Customs Valuation Implications of Year-End Transfer Price Adjustments

Dear Friends:

Just a quick reminder for those of you working at multinational companies which operate on a calendar year basis – do not forget to ask your tax colleagues whether any retroactive transfer pricing adjustments were made at, or before, year end (assuming they do not send this information to you on their own).  

If such adjustments were made (whether upward or downward), please be sure to consider the customs valuation implications here in the United States and elsewhere.  The failure to declare upward transfer pricing adjustments is a very common enforcement issue in many jurisdictions (largely because the issue is so easy to identify and often involves significant amounts/penalties); whereas downward adjustments could lead to a refund of customs duties, taxes and fees in some jurisdictions (including the US, the EU, and Canada).  A quick note to your tax colleagues now could save a potential headache down the line, or put some money back in the company’s pocket. 

As part of our customs compliance assessment process, we have developed a questionnaire tailored to these issues for sending to your in-house tax colleagues.  If you think the questionnaire would be helpful to you, just let me know.

Best regards,
Ted

 

GAO Report on C-TPAT

Dear Friends,

The U.S. Government Accountability Office (GAO) recently released a report on the U.S. Customs and Border Protection (CBP) Customs-Trade Partnership Against Terrorism (C-TPAT) program that we thought you might find to be of interest.  In conducting this review, the GAO sought to assess the extent to which (1) CBP is meeting its security validation responsibilities, and (2) C-TPAT members are receiving the benefits promised by CBP for participation. 

While the full report is worth a quick read (available here), the GAO concluded that problems with the data management system (i.e., the Portal) have led to problems with C-TPAT validations (e.g., incorrect tier levels being reflected in the system, incorrect dates for profile updates/reviews, lack of standardized guidance from CBP HQ, etc.) and that CBP cannot determine the extent to which C-TPAT members are actually receiving benefits because of these data problems.  On this latter point, GAO stated:

Since 2012, CBP has compiled data on certain events or actions it has taken regarding arriving shipments—such as examinations, holds, and processing times—for both C-TPAT and non-C-TPAT members through its C-TPAT Dashboard.20 However, based on GAO’s preliminary analyses of data contained in the Dashboard, and data accuracy and reliability concerns cited by C-TPAT program officials, we concluded that CBP staff are not able to determine the extent to which C-TPAT members are receiving benefits, such as reduced likelihood of examinations of their shipments and expedited shipment processing, compared to non-members.

We conducted preliminary analyses of C-TPAT program data from the Dashboard to understand, for example, how the examination rates of C-TPAT members’ shipments compared with those of non-C-TPAT members across different modes of transportation (air, truck, vessel, and rail) for each year from fiscal year 2011 through fiscal year 2015. The results of our analyses showed that C-TPAT members’ shipments did not consistently experience lower examination and hold rates and processing times compared to non-members’ shipments across the different modes of transportation.

Report at 18. 

While the findings of this report many not come as much of a surprise to the companies that participate in the program, it is good to see the government auditing the program and trying to make it better. 

If you have any questions about the report, or C-TPAT more generally, please let us know.

Best regards,
Ted

 

Trump on Trade/NAFTA’s Future – Part II

Dear Friends,

It is being widely reported this afternoon that President Trump is considering imposing a 20% tax on imports from Mexico in order to pay for the border wall (which would mean that U.S. companies/consumers will be paying for the wall, not Mexico. . . ). 

While nothing is imminent, this is a further example of how the rhetoric on renegotiating/withdrawing from NAFTA is being ratcheted-up.  Any company with meaningful investments in Mexico, or that otherwise imports meaningful volumes from Mexico, should be modeling different scenarios and developing contingency plans.  We are assisting numerous clients with this and would be happy to discuss the issues with you further.  If you would like to do so, please let me know.

Best regards,
Ted

Trump on Trade/NAFTA’s Future

Dear Friends,

Earlier today, I had the privilege of speaking at a seminar hosted by my colleagues in Toronto entitled “Trade and Business Strategies for a Post-Globalization World – CETA, Brexit, NAFTA and Preserving Cross Border Data Flows.”  I spoke on a panel entitled “NAFTA’s Prospects and Preserving its Benefits” with colleagues from the US, Canada and Mexico.  I thought that you might find the slides from this panel to be of interest.

If you have any questions about the future of NAFTA, or trade in general, in these interesting times, please let me know.  Also, please check out our “Trump on Trade” webpage for further updates.

Best regards,
Ted

 

Dutiability of Royalties

Dear Friends,

U.S. Customs and Border Protection (CBP) recently published a customs valuation ruling that we thought you might find to be of interest.  The ruling, HQ H233376 (Sept. 19, 2016) involves the dutiability of royalties paid to a licensor unrelated to the importer or the manufacturer of the imported merchandise.  The issue in the ruling was whether the payment of royalties to a third party licensor unrelated to the manufacturer were considered to be a “condition of the sale” of the imported merchandise.

This ruling is worth a quick read, but we have summarized the key facts for your reference below.

The importer entered into an agreement with an unrelated U.S. patent holder to license certain utility patents.  The license covered, among other things, the right to “make, have made, use, sell, offer for sale and import” licensed devices.  The technology covered by the patents was developed in the United States.

The importer also entered into a manufacturing agreement with an unrelated Malaysian manufacturer to have the imported merchandise made.  The agreement authorizes the manufacturer to use the technology disclosed to it by the company to make the imported merchandise.  The importer declared upon importation the price it paid to the manufacturer for the goods.

The importer pays the U.S. patent holder a royalty based on the resale price of the imported merchandise in the United States.

Based on these facts, CBP concluded that (i) the royalty was related to the imported merchandise, and (ii) the importer was required to pay it directly to the licensor.  As a result, the only remaining issue was whether the royalty payments were a “condition of the sale” of the imported merchandise.  This is was particularly important here since the royalties were paid to a licensor who was unrelated to the manufacturer of the imported merchandise (i.e., is a royalty payment to an unrelated third party licensor a condition of the sale of merchandise between two other parties?). 

CBP ultimately adopted what it referred to as a “practical, common sense” approach to this issue and concluded that the royalties were part of the dutiable value of the imported merchandise.  CBP found it relevant that the royalties were for patents, as opposed to trademarks, and that the licensed technology was necessary to produce the imported merchandise. 

The ruling highlights several important points all importers should keep in mind, namely:

(1) royalties paid for patents are more likely to be dutiable under U.S. law than are royalties paid for trademarks, regardless of to whom they are paid (i.e., to the seller or even to a party unrelated to the seller);

(2) the request for internal advice grew out of a Focused Assessment – which demonstrates how closely Regulatory Audit looks at such issues; and

(3) the ruling was issued more than 4 years after the request for internal advice was originally submitted to CBP HQ — which demonstrates how long it takes CBP HQ to issue customs valuation rulings, in particular.

In light of the foregoing, all importers should confirm internally whether any royalties or licenses fees are paid in relation to any imported merchandise.  If so, then the agreements should be reviewed to determine whether the royalties or license fees are dutiable additions to value.  This is not particularly difficult to do.  We regularly help importers with this issue and would be happy to discuss with you how best to do so, if helpful.  If such a discussion would be helpful, just let us know.

We hope this is helpful.

Best regards,

Ted

Post-Entry Preference Program Claims

Dear Friends,

There has been some recent developments in the world of post-entry preference program claims that we wanted to make sure you were aware of, as they could provide meaningful refund opportunities.  A recent decision by the U.S. Court of International Trade (CIT) raised serious concerns about the legality of U.S. Customs and Border Protection’s 2014 policy limiting the filing of post-importation claims for preferential tariff treatment under a number of programs, including GSP, AGOA, the US FTAs with Australia, Bahrain, Israel, Jordan, Morocco and Singapore, the Pharmaceutical Products Agreement, and others (“the 2014 Policy”).  It is now being reported that CBP may have abandoned the 2014 Policy altogether.

There are two key outcomes from this development.  First, post-entry claims under certain preferential duty programs may now be raised for the first time in a protest.  Second, for companies which have filed protests asserting such claims, there may be an opportunity to revive such protests and obtain the duty savings, regardless of how long ago such protests were filed.

Background

Preferential duty programs (such as free trade agreements, GSP and the like) can be grouped into two buckets when it comes to post-entry preference claims—the programs which explicitly authorize post-entry claims (e.g., NAFTA), and those which do not.  When it comes to asserting post-entry preference claims for the second bucket of programs, CBP has, since 2014, taken the view that such claims could only be made prior to liquidation.  In other words, for this second group of programs, a preferential duty claim could not be raised for the first time in a protest.  Once an entry was liquidated, the window for claiming a duty preference was closed.

In August, the CIT issued an opinion in a case captioned, Zojirushi America Corp. v. United States, which questioned the legality of CBP’s 2014 Policy.  The CIT said that the 2014 Policy was based on a misreading of two key Federal Circuit cases.  Both of those cases had addressed post-entry claims for NAFTA (which belongs to the first bucket of preferential duty programs), and according to the CIT, it was a mistake for CBP to try and apply the outcome of those cases to post-entry claims made under preferential duty programs falling in the second bucket. 

Zojirushi was dismissed by the CIT for lack of jurisdiction, because the Court found that the importer had not followed the appropriate course to get into court.  The importer claimed that it could not follow the traditional course for bringing a customs case at the CIT, because CBP would not deny its protests.  Instead, its protests had been “rejected as non-protestable”, leaving the protests in a state of limbo— having been neither allowed nor denied. 

The Court pointed out that there is a way to get your protest denied, even where CBP merely rejects them.  Namely, an importer can file a request for “accelerated disposition”.  Any such protest that is not granted within 30 days is deemed to be denied, thereby satisfying one of the prerequisites for getting into court.  Interestingly, there is no limit on the time for requesting accelerated disposition on a protest that has not been denied.  In other words, any protest that (1) has not been approved or denied, or (2) has been rejected as non-protestable, can be “revived” by filing a request for accelerated disposition.  At the very least, the request for accelerated disposition will trigger a deemed denial, which will in turn start the 180-day clock for filing a summons with the CIT.

Just this week, it has been reported that Zojirushi took the Court’s advice.  It went back to CBP and requested accelerated disposition for all of its rejected protests.  CBP could have denied the protests, or just waited 30 days until they were deemed denied, giving Zojirushi a path back to court.  Instead, we understand that CBP has relented with respect to its 2014 Policy, and has decided to allow these protests, rather than denying them.  While this change in policy by CBP has not been formally announced, we believe that a similar outcome is likely available to any importer with similar facts.

What To Do Now

(1)  Make a note of this change in the law.  If you need to make a post-entry preference claim under a preferential program in the second bucket (i.e., a program which does not include an explicit post-entry refund provision), you may now seek to do so by filing a protest, which extends the period available to file the claim.

(2)  Review your records to identify any protests that your company may have filed that were “rejected as non-protestable”, particularly protests that were rejected for the reasons set out in CBP’s 2014 Policy. 

*     *     *

We hope this is helpful.  If you have any questions on this potential refund opportunity, please let us know.

Best regards,
Ted

 

Miscellaneous Tariff Bills — Hope Becoming Reality – III

Dear Friends,

This Friday, October 14, 2016, marks the opening of a 60-day window for filing miscellaneous tariff bill (MTB) petitions with the U.S. International Trade Commission (ITC) through its online portal. The MTB process allows importers to seek a temporary suspension or reduction of duties of up to $500,000 per year for each eligible product. If you import products that are not produced in the U.S. (and are not in direct competition with U.S. manufactured products), this is an opportunity that must not be overlooked.  

We participated in an ITC training session on using the online portal yesterday and believe companies should find it to be a relatively straight-forward process.  We are assisting a number of clients prepare and/or file MTB petitions and would be happy to discuss this opportunity with you further.  If you would like to do so, just let us know. 

Best regards,
Ted