyer provided a detailed description of the determination of its selling price. The Importer/Buyer states that its selling price to the U.S. customers after importation is determined using two methods: (1) U.S. purchasers ask the Importer/Buyer to submit a selling bid for a certain product at a certain price when the customer wants to buy one of the Importer/Buyer’s products, or (2) the Importer/Buyer searches the market for potential customers and offers the goods at market prices based on what the Importer/Buyer’s U.S. management team is able to determine is the price that its competitors are offering for the same or similar products.