Application for Further Review (“AFR”) of Protest 5501-10-100261; Transaction Value; Related Party Transactions; Post-Importation Adjustments

September 12, 2014 HQ H125118 OT:RR:CTF:VS H125118 YAG CATEGORY: Valuation Port Director U.S. Customs and Border Protection Port of Dallas, Fort Worth P.O. Box 619050 DFW Airport, TX 75261-9050 RE: Application for Further Review (“AFR”) of Protest 5501-10-100261; Transaction Value; Related Party Transactions; Post-Importation Adjustments Dear Port Director: This is in response to your correspondence, dated September 9, 2010, forwarding the Application for Further Review (“AFR”) of Protest 5501-10-100261, timely filed by the Pike Law Firm, P.C. on behalf of its client [***] (“Protestant”). We regret the delay in responding. Protestant has asked that certain information submitted in connection with this AFR 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 ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this decision. FACTS: Protestant is a U.S. importer/corporation, which acts as an exclusive distributor of motor vehicles imported from the Seller/Manufacturer [***], the parent company, for re-sale in the U.S. market. Protestant also acts as the exclusive distributor for parts, accessories, and service tools imported from [***], the affiliate of the parent company. In September of 2003, Protestant voluntarily applied for a bilateral Advance Pricing Agreement (“APA”) with the Internal Revenue Service (“IRS”) and the foreign country [***] to cover all of its imported items (vehicles and parts) for the years of 2002-2006 (expanded to cover years 2007-2008 as well). This APA was approved on October 11, 2006 and was the subject of Headquarters Ruling Letter (“HRL”) H029658, dated December 8, 2009. In HRL H029658, CBP held that the company showed that the sales price was not influenced by the relationship for purposes of the circumstances of the sale test, based on the totality of the circumstances considered, and, as a result, transaction value was the proper method of appraisement. In HRL H029658, the importer provided various evidence to show that the prices were at arm’s length, including: (1) a detailed description of its sales process and price negotiations; (2) a bilateral APA that was approved by the IRS (the importer was a tested party under the APA, with CPM chosen as the best method to evaluate inter-company transactions); and, (3) a paper, prepared by the importer’s accountants, which provided details with respect to the pricing practices in the automotive industry. The evidence presented by the importer did not strictly fall within a single illustrative example, specified in 19 CFR §152.103(l)(1)(i)-(iii), such as the normal pricing practices of the industry. Nevertheless, taken together, the documents provided by the importer assisted CBP in reaching its conclusion that the relationship of the parties did not influence the price. In HRL H029658, the company claimed that it did not make compensating adjustments pursuant to its APA. The company stated that it engaged in rigorous negotiations with its parent company to set vehicle prices which allow it to earn an operating profit that meets the target interquartile range of the APA. Accordingly, these negotiations have resulted in prices that have never needed an adjustment (except for the years 1999-2001 when a compensating adjustment was booked). Nevertheless, with respect to the compensating adjustments, a particular kind of adjustment has been booked by Protestant for several of the years covered by the APA at issue in HRL H029658 (2005-2009). Protestant refers to these adjustments as “marketing support” payments from the parent company (Seller/Manufacturer) to Protestant. Protestant provided three (3) Media and Production Costs, and Incentives Reimbursement Agreements between Protestant and its parent company (Seller/Manufacturer), whereby the parent company agreed to make certain payments to Protestant as a reimbursement of media and production costs and incentive expenses for the calendar year 2008. Protestant now believes that these “marketing support” payments at issue are part of the transaction value formula set forth in Protestant’s APA that was approved as the basis of appraisement in H029658 and argues that it is entitled to certain duty refunds. These “marketing support” payments were not covered transactions under the APA approved in HRL H029658. Nonetheless, these adjustments were cash payments from the parent company to Protestant in the United States and were recorded on the accounts of both the buyer and the seller. Additionally, according to Protestant, these “marketing support” payments began in 2005 as the automotive industry became more competitive and started offering incentives to customers. Protestant argues that because these incentives effectively lower the Manufacturer’s Suggested Retail Price (“MSRP”) of vehicles, importers like the Protestant have been unable to cover the cost of their marketing expenses, thus, making the reimbursement in the form of a “marketing support” payment from its parent corporation necessary. Thus, these “marketing support” payments have been accounted for as a reduction of marketing expenses in accordance with the companies’ financial support agreement (not provided for our review). Protestant claims that for tax accounting purposes, the “marketing support” payments should have been treated as reductions in Cost of Goods Sold (“COGS”) (or in the invoice prices of imported vehicles and parts, resulting in lower customs values). Nonetheless, for administrative convenience, the tax accounting of these payments was left unchanged from the book accounting because at the end, the goal of bringing Protestant’s operating profit back into the APA range could be accomplished by leaving the payments booked as reductions in marketing expenses. In other words, for Protestant, the way it booked the adjustments was a form over substance choice, and it was the only way the parent company could transfer the substantial sums out of the foreign country in order to reimburse Protestant. Protestant provided a copy of the [***]. Pursuant to this law, when payments are made by a resident of [***] to a foreign country, and such payments are required to fulfill a treaty (this term includes APAs), permission from the government may be required. The company was notified that such permission would not be granted in 2005-2009 if the payments were labeled “APA support.” Therefore, the company called these payments “marketing support payments” and booked them accordingly. This AFR followed. ISSUE: Whether the post-importation “marketing support” payments from the parent company to Protestant should be taken into account for purposes of determining customs value. LAW AND ANALYSIS: Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. §1401a). 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 to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. §1401a(a). In order to use transaction value, however, there must be a bona fide sale for exportation to the United States. See HRL 546067, dated October 31, 1996. We determined in HRL H029658 that there is a bona fide sale for export between the related parties in question. Furthermore, there are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. §1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale or (2) test values. See 19 U.S.C. §1401a(b)(2)(B). CBP addressed this issue in HRL H029658. Accordingly, the only issue under consideration in this decision is whether the “marketing support” payments from the parent company to the Protestant should be taken into account in determining customs value. In order for Protestant to claim the adjustments made for tax purposes, these adjustments must relate to the value of the imported merchandise and be part of the price actually paid or payable. By working back from the arm’s length net margin (or profit) of Protestant, the arm’s length COGS (or price actually paid or payable for customs purposes) can be deduced. Thus, the customs value of the imported merchandise is affected every time the related parties reduce or increase their profitability pursuant to APAs or transfer pricing studies, which cover the imported goods, resulting in payments, transfer of funds, or credit/debit transactions between the related parties. Nevertheless, we recognize that in certain circumstances, compensating (post-importation) adjustments might not be part of the price actually paid or payable for customs purposes. In this particular case, the “marketing support” payments from the parent company to Protestant in the United States represented cash payments and were recorded on the accounts of both the buyer and seller. Thus, there was a transfer of funds between the related parties. However, even though Protestant claims that these payments should have been treated as a reduction in the COGS, this was not the case, and the arm’s length COGS, which represents the price actually paid or payable for customs purposes, remained unchanged. Additionally, the payments have been accounted for as a reduction of marketing expenses in accordance with the companies’ financial support agreement, indicating that the related parties did not intend the payments to affect COGS (despite the advice provided by Protestant’s accounting firm, which suggested that these adjustments should have been booked in COGS). Thus, the related parties anticipated that the payments were meant to adjust the profitability of Protestant for tax purposes. This fact is also supported by the foreign country’s Act [***], indicating that when payments are made by a resident of [***] to a foreign country, and such payments are required to fulfill a treaty (this term includes APAs), permission from the government may be required. The parent company was notified that such permission would not be granted in 2005-2009 if the payments were labeled “APA support.” Therefore, the company called these payments “marketing support” payments and booked them accordingly. Since the “market support” payments were tax adjustments, were not covered transactions under the APA, and did not change the price actually paid or payable, these payments should not be considered part of the value of the imported merchandise for customs purposes. Finally, we look at the nature of these payments and what these payments are meant to achieve. The Media and Production Costs, and Incentives Reimbursement Agreements, entered into by Protestant and its parent company, specifically refer to the reimbursement of media and production costs and incentive expenses for calendar year 2008. According to Protestant, the “marketing support” payments began in 2005 as the automotive industry started offering incentives to customers. Because these incentives, provided by importers, effectively lower the MSRP of vehicles, importers like Protestant have been unable to cover the cost of these marketing expenses. Therefore, the reimbursement from the parent company for the incentives provided by Protestant to end-customers after importation became necessary. As these were payments from the parent company to Protestant for services provided by Protestant after importation, it is our opinion that such payments were not part of the price actually paid or payable for the imported merchandise. This scenario is an example of how the adjustments to the profits of Protestant made for tax purposes do not affect the price actually paid or payable declared to CBP. Considering our determination that the “marketing support” payments do not represent part of the price actually paid or payable for customs purposes, we find that it is not necessary for us to determine whether Protestant meets the criteria, specified in HRL W548314, dated May 16, 2012, in order for its APA/transfer pricing policy to be considered an objective formula for purposes of appraising the merchandise under transaction value. HOLDING: The protest is denied. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the Protestant no later than sixty (60) days from the date of this letter. Any re-liquidation of the entry or entries in accordance with the decision should be accomplished prior to mailing of this decision. Sixty (60) days from the date of this decision, the Office of International Trade; Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial & Trade Facilitation Division