On January 24, 2008, the Bureau of Customs and Border Protection (CBP or "Customs") published notice in the Federal Register that it is contemplating a revision to its valuation scheme for some U.S. imports that, if adopted, could mean an increase in the duties charged on certain U.S. imported merchandise by as much as 15%.
Customs has suggested altering the understanding of "transaction value"—its primary method of assessing the value of various imports—applied to imported products that have been sold two or more times before they reach the U.S. (i.e. multi-tier sales). Under U.S. and international law, transaction value is currently defined as: "the price actually paid or payable for merchandise when sold for exportation to the U.S." Transaction value is a critical data element since it serves as the basis for duties and other fees assessed by Customs.
Customs explains that when an import transaction involves only one foreign seller and one U.S. buyer, identifying the price paid when the good was sold for export to the U.S. is fairly straightforward. When a sale involves more than two parties—say a manufacturer, intermediary and a buyer—there is, however, more than one sale that might qualify as a "sale for export to the U.S."
Presently, CBP bases transaction value on the price paid by the buyer in the "first sale" (e.g., the sale between the manufacturer and the intermediary), provided the importer can prove it is an arm's length sale and that the merchandise was clearly destined for export to the U.S.
But the agency is now proposing that transaction value be based on the price paid in the last sale occurring prior to the introduction of the goods into the U.S. (i.e., the importer's price), which it says will bring the U.S. in line with a recent World Customs Organization (WCO) ruling as well as the interpretation adopted by a number of U.S. trading partners.
U.S. importers and retailers favor the "first sale" price, however, because it does not include things like mark-up, costs, overhead and profits often found in the intermediate price. They have sharply criticized the proposal, arguing that it will significantly drive up the value to which U.S. import duties are applied, and contradicts well-established legal precedent.
As it stands, CBP's proposal is still just that—a proposal—and the agency is currently accepting public comments on the proposal until April 23, 2008. With this in mind, this article will review key arguments being made on both sides of the issue.
"Current Interpretation…Is Not Correct"
The current definition of transaction value comes directly from the Valuation Agreement that was included in the 1979 General Agreement on Tariffs and Trade (GATT) agreement, and was codified by Congress under Title 19, Section 1401a, of the United States Code.
The original agreement did not explicitly address the issue of multi-tier sales, but it did call for the creation of a WCO Technical Committee on Customs Valuation to provide advice on these kinds of questions. It was a July 2007 commentary from the WCO's Technical Committee supporting the use of last sale to establish transaction value, in fact, that prompted CBP's internal review of the issue, the agency notes. After conducting a thorough examination of U.S. valuation law and the related legislative history, U.S. Customs concluded that the "current interpretation…is not correct" and that "basing transaction value on the last sale…reflects the proper construction of the statute and carries out legislative intent of the TAA."
As justification, CBP points to Congressional report language that accompanies the 1979 TAA, which describes lawmakers' interest in finding a replacement for a complicated export valuation system in the U.S., which they believed was overly burdensome because it required investigations into the pricing practices of foreign countries.
Although multi-tier sales were not explicitly addressed in the statute, knowing Congressional desire to simplify the overall valuation process and eliminate the need to engage foreign countries, it is logical to assume that lawmakers believed the last sale method would be used in multi-tier sales scenarios since it would provide, as CBP puts it, "the most straightforward means for identifying transaction value…and would not require CBP to engage in formidable fact-finding or to conduct foreign inquiries."
Furthermore, CBP contends that adopting the proposal would bring U.S. policy more in line with that of other countries because the proposed change is "consistent with the provisions and purpose of the Valuation Agreement, as clarified by the Technical Committee" and would "conform the U.S...to the current interpretation of most other WTO members."
But, U.S. importers and retailers maintain these arguments are flimsy at best. They counter, for instance, that key U.S. trading partners–including the European Union and New Zealand—rely on the first sale approach and that use of "first sale" as a viable appraisement tool has consistently been upheld under numerous decisions issued by the U.S. Court of International Trade and several Federal courts over more than 20 years.
Critics of the CBP proposal also note that Customs failed to consult appropriate private-sector trade advisors before publishing the proposal in the Federal Register as required under law, and claim that the proposed policy change would be unconstitutional since it would essentially allow the executive branch to overturn existing judicial decisions (a power limited to the legislative and judicial branches under the U.S. Constitution).
Finally, opponents of the proposal have questioned CBP's motives with this effort. In issuing the proposal, for example, CBP states that the WCO commentary cited earlier was a primary impetus for issuing the proposal, and that the change would simplify existing valuation procedures. Critics, however, point out that the WCO opinion is non-binding and that CBP has failed to demonstrate that it has had problems administering the first sale rule in the past. Indeed, some opponents of the change have openly speculated that the proposed revision is simply another way for the agency to generate revenue at the expense of U.S. consumers who will eventually absorb the costs of the increased import duties.
Armed with these kinds of arguments, a coalition of nearly 100 industry groups and companies sent a letter to Homeland Security secretary Michael Chertoff on February 11 requesting the immediate withdrawal of the January 24 proposal.
For its part, INDA, Association of the Nonwoven Fabrics Industry, is currently polling its members to determine whether the association should weigh-in on the CBP proposal, and if so, what position to take. If you have any input, please contact INDA's Associate Director of Government Affairs at 703-538-8805 or email@example.com by April 2, 2008.