Related-Party Transaction Value: Molds, Royalties, and Commissions
Ravello Tile LLC imports tile from Cerámica del Norte, S.A., in which Ravello holds 40% of the voting stock. The June invoice reads "$180,000, FOB Monterrey." Additional facts from the entry file: Ravello shipped steel molds to the factory free of charge; the molds cost $24,000 and are dedicated to this tile line, whose total expected output is 400,000 pieces, of which this shipment is 100,000. Ravello pays a 3% royalty to an unrelated Italian designer for the tile pattern, and the purchase contract makes the license a condition of sale ($5,400). Ravello pays a 4% buying commission to a Hong Kong buying agent ($7,200) and a 5% selling commission to Cerámica's export agent ($9,000). Packing cost $1,200; ocean freight to Houston $6,000; marine insurance $400; U.S. customs brokerage $1,500.
1. Are Ravello and the seller related, and what must be established before transaction value can be accepted?
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Related. The relationship test looks to ownership of 5% or more of the outstanding voting stock of the buyer or seller, and it runs both directions. Ravello's 40% stake squarely qualifies (19 CFR 152.102(b)).
Consequence. Relatedness does not disqualify transaction value; it triggers a test of whether the relationship influenced the price. The importer must show either:
- Circumstances of sale - the way the sale was conducted shows the price was not influenced by the relationship. Evidence: the price is settled the way unrelated parties would settle it; it covers all costs of production plus a profit consistent with the industry's normal pricing for the same or similar merchandise; the buyer and seller behave at arm's length (negotiation records, comparable sales to unrelated customers).
- Test values - if the circumstances-of-sale showing cannot be made, CBP may test the price against identical or similar merchandise transaction values, or against deductive/computed value.
Practical point. The burden is the importer's, and the file must contain the supporting evidence at the time of entry, not a promise to produce it later. If Cerámica sells identical tile to unrelated U.S. buyers at a materially higher price, the entry is exposed.
2. Compute the entered value. State each adjustment and why it is included or excluded.
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Start with price actually paid or payable: $180,000.
| Item | Amount | Treatment |
|---|---|---|
| Molds (assist) | +$6,000 | Included as an assist furnished free of charge. Apportion over total planned production: $24,000 × (100,000 ÷ 400,000) |
| Royalty to designer | +$5,400 | Included - payment is a condition of sale, and it is included even though paid to an unrelated third party |
| Selling commission | +$9,000 | Included - a selling commission is part of the price |
| Packing | +$1,200 | Included - packing costs are added |
| Buying commission | $0 | Excluded - buying commissions are not part of customs value |
| Ocean freight $6,000 + insurance $400 | $0 | Excluded - the price is FOB Monterrey; international movement costs are not part of customs value when the sale is not a delivered-price sale |
| Foreign inland freight to Monterrey | $0 adjustment | Already inside the FOB price; foreign inland freight is not deductible |
| U.S. brokerage $1,500 | $0 | Excluded - a post-importation U.S. cost |
| Proceeds of resale | $0 | None here |
Entered value = $201,600.
The two errors most likely to be made are adding the buying commission (it is excluded, the mirror image of a selling commission) and adding ocean freight to an FOB price.
3. Production is later expanded. What happens to the mold apportionment, and what should the broker do?
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The $6,000 figure was based on an assumption that must be tracked. The assist value is apportioned over the total anticipated production, so if the actual output exceeds 400,000 pieces, the per-unit assist value falls and each entry has overstated value. If production falls short, the reverse.
What to do:
- Build the apportionment into the entry documentation - the production plan, the mold invoice, and the basis for the denominator - so the number can be defended and, if needed, reconciled.
- Consider a reconciliation entry (or an amended summary) for the affected entries, and correct the per-unit figure prospectively for future shipments.
- If the molds had been used before being furnished, their value would be depreciated rather than taken at cost; the same principle applies to any engineering, development, or tooling assist.
- If the price turns out to have been influenced by the relationship once volumes changed, revisit the circumstances-of-sale analysis; the related-party issue and the assist issue are separate, and one can fail without the other.