Related Party Transaction

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Related Party Transaction

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Transaction Value for Related Party Transaction

The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions as described below to the extent not otherwise included in the price actually paid or payable.

A. The packing costs incurred by the buyer.

B. Any selling commission incurred by the buyer.

C. The value, apportioned as appropriate, of any assist.

D. Any royalty or license fee that the buyer is required to pay, directly or indirectly, as a condition of the sale.

E. The proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

There are special rules that apply when the buyer and seller are related parties. Transaction value can only be applied if “the buyer and seller are not related, or the buyer and seller are related but the transaction value is acceptable.” Transaction value between a related buyer and seller is acceptable if the importation meets either of two tests: 1) circumstances of sale or 2) test values.

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Circumstances of Sale

Under the “circumstances of sale” test, 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 the buyer and the seller did not influence the price actually paid or payable. Under this test, the relevant aspects of the transaction are analyzed, including:

1) the way in which the buyer and the seller organize their commercial relations, and

2) the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price.

The circumstances of sale test by its very nature must be applied case-by-case. As provided in Customs Regulations, the following circumstances demonstrate that the relationship has not influenced the price:

1)  The price was settled in a manner consistent with the normal pricing practices of the industry in question;

2)  The price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it; or

3)  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.

In-Depth Coverage: Marketing and Advertising Compliance

CBP has issued a number of rulings on the application of the circumstances of sale test. Some of the issues that have arisen are:

1. The price was settled in a manner consistent with the normal pricing practices of the industry in question.

When the importer claims that transaction value is acceptable because the transfer price was settled in a manner consistent with the normal pricing practices of the industry in question, the importer must have objective evidence of the normal pricing practices of the industry in question and present evidence that the transfer price was settled in accordance with these industry pricing practices.

2. The price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it.

This method applies in situations where the seller sells the same merchandise to both related and unrelated parties and determines the prices in a consistent way.

3. 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.

This method, which is often referred to as the “all costs plus profit method”, examines whether the related party price compensates the seller for all its costs plus a specified amount of profit (i.e., 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). This method is especially useful when there are no sales to unrelated buyers that can be used as a point of reference. It is the most objective method of meeting the circumstances of sale test when there are no sales to an unrelated buyer.

In-Depth Coverage: Importing Cosmetics

Information and Evidence to Substantiate the Circumstances of Sale Claim

In CBP’s rulings applying the circumstances of sale test, the determination of whether the relationship between the parties influenced the price depends on a review of all the relevant circumstances of sale and the supporting documentation.

The application of the circumstances of sale test generally presents two issues:

1) whether there is sufficient evidence to establish the alleged circumstances of sale; and

2) whether such circumstances demonstrate that the relationship between the buyer and the seller did not influence the price.

The importer should be prepared to provide a thorough explanation of the circumstances surrounding the sale, supporting evidence, and an explanation of why the importer believes that such circumstances establish that the relationship did not influence the price.

Test Values

An alternative method to establish the acceptability of transaction value is to demonstrate that it closely approximates certain test values pertaining to identical or similar goods exported at or about the same time as the imported merchandise under review.

Specifically, under the test value method the transaction value between a related buyer and seller is acceptable if the transaction value of the imported merchandise closely approximates one of the following “test values”:

(i) the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States;

(ii) the deductive value or computed value for identical merchandise of similar merchandise;

(iii) but only if each value referred to in clause (i) or (ii) that is used for comparison relates to merchandise that was exported to the United States at or about the same time as the imported merchandise.

In-Depth Coverage: USDA-Regulated Products

CBP has issued a number of rulings on the application of the test value method. Two issues that frequently arise are whether the test values must be actual appraised values of previously imported merchandise and whether the test values can be substituted for the transfer price.

CBP requires that the test values must be values previously determined by CBP pursuant to an actual appraisement of imported merchandise.

Importers often mistakenly believe that transaction value is acceptable for the imported goods when it is the same as the value calculated by the importer under the deductive value or the computed value method for those same imported goods. This is not the case. If there are no previous importations of identical or similar merchandise that were appraised under the transaction, deductive or computed value methods, there are no test values that can be applied.

With regard to the proper use of test values, the value law indicates that they are to be used for comparison purposes. In other words, test values are used solely to determine whether the related party transaction value is acceptable. If the related party transaction value closely approximates a test value, the merchandise is appraised based on the related party transaction value. If the related party transaction value does not closely approximate a test value, then transaction value is acceptable only if the circumstances of sale test are met. Otherwise, the merchandise must be appraised using the next applicable valuation method in the hierarchy.

If the importer has information regarding possible test values pertaining to the related party transaction, this information should be brought to CBP’s attention.

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