Internal Advice Request; Dutiability of Interest Charges; T.D. 85-111

January 28, 2015 HQ H259861 OT:RR:CTF:VS H259861 YAG CATEGORY: Valuation Port Director U.S. Customs and Border Protection Port of Charleston 200 East Bay Street Charleston, South Carolina 29401 Re: Internal Advice Request; Dutiability of Interest Charges; T.D. 85-111 Dear Port Director: This is in response to the internal advice request, initiated by Barnes, Richardson & Colburn, LLP, on behalf of their client, BASF Corporation (“BASF”) and transmitted to our office on November 14, 2014, regarding the proper treatment of interest charges paid by BASF to its parent company pursuant to a written interest agreement. FACTS: BASF imports a wide range of chemical and related products from its parent company, BASF Societas Europeae (“BASF SE”). BASF is the subject of a Quick Response Audit (“QRA”) conducted by the Regulatory Audit Office, Philadelphia Field Office, Newark Branch. The draft QRA report was provided for our consideration. The draft QRA report, issued by the Regulatory Audit office, addresses the issue of whether certain interest charges paid by BASF on shipments from its parent company should have been declared as part of the price actually paid or payable for the imported merchandise, or were correctly excluded by BASF as non-dutiable charges. Regulatory Audit determined that BASF is deducting payments from the customs value of the imported merchandise, as non-dutiable charges, based on the company’s analysis of criteria outlined in Treasury Decision (“T.D.”) 85-111, entitled “Treatment of Interest Charges in the Customs Value of Imported Merchandise,” 50 Fed. Reg. 27886 (July 8, 1985). Specifically, BASF excludes the interest payments made to its parent company from the dutiable value of the merchandise pursuant to its written interest agreement, executed on October 11, 1985 and provided for our review. The company states that the reference to “BASF” in the agreement was to BASF Aktiengesellschaft (“AG”), the predecessor-in-interest to BASF SE. The reference to “BWC” was to BASF Wyandotte Corporation, the predecessor-in-interest to BASF. BASF AG was the parent company of BASF. This agreement provides the following terms, relevant for our review: WHEREAS, for a number of years BWC has purchased products, from BASF at prices agreed to by the parties and under terms requiring payment in U.S. Dollars within 120 days from the date of invoice; WHEREAS, it has been the practice of BASF to include in the invoice price of products sold to BWC an amount of interest for 120 days … . . . NOW, THEREFORE, in consideration of the covenants contained herein, the parties agree as follows: Interest included in the invoice price of products exported by BASF to BWC on 120-day payment terms shall be 92% of the prime rate for U.S. Dollars as published in the Wall Street Journal (Citibank) on the date each such invoice is rendered by BASF to BWC. BASF agrees to separately state on each such invoice: the applicable rate of interest in accordance with Paragraph 1, above, the payment terms, and the total amount, in U.S. Dollars, of each such interest payment. As stated by BASF, under the terms of this agreement, BASF originally paid its parent company 120 days-worth of interest for the right to make payment on 120 day payment terms. This was reflected on the intercompany invoices, which broke out the interest on a separate line entitled “interest” and identified the rate and the term. These terms were followed until January 2004, when BASF started paying its invoices sooner. BASF did not amend its 1985 agreement to reflect the new terms of payment. Regulatory Audit states (and BASF confirms) that BASF’s current payment structure provides that invoices are typically paid between 60 and 90 days after the invoice date. Additionally, BASF computes interest on a 75 day basis, which is an average of the 60 and 90 day payment dates. Therefore, now the invoices include a charge of 75 days of interest, not 120 days. BASF also states that on rare occasions invoices are paid outside the 60-90 day payment window. Accordingly, Regulatory Audit is of the opinion that the interest charges in question are dutiable because BASF does not follow the terms of the written interest agreement by making payment for the merchandise in accordance with the time frame set forth in the agreement. Additionally, since the interest payment computations are based on average invoice payment dates, Regulatory Audit is unable to determine whether the interest payments to the parent company are accurate without an extensive audit of individual entries. Therefore, Regulatory Audit opines that BASF does not abide by the terms of the 1985 agreement, since this agreement does not reflect BASF’s current payment processes and terms. Finally, in its draft report, Regulatory Audit states that since the agreement was executed in 1985, there have been various name changes of the parties concerned; therefore, it is no longer apparent as to which corporate entities are the parties involved in the transactions. BASF disagreed with Regulatory Audit’s determination, and this internal advice followed. ISSUE: Are interest payments made by BASF to its parent company, pursuant to a written interest agreement presented to CBP, dutiable as part of the price actually paid or payable for merchandise imported by BASF from its parent company? 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 (“TAA”) codified at 19 U.S.C. §1401a. The preferred method of appraisement under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain additions specified in sections 402(b)(1) (A) through (E) of the TAA. The applicability of transaction value is not at issue here, and we will assume that it is the correct basis for appraising the merchandise involved. The term “price actually paid or payable” is defined in section 402(b)(4)(A) of the TAA as follows: 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. It is CBP’s position that all monies paid to the seller, or a party related to the seller, are part of the price actually paid or payable for the merchandise under transaction value. See Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). The court in Generra specifically held that “a permissible construction of the term “for imported merchandise” does not restrict which components of the total payment may be included in transaction value.” Generra, 905 F.2d at 380. Under Generra, the interest charges paid by BASF to its parent company are part of the price actually paid or payable for the imported merchandise. However, T.D. 85-111 (along with a “Statement of Clarification,” 54 Fed. Reg. 29973 (July 17, 1989)) sets forth the requirements for the exclusion of interest charges from the price actually paid or payable. T.D. 85-111 states that interest payments should not be considered part of the dutiable value of merchandise if: The interest charges are identified separately from the price actually paid or payable for the goods; The financing arrangement in question was made in writing; Where required by Customs, the buyer can demonstrate that The goods undergoing appraisement are actually sold at the price declared as the price actually paid or payable, and The claimed rate of interest does not exceed the level for such transaction prevailing in the country where, and at the time, when the financing was provided. Furthermore, in order to meet the terms of T.D. 85-111 as written agreements, it must be demonstrated that the parties actually adhered to the agreements. In Luigi Bormiolo Corp. v. United States, 304 F.3d 1362 (Fed. Cir. 2002), the appellate court found that the Court of International Trade was correct in holding that Bormioli failed to demonstrate that its financing agreement was in writing. Bormiolo failed to demonstrate the existence of the financing agreement not because written documents did not exist, but because Bormiolo failed to follow the terms of the written agreement. The Court of International Trade found that Bormioli deviated from its written agreement by (1) failing to pay its interest payments quarterly, instead paying on six to twelve months worth of accrued charges at a time; (2) paying an interest rate above the prime rate in Italy at the time when the agreed rate was the prime rate; and (3) paying late (from between 1 day to 22 days after the payment due date). See Luigi Bormioli Corp., Inc. v. United States, 24 C.I.T. 1148, 1155 (2000). In affirming the lower court’s decision, the Court of Appeals for the Federal Circuit stated in its decision: . . . while Customs may choose to ignore a de minimis variation from the terms of a written financing arrangement, the parties’ repeated violation of the salient terms of the arrangement must remove it from coverage under T.D. 85-111. T.D. 85-111 does not merely require that the parties have a written financing arrangement, but that the written financing arrangement actually govern the payments at issue. . . . Luigi Bormiolo Corp. v. United States, 304 F.3d 1362, 1372. Regulatory Audit first concluded that it could not determine whether the entries for which the interest deduction was being taken represented sales between the actual signatories of the interest agreement because the names of the parties had changed. BASF provided us with the following documentation, supporting its statement that the corporate changes resulted in the merger of BASF Wyandotte Corporation into BASF and of the name change from BASF AG to BASF SE: (1) a copy of the Delaware certificate of merger whereby BASF Wyandotte Corporation and other BASF companies were merged into BASF (the merger became effective on December 31, 1985, more than two months after the interest agreement was executed); and (2) a copy of another certificate of merger (in German), which demonstrates the name change from BASF AG to BASF SE. Upon our review of this information, we find that these documents substantiate BASF’s assertion that BASF and BASF SE succeeded BASF Wyandotte Corporation and BASF AG as parties to the 1985 interest agreement. Moreover, Regulatory Audit argues that BASF did not follow the terms of the interest agreement by making payments for merchandise in accordance with the time frames set forth in the agreement. BASF argues that the phrase “on 120-day payment terms” means that BASF can make the interest payment within 120 days. Therefore, since BASF is paying its invoices on average, on the 75th day (or within the 120 day timeframe), BASF is in compliance with the terms of the 1985 agreement between the related parties. We note that in this case the real issue is whether the interest is calculated in accordance with the terms provided for in the agreement. Upon our review of the 1985 agreement, we note that the first paragraph of the agreement states that the payment for the merchandise is usually made within 120 days from the date of invoice. Therefore, it appears that there is nothing that prohibits BASF from paying earlier for the imported merchandise. However, the second paragraph of the agreement mentions that it has been the practice of BASF to include in the invoice price for the products an amount for interest for 120 days. Additionally, the subsequent provision of the agreement confirms that the interest included in the invoice price should be calculated on 120-day payment terms. BASF admits that it originally paid its parent company 120 days-worth of interest for the right to make payment on 120 day payment terms. Therefore, the company had no problems following its 1985 agreement until 2004, when it changed its practice and terms of the agreement, without amending it in writing. In 2004, BASF began to compute the interest on a 75 day basis, which is an average of the 60 and 90 day payment dates. Therefore, now the invoices include a charge of 75 days of interest, not 120 days. Our reading of the 1985 agreement shows that the agreement provides for an interest calculation on the basis of a 120-day term, and not the interest computations based on averages. In other words, the 120-day payment term is the point of reference to calculate the applicable interest. Accordingly, since BASF never provided documentation or evidence of any modification to their 1985 interest agreement to reflect the new terms, we agree with Regulatory Audit’s determination that BASF failed to follow the terms of the written agreement. To find otherwise would not allow CBP to verify the proper interest to deduct from the price actually paid or payable. Therefore, we find that the interest payments made by BASF to its parent company pursuant to a written interest agreement are dutiable since these charges constitute a part of the price actually paid or payable for the imported merchandise HOLDING: In conformity with the foregoing, we find that the interest payments made by BASF to its parent company pursuant to a written interest agreement are dutiable since these charges constitute a part of the price actually paid or payable for the imported merchandise. BASF failed to follow the term of the existing written agreement. This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB 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.   Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch