Customs Planning Opportunity: Achieving Duty-Savings Through Global Distribution Arrangements

Dear Friends:

We wanted to let you know about a ruling recently published by U.S. Customs and Border Protection (“CBP”) that presents companies that distribute products in the United States (and subsidiaries of non-U.S. multinationals, in particular) with a meaningful customs valuation planning/duty savings opportunity.

Headquarters Ruling #H242894 (Dec. 4, 2013) (copy available here) concerns whether a “territorial exclusivity fee” a U.S. automotive manufacturer/distributor pays its non-U.S. parent company in exchange for the exclusive right to distribute the company’s branded vehicles, parts and accessories in the United States is part of the dutiable value of the merchandise the U.S. company imports from the parent.  According to the ruling, the territorial exclusivity fee is paid under a multi-year agreement as part of a global strategy to build consumer brand awareness and create product demand.

In the past, CBP had determined that such exclusivity fees were part of the price paid or payable for imported merchandise and, therefore, subject to duties.  CBP found that precedent distinguishable here and concluded that the territorial exclusivity fee is not be part of the customs values of the vehicles, accessories and parts the U.S. distributor purchases and imports from its parent.  In finding that the territorial exclusivity fee is not part of the customs value, CBP noted that the fee was distinct from the payments the U.S. manufacturer/distributor makes for the purchase of imported vehicles and parts, and was not linked to specific import transactions.  The Exclusivity Agreement also had explicit language to the effect that none of the rights granted thereunder pertained to the manufacture or purchase of the licensed products and that the parent’s sole remedy for the U.S. distributor’s failure to pay the territorial exclusivity fee was termination of the exclusive distribution arrangement and the intellectual property rights granted.  Also of significance to CBP was the fact that the fee was not dependent on, or determined by reference to, the volume of the products purchased by the U.S. distributor.  CBP then went on to analyze whether the fee was includable in the customs value as either a royalty or proceeds; ultimately concluding that it was not.

As the ruling illustrates, there are meaningful planning opportunities on the customs valuation side that should not be overlooked.  This is another example of how thoughtful planning and careful agreement drafting can reduce the customs value required to be declared to CBP.  All multinational companies that import dutiable merchandise should review their pricing structure (together with your tax colleagues) to determine whether there is an opportunity to separate non-dutiable charges (e.g., a territorial exclusivity fee) from dutiable charges in order to (legitimately) reduce the amount of duties required to be paid to the government.

We hope this is helpful.  If you have any questions concerning this issue, please let us know.

Best regards,

Ted

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