On July 9, 2014, U.S. Customs and Border Protection (CBP) circulated a draft revised Informed Compliance Publication entitled “Bona Fide Sales & Sales for Exportation to the United States,” which identifies additional documents importers may need to substantiate their use of “first sale” values. In multi-tiered transactions, the “first sale” rule allows an importer to declare the lower price paid by a middleman to a foreign manufacturer rather than the higher price paid by the importer.

CBP’s draft ICP provides additional examples of documentation that may be necessary for importers to review, maintain and provide upon request by CBP as part of their justification for first sale claims. Thus, CBP’s proposed modifications to the existing ICP are likely to make the first sale rule more difficult to apply, including for importers who are already making first sale claims and have done so pursuant to the terms of a binding ruling or by way of a long-established practice. If adopted, the proposed ICP revisions will formalize CBP’s ability to request, in particular, exhaustive financial detail for all parties to the transaction, which will likely prove to be a laborious and intrusive process for related-party first sale scenarios. With these developments, one should reasonably conclude that the agency is preparing to take a stricter approach when verifying first sale claims.

Documentation Checklist

Included among the proposed revisions to the ICP publication is a checklist of documents that CBP may request, which includes some of the same documents already referenced in the current version of the ICP but, in addition, includes many financial-related documents that in the past have not been consistently requested by CBP. With increased emphasis placed on such business records, CBP’s approach to vetting first sale transactions is likely to become too burdensome for participation by smaller textile and apparel manufacturers, thereby preventing importers from avoiding high duties paid on such products from countries with which no Free Trade Agreements or other Duty Preference Programs exist (e.g., China).

Currently, CBP considers the totality of circumstances in analyzing whether a bona fide sale for exportation to the United States took place, which would allow an importer to use the first sale value. Going forward, CBP would similarly approach first sale transactions on a case-by-case basis, with CBP recognizing that different documentation from the provided checklist would be necessary to illustrate the first sale eligibility depending upon the relationship of the parties, their accounting structures, etc.

Further, CBP indicates that when seeking an advance ruling, requesting internal advice or filing a protest, the above-mentioned documentation should be provided and addressed as part of the requesting party’s formal submission.

First Sale International Update

As background, as early as 1979, the World Trade Organization’s (WTO) Valuation Agreement has preferred the use of the “transaction value” as the customs value of imported goods, which it defined as “the price actually paid or payable for the imported goods when sold for export.” In the case of multiple bona fide sales, however, it remained silent on which sale for export would be preferred. The WTO’s preference for transaction value and its definition became widely followed after the conclusion of the Uruguay Round negotiations in 1994.

The WTO did not clarify its interpretation of “sold for export” until 2007, leaving countries to interpret the phrase on their own. Australia and Canada interpreted it to be the last sale before importation. Some countries even adopted the phrase “sold for import” to depart from the “first sale” principle. However, prior to the WTO’s clarification, the United States, Japan, and the European Union all allowed importers to use the “first sale” value if certain requirements were met.

On April 27, 2007, the Technical Committee on Customs Valuation (formed under the World Customs Organization but comprised of representatives of WTO member states) adopted Commentary 22.1, which concluded that the price actually paid or payable is the price paid in the last sale occurring prior to the entry of goods into the country of importation. Although the Commentary is not binding on member countries, it influenced customs authorities to rethink their positions on first sale.

Specifically, in 2008, CBP proposed to eliminate the “first sale” rule and base transaction value on the price paid in the “last sale.” The U.S. trade community strongly opposed this proposed change, and Congress passed legislation requiring CBP to collect data on the use of “first sale” and postpone any action until January 2011. Based on its data collection and a report promulgated by the U.S. International Trade Commission, CBP formally withdrew its proposal in July 2010.

Since 2008, the European Union and Japan have also revisited their positions on the use of the “first sale” price. In October 2013, the European Union adopted the Union Customs Code, which is set to take effect on May 1, 2016, if fully implemented. The Union Customs Code unequivocally states that the value of imported goods shall be determined “on the basis of the transaction occurring immediately before the goods are declared.” Similarly, beginning Apil 1, 2013, Japanese Customs now considers the correct sales price to be the price in the “last sale in a chain of commercial transactions.”

Conclusion

Despite the global trend to do away with the first sale rule, the program continues to be a viable one in the United States, at least for the foreseeable future. However, CBP’s proposed updated ICP on the first sale rule reveals that the agency is going to take a much closer look at the documentary justification for first sale claims. In those instances where the importer is not able to provide air-tight supporting documentation, the underlying first sale claims will most likely be denied by CBP and determined to be valued at the higher second sale.