Transaction Value When the Buyer and Seller Are Related
A domestic importer buys industrial pumps from its wholly owned foreign parent. The invoice price is 95,000 USD FOB. The parent also sells the same model to unrelated buyers in the same country at 110,000 USD FOB. The importer pays a 2% royalty to the parent for the right to use the parent's trademark on the pumps it resells domestically. The importer also paid 4,000 USD to an unrelated engineering firm for pre-shipment inspection required by the importer, and 6,000 USD for freight to the port of import. The customs administration challenges the declared value. The broker must determine whether transaction value can be used and, if so, what adjustments apply.
1. Is the relationship between buyer and seller a bar to using transaction value?
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Not automatically. A related-party price may be accepted if the relationship did not influence the price. The test is whether the price is close to the value of identical or similar goods sold to unrelated buyers in the same country at or about the same time. Here the parent sells the same model to unrelated buyers at 110,000 USD FOB, and the related-party price is 95,000 USD, a difference of about 13.6%. That gap is large enough that customs may find the relationship influenced the price and reject transaction value, moving to the sequential fallback methods. The broker should be prepared to demonstrate that the difference is explained by legitimate factors (volume, payment terms, absence of selling expenses) or accept that the declared value will be adjusted upward toward the 110,000 USD comparable.
2. Which of the payments must be added to the price actually paid or payable if transaction value is used?
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Add the 2% trademark royalty only if it is a condition of sale of the imported goods and is not already included in the price; a royalty paid to the seller as a condition of sale is added. Do not add the 4,000 USD inspection fee, because pre-shipment inspection carried out for the buyer's own account is not part of the price and is not a listed addition. Do not add the 6,000 USD freight if the customs value is assessed on a CIF basis - freight and insurance to the port of import are added in a CIF system, so here the 6,000 USD is added. The result: price 95,000 + royalty (2% of 95,000 = 1,900) + freight 6,000 = 102,900 USD, subject to the related-party challenge above.
3. If customs rejects transaction value, what is the order of the fallback methods?
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The order is fixed: transaction value of identical goods, then transaction value of similar goods, then deductive value, then computed value, and finally the fallback method. The methods must be applied in that sequence; the importer may request that deductive and computed value be reversed, but otherwise the order is mandatory. In this case the 110,000 USD sales to unrelated buyers supply the identical-goods comparable, so the second method is likely to set the value before reaching deductive or computed value.