U.S. Courts Scrutinize Applicability of Transaction Value for Chinese Goods

The U.S. Department of Justice (DOJ) recently challenged the applicability of the “transaction value” for customs purposes under the First Sale Rule (FSR) to imports from China in its April 29, 2021 rebuttal filing in the Imperia Trading, Inc. v United States matter. The case involves the use of the transaction value for FSR claims involving a Chinese manufacturer. The FSR permits importers to use the factory invoice to enter goods when a sale to a middleman takes place before the middleman’s sale to the U.S. importer, among other criteria. However, to apply the FSR, U.S. importers must provide a detailed description of the roles of all parties involved in a multi-tiered transaction and a complete paper trail that shows the structure of such transactions. In sum, the legal standard requires importers to prove that all prices leading to the import transaction constitute viable arm’s length transaction values.
Under U.S. Customs and Border Protection (CBP) rules, the transaction value is the price paid for goods when sold for export to the U.S. The courts have long held that importers must show that all invoice prices constitute viable transaction values and that the manufacturer and middleman are dealing with each other at arm’s length. Further, the prices must be free of any nonmarket influences that affect the legitimacy of the sale price, a standard set in the landmark case of Nissho Iwai American Corp. v. United States. The DOJ stated in its filing that this language also requires importers to establish the absence of any distortive market influences when transacting with China, given its nonmarket economy status.  
The DOJ’s position relies on a 2021 Court of International Trade (CIT) decision in the Meyer Corp. v. United States case, in which the court recognized that China was a nonmarket economy. The court also focused on the language of Nissho Iwai, which, in the past, was applied to transactions between related companies and was widely interpreted to mean the relationship between the companies, not the market conditions in a country. The DOJ now appears to be seeking to graft nonmarket economy regulations in the antidumping and countervailing duty law context to customs valuation law.
Whether the presence of a nonmarket economy could foreclose the possibility of using the transaction value remains an open issue. However, the Meyer decision suggests that a party might be able to establish the absence of a market-distortive influence through “the factors used by entities located [in the non-market economy] to obtain a duty rate other than the country-wide rate established by the U.S. Department of Commerce in antidumping-duty [sic] proceedings involving nonmarket economy participants.” Meyer and Imperia indicate a potentially new obstacle to support an arm’s length price for transaction value, but the legal impact on the FSR is yet to be determined. If the DOJ prevails in this matter, China’s nonmarket status could potentially undermine the use of the transaction value for products sourced from all nonmarket economies as a whole or potentially could result in new requirements for U.S. businesses to support existing cost structures.
U.S. businesses should use reasonable care to evaluate supplier documentation to make sure it effectively supports import values under CBP rules.

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Customs duties, VAT and trade policy present unique challenges that businesses face when conducting regulated cross-border transactions. BDO’s Customs and International Trade Services practice can help businesses navigate the complex rules governing cross-border product movements to minimize duty and tax payments and maximize import and export compliance.
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