Intercompany Pricing & Customs Valuation, ACS Entry

Intercompany Pricing & Customs Valuation, ACS Entry Reconciliation Presented by George R. Tuttle, III George R. Tuttle Law Offices Three Embarcadero Center, Suite 1160, San Francisco Tel: (415)986-8780 Fax (415) 986-0908 E-mail: [email protected] The information contained in this presentation is general in nature and is not intended or written to be treated or used by any person as constituting tax advice.

Customs Valuation An importer has a legal obligation under 19 U.S.C. 1484 to: Declare the correct value Provide Customs with all pertinent information so that it may verify correctness of declared value Customs Service has legal responsibility to verify correctness of declared value of imported merchandise (19 U.S.C. 1500) ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 2

Customs Valuation: 1401a(b)(2) Related Party Rule Statute (19 USC 1401a) requires imported goods to be appraised at “transaction value” unless transaction value is found inappropriate (b)(2)(A) -- The transaction value of imported merchandise shall be the appraised value of that merchandise for the purposes of this chapter only if *** (iv) the buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable Burden is on importer to establish that the relationship does not affect the price ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 3

Transaction Value Related Parties When are parties related? (19 U.S.C. 1401a(f)) (A) Members of the same family. (B) Any officer or director of an organization and such organization. (C) An officer or director of an organization and an officer or director of another organization, if each such individual is also an officer or director in the other organization. (D) Partners. (E) Employer and employee. (F) Any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization and such organization. (G) Two or more persons directly or indirectly controlling, controlled by, or under common control with, any person. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 4

1401a(b)(2) Related Party Rule The transaction value between a related buyer and seller is acceptable if: An examination of the circumstances of the sale of the imported merchandise indicates that the relationship between such buyer and seller: did not influence the price actually paid or payable; or If the transaction value of the imported merchandise closely approximates (i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; or (ii) the deductive value or computed value for identical merchandise or similar merchandise value referred to in clause (i) or (ii) that is used for comparison must be exported to the United States at or about the same time as the imported merchandise. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 5

Transaction Value Related Parties Use of test values Prices closely approximate deductive or compute value of imported goods Customs will not accept this as a means of verifying value unless there has been an actual appraisement entry at the test value Circumstances-of-sale test Price reflects the normal pricing practice for the industry Evidence that the parties negotiated over price Selling price includes all costs plus an amount for profit and general expenses (most common method) ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 6

Customs’ Statement of Administration Action To Adoption of TAA The appraisement of imported merchandise pursuant to the transaction value method will be acceptable, even for a transaction between related parties, if the price is settled: "in a manner consistent with the normal pricing practices of the industry in question, or the way the seller settles prices for sales to buyers who are not related to him.” Statement of Administration Action; see also 19 C.F.R. 152.103 (l)(1)(ii). ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 7

Related Party Rule For Customs Valuation Use of “Test Values” Comparison of transfer price to: Transaction value of similar goods computed or deductive value of goods “Circumstances of Sale” Documentary Evidence of “arms length negotiations” Evidence of Market value of goods Selling price equals all costs plus profit and general expense for seller ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 8

“All Costs Plus Profit” Method An importer may also demonstrate that the relationship between the buyer and the seller did not influence the price by establishing that: "the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind . . ." Statement of Administration Action, Id.; see also 19 C.F.R. 152.103 (l)(1)(iii). ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 9

“Price Paid or Payable" The "price actually paid or payable" is The "total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise.) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller.” Intercompany transfer prices may not reflect the "price actually paid or payable" if all elements of Customs valuation are not included in the invoiced price. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 10

The Generra Rule There is a presumption that all payments made by a buyer to a seller, or a party related to the seller, are part of the price actually paid or payable for the imported merchandise. (Generra Sportswear Co. v. U.S., 8 CAFC 132 (1990)) Congress did not intend for CBP to engage in extensive factfinding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. The burden of establishing that payments are unrelated to the imported merchandise rests on the importer. Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990) ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 11

Acceptability of Transfer Prices Based On “IRS” Transfer Pricing Methodology HQ 546979, August 30, 2000 “While the goal of both the TAA and section 482 of the Tax Code is to ensure that the transactions between related parties are at arms length, the method of making that determination is different under each law.” “Customs approach to related party transactions differs from the IRS approach . . . the [IRS] methods review profitability on an aggregate basis, not a product by product basis.” “Customs generally analyzes related party transactions at a more detailed product by product level . . . ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 12

Summary: Transfer Pricing To substantiate transfer price, Importer should be prepared to provide: Worksheets calculating cost of materials, labor and fixed costs for specific merchandise. Audited financial statements, and information regarding the seller's costs for the subject items and the actual profit for them. Comparison of actual profit on items under review to profits incurred by company as a whole. Producer's profits and expenses should be consistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 13

If Transfer Price is Rejected CBP may resort (in order of presentation) to: Transaction value of identical or similar merchandise Deductive value (U.S. importer’s sales price to first unrelated customer in U.S.) Computed value (Cost of production plus general expenses and profit associate with imported goods) Fallback method (any of the above based on reasonable adjustments). ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 14

Section 500 Appraisements Under section 500 of the Tariff Act of 1930, as amended, (19 U.S.C. 1500) CBP has general appraisement authority, and may: Fix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means . . . any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding . 19 U.S.C. 1500(a) Section 500 allows Customs to consider the best evidence available . . . when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations . ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 15

Customs’ ACS Entry Reconciliation

Why use Entry Reconciliation? Obligation to Report The Correct & Accurate Value All invoices for imported merchandise are required to set forth, among other things, "the purchase price of each item . . . .” 19 U.S.C. § 1481(a)(5). The Statute defines transaction value as "the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts equal to . . . the value, apportioned as appropriate, of any assists . . . ." 19 U.S.C. § 1401a(b)(1). ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 17

Why Use Entry Reconciliation? An importer making an entry . . . must file a declaration under oath stating that "the prices set forth in the invoice are true . . . [and that] all other statements in the invoice . . . or in the entry itself, are true and correct . . .” 19 U.S.C. § 1485(a)(2) & (3). Under 19 U.S.C. § 1952, “No person, by fraud, gross negligence, or negligence--(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of— (i) any document, written or oral statement, or act which is material and false, or (ii) an omission which is material . . .“ ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 18

What is Entry Reconciliation? Legal basis for ACS entry reconciliation was added to 19 USC 1484(b) by Mod Act. Reconciliation allows importers to file entry summaries using the best available information and to electronically “flag” data elements that are estimated, with the understanding that the “actual” information will be submitted later. Importers provide “actual” information on a new type of entry called a “Reconciliation” (can cover one or hundreds of previously filed individual entries). ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 19

What is Entry Reconciliation? “Elements” of the entry that are flagged for reconciliation are withheld from liquidation while all non-flagged elements are liquidated as entered. ACS Reconciliation does not change or replace existing laws regarding the reporting of value. It simply provides a new process for amending data that was previously provided to CBP. ACS Reconciliation is the exclusive means for reconciling postsummary adjustments to: Dutiable value, HTSUS Heading 9802 value, NAFTA, Chile FTA Limited classification issues ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 20

Issues For Reconciliation Classification issues will be eligible for reconciliation only when such issues have been formally established as the subject of one or more of the following: Pending administrative ruling (including preclassification rulings) Protest Pending court action Reconciliation for other classification issues is not permitted. Quantity is not a reconcilable issue since it directly affects admissibility. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 21

What is Entry Reconciliation? Entry summaries with outstanding issues are filed as normal, except that an electronic flag is added in the header record of the entry that specifies an issue is outstanding. The flag notifies CBP of the importer’s intent to file a Reconciliation covering that entry summary at a later date. If an entry summary is flagged for value, a SIL should not be filed on that entry for any value issue, as no error in valuation is involved. The issue flagged is no longer addressable on the underlying entry. ASC Reconciliation Handbook, December 2004 ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 22

Entry Recon flagging Flagging accomplishes the following: Identifies unknown information Transfers liability for those issues to a Reconciliation Permits normal liquidation of the remainder of the entry summary A filer may flag entries via an individual entry flag or a blanket flag Individual entry flagging-- The entry filer flags the underlying entries on the header record of an entry summary at the time of filing ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 23

Entry Recon flagging Blanket Flagging A flag is automatically added by CBP to all entries for all ports made under the recon-filer’s importer of record number. This means each entry summary must be closed by a Reconciliation, even those entries that do not require adjustments. Importers who wish to obtain reports of flagged entries may do so by contacting CBP National Finance Center. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 24

Time Period For Filing Recon Entry Participants in Recon program now have up to 21 months from the date of entry of the flagged entry to file the recon. (Except for NAFTA claims– limit is 12 months from date of entry filing) Failure to file a timely reconciliation will result in the assessment of a liquidated damage penalty. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 25

Types of Reconciliations Two types of Reconciliations may be filed: Entry-by-Entry Aggregate For both, the Reconciliation will consist of three documents: A Header Page, Association file, and Summarized line item data spreadsheet ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 26

Types of Reconciliations Entry-by-Entry Reconciliation This Reconciliation is a detailed submittal in which the revenue adjustment is specifically provided for each affected entry summary. The revenue adjustment must be broken down to entry-by-entry detail for all underlying entry summaries on the association file submitted through ABI. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 27

Types of Reconciliations Aggregate Reconciliation; This option consolidates all entries covered in the Reconciliation, Applies generally to those situations that involve an increase The association file for the Aggregate Reconciliation only requires a list of all underlying entries and not the revenue adjustment broken down by entry. The Importer waives any refunds through the reconciliation filing process for aggregate recon filing. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 28

Aggregate Reconciliations The Header Sheet The Reconciliation header provides general information about the recon, including: Reconciliation entry number Type of Reconciliation Issues on Reconciliation Grand totals for duties and fees, both original and reconciled Interest ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 29

ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 30

Aggregate and Entry-by-Entry Reconciliation The major difference between Aggregate and Entry-byEntry Reconciliation is the structure of the association file The association file contains a list of affected entry summaries flagged for Reconciliation sorted by Port code where they were filed. For Entry-By-Entry Reconciliation, the following elements are also required: The actual amount of fees (broken out by class code), duties and fees, deposited per underlying entry summary The reconciled amount of fees (broken out by class code), duties, and fees owed for each underlying entry ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 31

Aggregate and Entry-by-Entry Reconciliation Summarized Line Item Data Spreadsheet The third element of the Reconciliation must show, at a macro level, all substantive changes reported in the Reconciliation. The data must be presented in a standard format (See sample spreadsheet). The data elements in the spreadsheet are the same for both Entry-by-Entry and Aggregate Reconciliations. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 32

Summarized Line Item data Spreadsheet ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 33

Aggregate and Entry-by-Entry Reconciliation Summarized Line Item Data Spreadsheet The summarized line item data spreadsheet captures adjustments that have an effect on reportable data elements declared throughout the reconciliation period without reference to the underlying entry numbers Each combination of HTS, country of origin, Special Program Indicator (SPI), and calendar year of release (per Census requirements) will require a separate line. Each spreadsheet line is to show the original and reconciled data. The original data is extracted from the rolled-up groupings of the entry lines from flagged entries The reconciled data is either input manually or prorated automatically via formula ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 34

Customs Validation of Data Customs compares information on duty/fees paid From Header record, association file and summary line item data file against Customs liquidation extract report Recon entry will be rejected if there is a total difference in duty/fees paid information of more than 20. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 35

Why A Recon Entry May be Rejected Customs line item entry report and Customs Liquidation extract report do not reflect SIL or PEA activity until entry is liquidated. Possible Importer/ Customs Database mis-matches. Customs uses rounding of values while importer uses exact values. This can lead to mis-matches in value when comparing importer data to Customs data. ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 36

Recon Entry Resources CBP Automated Commercial System (ACS) Reconciliation Prototype Operations Guide. Version 4.0 Exhibit 5T - Reconciliation - Technical Info rmation for Pre-Assessment Survey (TIPS ) Reviews red flags and best practices ICPA 2007 Miami Seminar Tuttle law Offices (c) 2007 37