[Federal Register Volume 60, Number 128 (Wednesday, July 5, 1995)]
[Notices]
[Pages 35105-35108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16406]
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DEPARTMENT OF THE TREASURY
Customs Service
Notice to Test the Use of Reconciliation for Adjustments Made to
the Price of Imported Merchandise by Related Party Companies Under 26
U.S.C. 482
AGENCY: U.S. Customs Service, Department of the Treasury.
ACTION: General Notice.
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SUMMARY: This notice announces Customs plan to conduct a test regarding
the use of reconciliation for those related party importers which have
reason to believe upward adjustments may be made to the price of
imported merchandise for tax purposes pursuant to 26 U.S.C. 482. This
notice invites public comments concerning any aspect of the planned
test, informs interested members of the public of the eligibility
requirements for voluntary participation in the testing of
reconciliation, for this purpose, and describes the basis on which
Customs will select participants.
DATES: The test will commence no earlier than October 1, 1995, and will
run until December 31, 1996. Comments concerning the methodology of the
reconciliation prototype must be received on or before (insert date 30
days from publication in the Federal Register). To participate in this
reconciliation test, the application must be filed and approved by
Customs on or before October 1, 1995.
ADDRESSES: Written comments regarding this notice, and information
submitted to be considered for voluntary participation in this test
should be addressed to Mr. William F. Inch, Director, Office of
Regulatory Audit, Office of Strategic Trade, U.S. Customs Service, 1301
Constitution Avenue NW., Room 2311, Washington, D.C. 20229-0001.
FOR FURTHER INFORMATION CONTACT: Matthew Krimski 202-927-0411.
SUPPLEMENTARY INFORMATION:
Background
Section 1059A of the Internal Revenue Code
Section 1059A of the Internal Revenue Code provides that in related
party transactions the amount of any costs--
[[Page 35106]]
(1) which are taken into account in computing the basis or
inventory cost of such property by the purchaser, and
(2) which are also taken into account in computing the customs
value of such property shall not, for purposes of computing such basis
or inventory cost for purposes of this chapter, be greater than the
amount of such costs taken into account in computing such customs
value.
The legislative history of section 1059A indicates that Congress
intended to preclude the ``whipsaw'' effect on U.S. revenue which
occurs when a party is allowed to claim a price for ``computing the
customs value of such property by the purchaser'' that is lower than
the price claimed for tax purposes.
When section 1059A was enacted, Congress was aware that the Customs
value statute recently had been amended to make price paid the critical
cost factor taken into account by the Customs Service in valuing goods
for duty purposes. The legislative history of section 1059A also
indicates that Congress wanted section 1059A to address this situation
by attempting to place a ceiling on ``the amount of any [such] costs''
that can be claimed for tax purposes. All of the applicable legislative
reports indicate, without exception, that Congress intended that
section 1059A would instill some uniformity on the amount of costs
which may be claimed to the IRS for tax purposes by limiting the amount
of such costs to the amount claimed to, and taken into account by, the
Customs Service in computing the Customs value.
The legislative history did state that appropriate adjustments may
be made in cases where customs pricing rules differ from appropriate
tax rules--as, for example, with the inclusion or exclusion of freight
charges. Finally, the history states section 1059A applies to transfer
prices subject to section 482 of the Internal Revenue Code.
In July of 1994, the Internal Revenue Service (IRS) issued final
regulations implementing 26 U.S.C. 482. The IRS subsequently began
considering whether and to what extent the 1059A regulations should be
amended in the context of the new section 482 regulations. The section
482 regulations, specifically 26 CFR 1.482-1(a)(3), permits a
controlled taxpayer, if necessary to reflect an ``arm's length
result'', to ``report on timely filed U.S. income tax return (including
extensions) the results of its controlled transactions based upon
prices different from those actually charged.'' The IRS is considering
whether the 1059A regulations should be amended to allow the taxpayer,
under appropriate circumstances, to make the upward section 482
adjustment.
This document announces a test that will facilitate the IRS/Customs
decision as to whether reconciliation procedures provide a viable and
appropriate circumstance for a taxpayer/importer to make a post entry
upward adjustment to the price of imported merchandise.
Customs Value Law
For Customs purposes the appraised value of imported merchandise is
determined pursuant to section 402 of the Tariff Act of 1930, as
amended by the Trade Agreements Act (TAA) of 1979. Transaction value is
the primary basis of appraisement. Transaction value is defined in
section 402(b)(1) as the ``price actually paid or payable for the
merchandise when sold for exportation to the United States'' plus
specified statutory additions.
Pursuant to section 402(b)(2)(A)(iv) the transaction value of
imported merchandise shall be the appraised value only if the buyer and
seller are not related, or if the buyer and the seller are related, the
transaction value is acceptable under 402(b)(2)(B). Section
402(b)(2)(B) provides that transaction value between a related buyer
and seller is acceptable if the buyer demonstrates that the declared
transaction value meets one of the following two tests: 1)
Circumstances of the Sale or 2) Test Values.
The reconciliation test, announced in this document, is designed
for participants that engage in related party transactions.
Related Party Transactions
Under section 402(g) of the TAA the following persons are treated
as related:
(1) Members of the same family, including brothers and sisters
(whether by whole or half blood), spouse, ancestors, and lineal
descendants.
(2) Any officer or director of an organization and such
organization.
(3) An officer or director of an organization and an officer or
director of another organization, if each such individual is also an
officer or director in the other organization.
(4) Partners.
(5) Employer and employee.
(6) Any person directly or indirectly owning, controlling, or
holding with power to vote, 5 percent or more of the outstanding voting
stock or shares of any organization and such organization.
(7) Two or more persons directly or indirectly controlling,
controlled by, or under common control with, any person.
For purposes of 402(g)(G), the phrase ``two or more persons
directly or indirectly controlling, controlled by, or under common
control with, any person'' is understood to cover the following
situations:
(1) where one of them directly or indirectly controls the other;
(2) where both of them are directly or indirectly controlled by a
third person; or
(3) where together they directly or indirectly control a third
person.
For purposes of this test, Customs will consider the fact that the
related party importer has reason to believe that an upward adjustment
may be made to the price as evidence that the relationship may have
affected the price actually paid or payable for the imported
merchandise. Therefore, transaction value may not be acceptable.
Rather, the merchandise may be appraised under section 402(f). The
appraised value pursuant to section 402(f) will be derived from the
transaction value method. That is, the appraised value will be the
price for the imported merchandise after the upward section 482
adjustment is undertaken by the importer/taxpayer plus the applicable
statutory additions: packing, selling commissions, assists, royalties/
license fees and proceeds of subsequent resale. In order to participate
in the test, the importer/taxpayer must agree that 402(f) is the proper
basis of appraisement, in the event an upward section 482 adjustment
is, in fact, claimed for tax purposes.
Title VI of the North American Free Trade Agreement Implementation Act
In order for the importer to comply with Customs value law, when
making upward adjustments, a mechanism must be established that permits
the importer to submit information related to the upward adjustment
after the time of entry. Customs has determined that the reconciliation
provisions of the North American Free Trade Agreement Implementation
Act (the Act) create a possible vehicle permitting these circumstances.
Specifically, Title VI of the Act, Public Law 103-182, 107 Stat. 2057
(December 8, 1993), contains provisions pertaining to Customs
Modernization (107 Stat. 2170). Subtitle B of Title VI establishes the
National Customs Automation Program (NCAP), an automated and electronic
system for the processing of commercial importations. Section 637 in
Subtitle B of the Act amends Section 484 of the Tariff Act of 1930 by
establishing a new subsection (b) entitled ``Reconciliation''.
Reconciliation is a planned component of the NCAP. Section 631 of the
Act authorizes tests of planned NCAP components. Section 101.9(b) of
the
[[Page 35107]]
Customs Regulations, provides the regulations governing the testing of
NCAP components. See T.D. 95-21 (60 FR 14211, March 16, 1995).
This test is established pursuant to those regulations.
Reconciliation
Reconciliation will allow an importer to provide Customs with
information not available at the time of entry summary filing and which
is necessary to ascertain the final appraisement of imported
merchandise. The reconciliation must be filed no later than 15 months
from the date of the first entry summary filed under that
reconciliation.
A reconciliation permits the liquidation of an entry summary/
summaries despite the fact that undetermined information will be
transmitted to Customs at a later time through the reconciliation
process. Assuming there are no other outstanding issues, the entry
summaries will be liquidated for all purposes other than that which is
identified by the importer as pending reconciliation. The
reconciliation will be liquidated in accordance with 19 U.S.C. 1500.
The liquidation of the reconciliation may be protested, in accordance
with 19 U.S.C. 1514, but the protest may only pertain to issues covered
by the liquidated reconciliation.
Description of Test
This test will be limited to participants who meet the eligibility
criteria set forth below. It will cover entry summaries filed by those
participants from October 1, 1995 to March 31, 1996 or the end of the
participant's tax year, whichever comes first. By statute,
reconciliation must be filed within 15 months of the entry summary. For
purposes of this test, participants must file the reconciliation within
15 months of the filing of the first affected entry summary or by
December 31, 1996, whichever comes first.
Application
Applications will be submitted to Mr. William F. Inch, Director,
Office of Regulatory Audit, United States Customs Service, 1301
Constitution Ave. N.W. Room 2311, Washington D.C. 20229-0001. All
applicants will be notified in writing of approval or disapproval
regarding test participation. All applicants who meet the eligibility
criteria will be chosen to participate in this test. The application
must address the ability to meet the eligibility requirements. The
applicant must consent, in the application, to all the conditions set
forth in the description of this test and eligibility criteria. The
applicant must set forth in the application the date on which the
applicant's tax year ends.
By applying, applicants agree that the value for merchandise
covered by all entry summaries filed by them or on their behalf on or
after October 1, 1995 until the end of the tax year or March 31, 1996,
whichever comes first, shall be finally determined by the liquidation
of the reconciliation filed in accordance with the test. The Office of
Regulatory Audit will review the application to determine that the
applicant has met all eligibility requirements.
Documentation Required To Support Reconciliation
The approved participant shall maintain and produce upon Customs
request all relevant documentation to support the change in the entered
value. The reconciliation shall include the following information:
1. The entry numbers and dates of all entries filed with Customs
during the period.
2. A cumulative list of units imported by classification number and
the change (final entered value) to that entered value.
In order to support the reconciliation, the approved applicant
shall maintain and produce upon Customs request all relevant
documentation to support the change in entered value. The approved
applicant may be required to provide any or all of the following
documentation:
1. The IRS Schedule M-1, and the Form 1120 Corporate Tax Return.
2. Any and all other supporting documentation filed along with the
M-1 and the Form 1120 that was furnished to the IRS.
3. Any or all IRS documents or communications with the participant
regarding the relevant 482 adjustment.
4. Any and all documentation including any books and records or
computerized data to relate the 482 adjustment to the entries filed
with Customs.
Such information and supporting material should be provided in a
format or electronic media commonly in use. Examples are an IBM
compatible computer 3.5 disk utilizing a software product such as
Access or Excel or other similar spreadsheet or database application
such as Lotus 1, 2, 3.
Verification
Customs Regulatory Audit, in conjunction with other Customs
disciplines, will determine if any verification effort is necessary to
establish the accuracy of the details submitted. The extent of the
verification will be determined by Regulatory Audit, and if an audit is
required, established Regulatory Audit procedures will be followed.
Eligibility Criteria
In order to qualify for this test of reconciliation, importers must
have reason to believe they may invoke the IRS regulations to make
upward adjustments to the price of the imported merchandise. Importers
must have the capability to provide, on an entry-by-entry basis, the
electronic entry of merchandise and the electronic entry summary of
required information (ABI). Other requirements and conditions are as
follows:
1. The test only applies to the related party transactions engaged
in by participants who qualify under Internal Revenue Service Section
482 requirements to make upward adjustments and which are not subject
to Antidumping/Countervailing Duty proceedings.
2. Participants' tax year must end between October 31, 1995 and
March 31, 1996.
3. Customs decision to allow a company to participate in the test
program will be made in consultation with the Internal Revenue Service.
4. Each participant must provide U.S. Customs with the methodology
that will be used to arrive at the final price of the imported
merchandise.
5. Each participant agrees that appraisement is under section
402(f) of the Tariff Act of 1930, as amended by the Trade Agreements
Act of 1979, if, in fact, an upward section 482 adjustment is made for
tax purposes.
6. Entries involving merchandise under this test will not be
eligible for drawback.
Selectivity Criteria
The Office of Regulatory Audit, in conjunction with other Customs
disciplines, will review the application to ensure the eligibility
requirements are met. All applicants who meet the eligibility criteria
will be allowed to participate, provided no other Customs office
objects.
Objectives of the Test
The objectives of this test are:
1. To work with the trade community to further compliance in the
value area regarding related party transactions.
2. To allow companies intending to make Internal Revenue Service
Section 482 adjustments, which may ultimately result in an upward
adjustment to the price for merchandise, the opportunity
[[Page 35108]]
to reconcile their business operations regarding U.S. Customs and
Internal Revenue Service requirements applicable to related party
transactions.
3. To determine if reconciliation is a viable method to ensure a
coordinated and consistent Customs response to Internal Revenue Section
482 adjustments which result in the upward adjustment of the Customs
valuation under Section 1059A.
5. To test the type of information needed by Customs to process a
reconciliation.
Test Evaluation Criteria
The criteria which will be used to evaluate whether or not
reconciliation is a viable means to allow importers which make upward
adjustments to the price of imported merchandise will be based on
measurable outcomes which include:
1. The number of participants;
2. Customs resources expended to administer and monitor the
program;
3. Customs resources expended to verify final reconciliation entry
claims and the methodologies applied;
4. Amount of additional revenue collected;
5. Survey of participants on the conduct of the test and its affect
on their business operations; and
6. IRS and Census satisfaction with the results of the test.
Dated: June 28, 1995.
Karen J. Hiatt,
Acting Assistant Commissioner, Office of Strategic Trade.
[FR Doc. 95-16406 Filed 7-3-95; 8:45 am]
BILLING CODE 4820-02-P
