Internal Advice Request; Applicability of Transaction Value; Related Party Transactions

January 29, 2015 HQ H206715 OT:RR:CTF:VS H206715 YAG CATEGORY: Valuation Field Director, Office of Regulatory Audit Office of International Trade U.S. Customs and Border Protection Port of San Francisco 555 Battery Street San Francisco, CA 94111 Re: Internal Advice Request; Applicability of Transaction Value; Related Party Transactions Dear Field Director: This is in response to the internal advice request, initiated by Baker & McKenzie, LLP, on behalf of their client, Bio-Rad Laboratories, Inc. (“Bio-Rad”) and transmitted to our office on February 23, 2012, regarding the proper method of appraisement of the imported merchandise purchased by Bio-Rad from its foreign subsidiaries. We regret the delay in responding. FACTS: Bio-Rad is a leader in the development, production, and distribution of analytical equipment for use in clinical diagnostics and life sciences research. Some of Bio-Rad’s products are manufactured for Bio-Rad by its wholly-owned foreign subsidiaries located in Israel, United Kingdom, France, Belgium, Singapore, and Germany. On or about October 4, 2010, the Regulatory Audit Division of U.S. Customs and Border Protection (“CBP”) at the Port of San Francisco commenced a Focused Assessment of Bio-Rad’s compliance with its customs obligations in the importation of the merchandise into the United States. A major element of Bio-Rad’s Focused Assessment involved an examination of whether the relationship between Bio-Rad and each of its foreign subsidiaries influenced the price of the imported merchandise, as stated in 19 U.S.C. §1401a and 19 CFR §152.103(l)(1). In examining the relationship between the related parties in question, Regulatory Audit reviewed transactions between Bio-Rad and its seven foreign subsidiaries: Bio-Rad Verdot in France; Bio-Rad France; Bio-Rad GmbH in Germany; Bio-Rad Deeside in the United Kingdom; Bio-Rad RSL in Belgium; Bio-Rad Singapore; and, Bio-Rad Haifa in Israel. Regulatory Audit found that there were no test values available for these transactions. Additionally, according to Regulatory Audit, none of the related parties had sales to unrelated parties, and Bio-Rad could not establish that their transfer prices were settled on the basis of industry practices. As a result, the analysis of the circumstances surrounding the sales between the related parties was based on Interpretative Note 3, stated in 19 CFR §152.103(l)(1), which requires the transfer price to be 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 sale of merchandise of the same class or kind (the all costs plus a profit test). Bio-Rad did not breakdown its profit margin by sales of like class or kind of merchandise. As a result, Regulatory Audit used each party’s net overall profit margin in their testing and compared the foreign subsidiaries’ overall profit margins to the overall profit margin of Bio-Rad (the parent company as well as the importer/buyer in this case). Regulatory Audit reviewed the related parties’ financial statements and determined that Bio-Rad Verdot in France, Bio-Rad Deeside in the United Kingdom, Bio-Rad GmbH in Germany, and Bio-Rad Haifa in Israel did not satisfy the all costs plus a profit test. Bio-Rad’s subsidiaries in France, United Kingdom, and Israel showed negative profit. Bio-Rad France and Bio-Rad GmbH showed positive profit; however, their profit margins were still substantially less than Bio-Rad’s overall profit for the same period. Bio-Rad’s subsidiaries in Belgium and Singapore satisfied the all costs plus a profit test. Bio-Rad agreed with CBP’s finding that Bio-Rad Deeside in the United Kingdom did not qualify for transaction value because the goods were transferred between the related parties at a substantial loss. However, the company disagreed with Regulatory Audit’s determination that the prices between Bio-Rad and Bio-Rad Verdot, Bio-Rad France, Bio-Rad GmbH, and Bio-Rad Haifa were influenced by the relationship of the parties. Specifically, Bio-Rad disagreed with Regulatory Audit’s interpretation of the phrase “firm’s overall profit,” to mean the profit of the parent company as a whole, including all worldwide subsidiaries. Bio-Rad’s position is that the “firm’s overall profit” means the profit only realized by the selling entity from the sale of the merchandise of the same class or kind. Additionally, Bio-Rad argues that transaction value of certain merchandise sold and supplied to Bio-Rad by its foreign subsidiaries should not be disregarded in circumstances in which that merchandise must be sold by the subsidiary, and resold by Bio-Rad, at a loss due to depressed market conditions in the United States. In other words, Bio-Rad believes that as long as the transfer price allows for a net loss of seller less than or equal to the relative losses incurred by Bio-Rad, the transfer price is adequate to satisfy the circumstances of the sale test. Thus, a difference of opinion between Bio-Rad and Regulatory Audit has arisen as to the proper interpretation and application of the circumstances of the sale test under Interpretative Note 3 in 19 CFR §152.103(l)(1). Additionally, Bio-Rad claims that the application of the test value analysis shows that the relationship between Bio-Rad and its foreign subsidiaries did not affect the price of the imported merchandise. Bio-Rad argues that the test value method permitted the importer to show that the transaction value under examination was valid because it closely approximated either the deductive or computed values of similar or identical merchandise. The Regulatory Audit opined that there were no test values in this case, and Bio-Rad filed this internal advice. Our decision follows. ISSUE:   What is the proper method of appraisement for the transactions between Bio-Rad and its related party suppliers? 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). Transaction value is an acceptable basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable, or the transaction value of the merchandise closely approximates certain “test values.” 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(l). Test Values The importer or the buyer may demonstrate that the transaction value in a related party transaction is acceptable by showing, that the value closely approximates any one of the following “test values,” provided these values relate to merchandise exported to the United States at or about the same time as the imported merchandise: (1) transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States; (2) the deductive value or computed value for identical merchandise or similar merchandise; or (3) the transaction value of imported merchandise in sales to unrelated buyers of merchandise, for exportation to the United States, that is identical to the imported merchandise under appraisement, except for having been produced in a different country. 19 U.S.C. §1401a(b)(2)(B); 19 CFR §152.103(j)(2)(i). If one of the “test values” is met, it is not necessary to examine the question of whether the relationship influenced the price. 19 CFR §152.103(l)(2)(iii). Regarding test values, Bio-Rad argues that the application of the test value analysis shows that the relationship between Bio-Rad and its foreign subsidiaries did not affect the price of the imported merchandise. We do not have any indication that the necessary (and sufficient) information/documentation was provided to the Regulatory Audit office in San Francisco to illustrate this point. Nevertheless, at our meeting with the company’s counsel on May 19, 2014, followed by counsel’s email, dated August 15, 2014, counsel argued that the test value method permitted the importer to show that the transaction value under examination was valid because it closely approximated either the deductive or computed values of similar or identical merchandise and that deductive and computed value test values intended to be contemporaneous to show that the relationship did not influence the price if the producer could show that it covered all its costs and earned a profit. Counsel submitted for our review a two-page excerpt from a Congressional Report that is part of the legislative history of the TAA, adopted as P.L. 96-39, and three pages from the Statement of Administrative Action (“SAA”) in support of Bio-Rad’s position that no timeframe is mentioned in the legislative history with respect to the test value analysis, and none can be inferred. Therefore, according to Bio-Rad, test values do not have to be the actual values previously accepted by CBP, as indicated in Headquarters Ruling Letter (“HRL”) 542580, dated November 4, 1981. In interpreting the test values provisions specified in the valuation law, it has been CBP’s longstanding position that test values refer to values previously determined pursuant to actual appraisements of imported merchandise. See HRL 542580, dated November 4, 1981; HRL 543568, dated May 30, 1986; HRL 544455, dated March 19, 1995; HRL 547982, dated May 20, 2002; HRL 548503, dated June 2, 2004, etc. Thus, for example, a deductive value calculation can only serve as a test value if it represents an actual appraisement of merchandise under section 402(d) of the TAA. See HRL 542580, dated November 4, 1981 and HRL 543568, dated May 30, 1986. In HRL 542580, we opined that “it is necessary to appraise an initial importation on the basis of computed value in order to establish the test value to be used to support transaction value at the transfer price.” Moreover, in HRL 543568, CBP auditors performed a computed value calculation, for test value purposes, and concluded that the producer’s invoice price less the credit adjustments closely approximated the tested computed value and, therefore, the invoice price less the credit represented an acceptable transaction value. In its decision, CBP reiterated that the test values, referenced in section 402(b)(2)(B) of the TAA, refer to values determined pursuant to actual appraisements of imported merchandise. Thus, in HRL 543568, CBP found that a computed value calculation may not serve as a test value unless that calculation represented an actual appraisement of imported merchandise determined pursuant to the definition of computed value, set forth in section 402(e) of the TAA. We also note that our interpretation of the test value analysis is consistent with Advisory Opinion 7.1, Acceptability of Test Values under Article 1.2(b) of the Agreement, issued by the Technical Committee on Customs Valuation, WCO in Brussels. The Technical Committee on Customs Valuation is entrusted with ensuring, at the technical level, uniformity in interpretation and application of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (or the WTO Customs Valuation Agreement), implemented by the United States in 19 U.S.C. §1401a. According to Advisory Opinion 7.1, the fact that the test values must be previously accepted by Customs is key to interpreting the test value approach. Accordingly, we are not persuaded by Bio-Rad’s arguments with respect to the applicability of the test value approach and reiterate that it continues to be CBP’s position that in determining whether a test value closely approximates an instant transaction value, the test value has to reflect a value previously accepted as a customs value. As we stated in HRL 544455, dated March 14, 1995, we have no legal authority to utilize values for the same entries of merchandise, based on different valuation methods, as evidence that the questioned transaction value closely approximates a test value. Circumstances of the Sale Under the circumstances of the sale approach, the transaction value between a related buyer and seller is acceptable if an examination of the circumstances of the sale indicates that although related, their relationship did not influence the price actually paid or payable. The Customs Regulations specified in 19 CFR Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also HRL H029658, dated December 8, 2009; H037375, dated December 11, 2009; and, HRL H032883, dated March 31, 2010. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. If it can be shown that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller settles prices with unrelated buyers, this will demonstrate that the price has not been influenced by the relationship. See 19 CFR §152.103(l)(1)(i)-(ii). In addition, CBP will consider the price not to have been influenced if the price was adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time. 19 CFR §152.103(l)(1)(iii). These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. Bio-Rad argues that in applying the all costs plus a profit example, stated in 19 CFR §152.103(l)(1)(iii), the term “firm’s overall profit” means the profit of the selling entity. Bio-Rad argues (1) it is the seller whose transaction value should be examined; (2) apart from a deductive value analysis, there is no aspect of the customs value law that refers to post-entry transactions as having any relevance in determining the value of the merchandise at the time of exportation to the United States; and, (3) to do otherwise would be inconsistent with a computed value analysis, which according to Bio-Rad is identified in 19 CFR §152.103(j)(2) as an appropriate benchmark for evaluating transfer prices between related parties. Bio-Rad also states that CBP consistently has held that the “firm’s overall profit” refers to the seller’s profit derived from the sale of the same class or kind of merchandise and references the following rulings in support of this statement: HRL 548482, dated July 23, 2004; HRL H017761, dated September 27, 2007; and, HRL H029658, dated December 8, 2009. Finally, Bio-Rad states that Regulatory Audit’s reliance on HRL H065015, dated April 14, 2011 is erroneous. Regulatory Audit, on the other hand, states that the “firm’s overall profit” means the profit of the parent company and compares Bio-Rad’s corporate group’s profit margin to the profit margin of each foreign subsidiary. We note that both HRL 548482 and HRL H029658 deal with the applicability of the all costs plus a profit analysis in the transfer pricing context. In both cases, the related parties submitted transfer pricing documentation (either a transfer pricing study or a bilateral APA), comparing the buyers’ profits to the profits of functionally comparable companies. In declining to solely look at the buyer’s profit in the context of the all costs plus a profit analysis, CBP stated that the focus of 19 CFR §152.103(l)(1)(iii) is the seller’s costs and profit. In other words, the all costs plus a profit example examines whether the seller received a price that enabled the recovery of all costs, plus a reasonable profit. Additionally, in HRL H017761, CBP determined that providing profitability figures for the limited number of transactions was not indicative that the all costs plus a profit example was met. In HRL H017761, the information did not demonstrate the acceptability of the related party transaction under the all costs plus profit analysis as the seller only provided information on the sale of three types of coloring products for two sales to unrelated parties in the U.S. and did not show the seller’s overall profit. Additionally, the seller’s profit in the unrelated sales was not earned during a representative time period. Therefore, CBP found that the products may not be appraised under the transaction value method and must be appraised in accordance with the remaining methods of valuation. On the other hand, HRL H065015 stated that in applying the all costs plus a profit test, CBP normally considers the “firm’s overall profit” to be the profit of the parent company. Thus, if the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s costs plus a profit that is equivalent to the parent company’s overall profit. See HRL H065015, dated April 14, 2011. This well-established principle is referenced in HRL 542792, dated March 25, 1983; HRL 546998, dated January 19, 2000 (which was specifically referenced in H065015); as well as in our Informed Compliance Publication, entitled Determining the Acceptability of Transaction Value for Related Party Transactions, issued in April 2007. In HRL 542792, the parent company in the United States purchased wild oat herbicide from its subsidiary. CBP could not determine whether the sale of the merchandise was adequate to ensure recovery of all costs plus a profit which was equivalent to the firm’s overall profit realized over a representative period of time in sales of the merchandise of the same class or kind. In HRL 542792, CBP stated that in making a determination in the context of a parent subsidiary relationship, where the subsidiary is the seller, the reference to the firm’s overall profit does not mean the overall profit of the subsidiary. The all costs plus a profit analysis was also not applicable because the parent company in the United States used the imported merchandise to manufacture an industrial strength herbicide for resale; therefore, the parent company was not selling the merchandise of the same class or kind (and its profit margins could not be used for the all costs plus profit analysis). Accordingly, pursuant to these rulings (HRL 542792, HRL 546998, and HRL H065015), the “firm’s overall profit” means the profit of the parent company in the circumstance where the seller of the imported merchandise is a subsidiary of the parent company (as is the case in this instance). Thus, the seller’s profit is compared to the firm’s overall profit (parent company’s profit) over a representative period of time for merchandise of the same class or kind. All CBP decisions cited here state that it is the seller’s profit that is important, be it in cases where the all costs plus a profit analysis is considered from the transfer pricing perspective or in the customs context, as was traditionally interpreted by CBP. The disagreement between Bio-Rad and the Regulatory Audit office is in what profit margins to compare to the seller’s profit. Bio-Rad adheres to the transaction-by-transaction analysis, where the seller’s overall profit realized by sales of merchandise of the same class or kind is compared to the profits realized in connection with the specific purchases involved (entry-by-entry, transaction-by-transaction method). Regulatory Audit, on the other hand, correctl