On May 30, 2012, U.S. Customs and Border Protection ("CBP" or "Customs") finalized its new policy on post importation adjustments to the price of imported goods in a related-party setting, thereby opening the door for companies making such adjustments to realize significant duty savings if the adjustment results in a lower dutiable value. Customs initially proposed this policy change in December 2011 in an effort to make it easier for related parties to use transaction value when making post-importation adjustments based upon a written transfer pricing policy that is in accordance with IRS rules or an Advance Pricing Agreement ("APA").

Customs historically has required importers to report post-importation price adjustments that increase the dutiable value of imported goods, but allowed post-importation reductions to entered value only if such adjustments were made pursuant to a formula that was fixed prior to importation, thereby eliminating for the most part influence exercised by the buyer or the seller over the price adjustment. In general, Customs did not consider written transfer pricing policies or APAs to constitute a "formula" for purposes of permitting appraisement using transaction value when post-entry adjustments were made in a way that Customs viewed as being within the control of the importer or exporter. Under the new policy, Customs will consider the use of transaction value in related-party transactions to be acceptable if the following five factors are present: 

• A written "Intercompany Transfer Pricing Determination Policy" is in place prior to importation, and the policy is prepared taking Internal Revenue Code section 482 into account; 
   
• The U.S. taxpayer uses its transfer pricing policy in filing its income tax returns, and any adjustment resulting from the transfer pricing policy is reported or used by the taxpayer in filing its income tax return; 
   
• The company's transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted; 
   
• The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and 
   
• No other conditions exist that may affect the acceptance of the transfer price by CBP.

If these factors are in place and if the circumstances of sale or test values establish that the price actually paid or payable by the importer/buyer to the exporter/seller was not influenced by the relationship between the parties, Customs will allow an importer to take all (both upward and downward) post importation adjustments into account in determining transaction value. Commenters had proposed discarding the circumstances of sale/test value as redundant given that a transfer pricing policy consistent with section 482 would satisfy the arm's length standard, but Customs maintained the requirement, stating that importers must still meet one of those standards even if the five factors listed above are also satisfied.

The new policy also clarifies the December 2011 proposal by indicating that, while participation in CBP's Reconciliation Prototype Program is strongly recommended, it is not a condition for taking advantage of the new policy.

For companies engaging in a large number of related party transactions, this policy change could provide great benefits. First, it will allow many companies that have written transfer pricing policies or APAs in place for U.S. income tax purposes to rely upon those policies when determining value using the transaction value method for Customs purposes, resulting in potential duty savings when there are downward price adjustments. Although APAs are comparatively rare, most large multinationals have written transfer pricing policies in place so as to avoid the imposition of penalties under the income tax rules should the Internal Revenue Service propose significant adjustments. The Customs policy will provide further incentive to prepare such policies. Second, for those importers who choose to use the Reconciliation Program, it will eliminate the need to file post-entry amendments or protests to report post importation price adjustments. Third, it will permit companies to receive a refund of duties paid when there is a downward adjustment in the transfer price.

The new policy takes effect July 30, 2012.

For more information, please contact:

Daniel P. Wendt, dwendt@milchev.com, 202-626-5898 (Customs)

Rocco V. Femia, rfemia@milchev.com, 202-626-5823 (Tax)

Richard H. Abbey*

Mary Prosser*

Saskia F. Zandieh*

*Former Miller & Chevalier attorney

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