In an unusual HQ ruling (HQ H260036), CBP recently ruled that an importer of natural and biodegradable additives (such as citric acid and xanthum gum, mainly used in the food industry) must use deductive value as the basis of appraisement for its imported merchandise – instead of transaction value. Despite the fact that the importer had an Advance Pricing Agreement in place with the IRS (mandating that the importer earn a certain operating margin), CBP found that its various tests for arm’s length pricing were not met. It continued to hold to its long-standing position that unless the companies used as comparables in establishing the targeting operating profit margin in the APA/transfer pricing study produce the same merchandise as the importer, the APA/transfer pricing study cannot support a finding of arm’s length pricing to validate the use of transaction value. Given that such comparables almost never exist (and are thus rarely used in preparing an APA or transfer pricing study), it is curious that CBP continues to adhere to this position.
The real significance of this ruling remains to be seen, but it appears that a shift in thinking at CBP HQ may be underway concerning the valuation of “commodity-type” products. Because commodities typically sell for “whatever the market will bear,” the ultimate price is dictated entirely by market conditions. Any profit is “backwards-driven” so that each party in the distribution chain takes their share of profit, with whatever profit remains going back to the seller. This scenario more closely reflects the deductive value methodology than it does transaction value, and CBP may be aligning its position accordingly. Nonetheless, for most of recent history, CBP has almost always applied deductive value only to imports of fresh produce. Given the burdensome nature of deductive value (use of pro forma invoices; calculating product-by-product prices based on surrogate end customer selling prices), CBP should proceed cautiously with any further expansion of the deductive value methodology.