August, 2019
Transaction Value of Identical or Similar Goods
Mark K. Neville, Jr.
One of the points of closest proximity between transfer pricing and customs valuation is the comparable uncontrolled pricing (CUP) method and its customs valuation analogues, the transaction values of identical or of similar merchandise. These latter provisions are set forth in the Valuation Agreement, at Articles 2 and 3, respectively.1
We thought it worthwhile to explore this topic, framed within the customs context.
That hierarchy looks to the transaction value of identical or of similar merchandise as the first alternative bases of appraisement6 where there is no transaction value.7 There is a logic to that approach, of course, if there are contemporaneous qualifying sales of identical or of similar goods which could provide a suitable basis for comparison.
The definitions at work are all important. We find that the definition of “identical goods” looks to merchandise identical in all respects to and produced in the same country and, preferably, by the same person as the merchandise being appraised.8 Minor differences in appearance will not preclude otherwise conforming merchandise from being considered “identical.”9 On the other hand, the standard implicitly recognizes the customs valuation effects of physical characteristics, quality and reputation.10 The Technical Committee on Customs Valuation of the World Customs Organization (“Technical Committee”) has observed that articles bearing different trademarks but in all other ways being the same are not the same in all respects and should not be considered identical.11
In the case of “similar goods,” too, we find a straightforward basis for comparison. In the US definition, the priority is for merchandise which will have been produced in the same country and by the same person, will be “like” the imported merchandise in characteristics and component material and is commercially interchangeable with the imported merchandise. If there is no imported merchandise that can meet that standard, it is relaxed to include imported merchandise produced in the same country but not by the same producer but otherwise meets the other requirements.12 At the international level, the definition looks to goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark are among the factors to be considered in determining whether goods are similar.13
At the same time, merchandise that contains any elements of value such as engineering, artwork or the like that would be considered a dutiable assist but for the fact that it was produced in the country of importation cannot be considered “identical merchandise” or “similar merchandise”14 for these purposes. This is an obvious acknowledgement of the skewing effect of such elements.
Bear in mind that adjustments can only be taken to account for differences in quantity and/or commercial level of the sales. Merchandise being imported under a comparable sales transaction cannot be adjusted to take into account any other differences between the goods themselves. Thus, the no-name vs. well-known trademark distinction might preclude a determination that the merchandise is similar. An analysis of the trademarks’ impact might be in order, as the Technical Committee on Customs Valuation of the World Customs Organization (“Technical Committee”) has implied that a difference in trademarks may or may not affect similar merchandise status
At the same time, the Technical Committee has observed that price itself is not a factor to be taken into consideration in considering whether goods are identical or similar, while noting that a price difference might indicate a difference in quality or reputation, which are such factors. 23
We would have a very low price, offered and available only on a very limited basis, usually in terms of time (“special price only for today”) or the number of eligible buyers (“the first 50 buyers”), which might serve as the basis for an Article 2 or 3 appraisement.
What if this flash sale price were to be applied as the basis of comparison with other import transactions? That is frightening to those jurisdictions which make wholesale use of databases. Readers of these commentaries will know already that I make no apology for the misuse of valuation databases, and I make no such defense here. We can only hope that corrective action will not be long in coming for those violations of the Valuation Agreement.
It is important to close this discussion, however, with a note of limitation. A flash sale price would generally not function as the basis for an Article 2 or 3 appraisement. The Valuation Agreement itself contains several curbs since the commercial practices and market conditions inherent in a flash sale (e.g., price today only! first 50 buyers!) are just that, limited and, well, gone in a proverbial flash.
And when we examine the Valuation Agreement and the Technical Committee instruments, we see that this unique character serves as a curb. The Preamble to the Valuation Agreement invokes the role of commercial practices
While the Technical Committee instruments are generally not invested with the force of the Valuation Agreements, they are authoritative. We bring your attention to the Technical Committee’s view on the context of the time limitation we have already noted
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Transaction Value
In the simplest case, customs valuation is a very straightforward exercise IF there is a sale for export between unrelated parties. In such a case, customs valuation proceeds without hindrance down a very smooth and level pathway to transaction value, which is based on the invoice price for the imported goods, even if adjusted by the addition of certain elements of value which might not have been captured in the invoice price or the subtraction of certain nondutiable elements which are included in the invoice price. Those add-on adjustments to the “price actually paid or payable” include certain royalties, dutiable assists provided to the foreign manufacturer and three other categories of payments, while the provision for allowable deductions foresees, inter alia, the backing out of international transportation and insurance costs from a price for the imported goods in those jurisdictions such as the US and Canada which assign nondutiable status to them.2Lease transaction
But the foregoing approach looks to a sale for export. For purposes of this discussion, let us forget about those adjustments to a sale price for this purpose.3 Instead, let us suppose that the transaction under inquiry is not a sale for export but is a lease transaction.4 That will eliminate a straightforward transaction value appraisement. Now what?Alternative Bases of Appraisement
The customs valuation agreement anticipates that there will be transactions which will not qualify for a transaction value appraisement and, instead, the importer will need to move to an alternative basis of appraisement in the strict hierarchy that comprises the customs valuation rubric.5That hierarchy looks to the transaction value of identical or of similar merchandise as the first alternative bases of appraisement6 where there is no transaction value.7 There is a logic to that approach, of course, if there are contemporaneous qualifying sales of identical or of similar goods which could provide a suitable basis for comparison.
The definitions at work are all important. We find that the definition of “identical goods” looks to merchandise identical in all respects to and produced in the same country and, preferably, by the same person as the merchandise being appraised.8 Minor differences in appearance will not preclude otherwise conforming merchandise from being considered “identical.”9 On the other hand, the standard implicitly recognizes the customs valuation effects of physical characteristics, quality and reputation.10 The Technical Committee on Customs Valuation of the World Customs Organization (“Technical Committee”) has observed that articles bearing different trademarks but in all other ways being the same are not the same in all respects and should not be considered identical.11
In the case of “similar goods,” too, we find a straightforward basis for comparison. In the US definition, the priority is for merchandise which will have been produced in the same country and by the same person, will be “like” the imported merchandise in characteristics and component material and is commercially interchangeable with the imported merchandise. If there is no imported merchandise that can meet that standard, it is relaxed to include imported merchandise produced in the same country but not by the same producer but otherwise meets the other requirements.12 At the international level, the definition looks to goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark are among the factors to be considered in determining whether goods are similar.13
At the same time, merchandise that contains any elements of value such as engineering, artwork or the like that would be considered a dutiable assist but for the fact that it was produced in the country of importation cannot be considered “identical merchandise” or “similar merchandise”14 for these purposes. This is an obvious acknowledgement of the skewing effect of such elements.
Apples-to-Apples Comparison
The statute looks to a proper basis of comparison. Even if there is an absence of potentially disqualifying factors, such as a “no-name” consumer product to be compared with a well-known trademarked product, the two transactions should be at the same commercial level and in substantially the same quantity.15 If there are no such sales, then adjustments can be made to take into account differences in commercial level or quantity if they can be demonstrated to be reasonable and accurate. The Valuation Agreement (Art. 2.1 (b) and 3.1 (b)) requires that any adjustments must be made “on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustment, whether the adjustment leads to an increase or a decrease in the value.”16Bear in mind that adjustments can only be taken to account for differences in quantity and/or commercial level of the sales. Merchandise being imported under a comparable sales transaction cannot be adjusted to take into account any other differences between the goods themselves. Thus, the no-name vs. well-known trademark distinction might preclude a determination that the merchandise is similar. An analysis of the trademarks’ impact might be in order, as the Technical Committee on Customs Valuation of the World Customs Organization (“Technical Committee”) has implied that a difference in trademarks may or may not affect similar merchandise status
Although not alike in all respects, the [imported goods] do have like characteristics and component materials which enable them to perform the same functions. As the goods are made to the same standard, are of the same quality, have equivalent reputations and carry trademarks, they should be considered similar, even though the trademarks are different.17
This task of reviewing component materials, standards and reputation may be outside the purview of the customs authority and suggests the prudence of the Technical Committee’s guidanceIn those instances in which Articles 2 or 3 are applied, there may have to be consultations between Customs and the importer with a view to arriving at a value under one of those Articles. 18
Apart from a comparison of the merchandise, there is also a time constraint.Chronological Constraint
An important feature of this protocol is the limitation on timing. The Valuation Agreement and the US and other implementing statutes maks this quite clear, with the definitions of identical or similar merchandise based on imported merchandise that is exported at or about the same time that the merchandise being appraised is exported. 19 In the case of fresh produce, CBP took the view that there should be a priority given to goods being exported on the same day as the goods under review. Failing that, goods exported within a week prior or a week after were deemed acceptable bases for comparison. The Court of International Trade gave deference to this reasoning. 20Lowest Comparable Price
Importantly, there is an explicit bias in favor of the importer if there appear to be two or more transaction values for identical or for similar merchandise, with the US customs regulations providing that the merchandise will be appraised on the basis of the lower or lowest of those values. 21 While on the subject of low prices, the Technical Committee has observed that the mere fact that a price is lower than prevailing market prices for identical goods should not cause it to be rejected for the purposes of an Article 1 transaction value appraisement. 22At the same time, the Technical Committee has observed that price itself is not a factor to be taken into consideration in considering whether goods are identical or similar, while noting that a price difference might indicate a difference in quality or reputation, which are such factors. 23
Reference Pricing, Flash Sales and Articles 2 and 3
Of course these considerations have not stopped the widespread use of reference pricing through a resort to customs valuation databases. 24 For those jurisdictions which tend to disregard transaction value appraisements and, instead, employ valuation databases or otherwise make general use of transaction value of identical or similar merchandise, a valid transaction value based on the low price available in a “flash sale” is a threatening proposition. 25We would have a very low price, offered and available only on a very limited basis, usually in terms of time (“special price only for today”) or the number of eligible buyers (“the first 50 buyers”), which might serve as the basis for an Article 2 or 3 appraisement.
What if this flash sale price were to be applied as the basis of comparison with other import transactions? That is frightening to those jurisdictions which make wholesale use of databases. Readers of these commentaries will know already that I make no apology for the misuse of valuation databases, and I make no such defense here. We can only hope that corrective action will not be long in coming for those violations of the Valuation Agreement.
It is important to close this discussion, however, with a note of limitation. A flash sale price would generally not function as the basis for an Article 2 or 3 appraisement. The Valuation Agreement itself contains several curbs since the commercial practices and market conditions inherent in a flash sale (e.g., price today only! first 50 buyers!) are just that, limited and, well, gone in a proverbial flash.
And when we examine the Valuation Agreement and the Technical Committee instruments, we see that this unique character serves as a curb. The Preamble to the Valuation Agreement invokes the role of commercial practices
Recognizing that customs value should be based on simple and equitable criteria consistent with commercial practices and the valuation procedures should be of general application without distinction between sources of supply;
Beyond that, as we have seen, the Valuation Agreement places a time limit on Art. 2 or Art. 3 appraisements—exported at or about the same time.While the Technical Committee instruments are generally not invested with the force of the Valuation Agreements, they are authoritative. We bring your attention to the Technical Committee’s view on the context of the time limitation we have already noted
…”at or about the same time” should be taken to cover a period of time, as close to the date of exportation as possible, within commercial practices and market conditions which affect price remain the same. 26
In Commentary 1.1, the Technical Committee also sounded a cautionary note…The questions that might arise in making such determinations [whether there is a valid basis for an Art. 2 or Art. 3 appraisement] will vary because of the goods being compared and because of differences in market conditions…27
With these constraints there should be little or no risk of flash sale prices functioning as the basis for a customs valuation of other imported merchandise based on the transaction value of identical or similar merchandise. Advisory Opinion 23.1 which was adopted by the Technical Committee at the May, 2019 Session is consistent with these limitations....................................................................................................................
1. Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (“Valuation Agreement”).
2. Of course in those many customs jurisdictions which include international freight and insurance in customs value, per Art. 8.2 of the Valuation Agreement, it would be necessary to adjust an invoice price if the sales term did not already include such elements. Examples would be an ex works price or an FOB price.
3. For an extended introductory discussion of the customs valuation process, see Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, chapter 5.
4. Of course, a related party sale will not automatically qualify for a transaction value appraisement, as the price must be shown not to have been influenced by the relationship. Valuation Agreement, Art. 1.2 (b), 19 USC §1401a (b) (2) (B). Further, if there is a sale but there are elements of value that cannot be quantified, transaction value will not lie. See, e.g., ruling no. 547738 (11/13/01) (insufficient information to value assists).
5. Valuation Agreement; 19 USC § 1401a (a) (1). The only deviation allowed is for computed value to be used as an alternative before deductive value.
6. Valuation Agreement, Arts. 2 and 3; 19 USC § 1401a (c).
7. For example, if there are dutiable assists but they cannot be quantified, then the imported goods cannot be appraised on the basis of transaction value and an alternative basis of appraisement is necessary. CBP will look to appraisement on the basis of the transaction value of identical or similar merchandise. See ruling no. 547738 (Nov. 13, 2001).
8. 19 USC § 1401a (h) (2).
9. 19 CFR § 152. 102 (d) and (i), 19 CFR § 152.104 (b).
10. Valuation Agreement, Art. 15.2 (a).
11. Commentary 1, para. 7, Example 5.
12. 19 USC § 1401a (h) (4).
13. Valuation Agreement, Art. 15.2 (b).
14. 19 USC §§ 1401a (h) (2) and (4), 19 CFR §§ 152.102 (d) and (i); Valuation Agreement, Art. 15.2 (c).
15. Not surprisingly, the US customs regulations provide for the same bases of comparison.
16. This finds expression in the US statute at 19 USC 1401a (c) (2) (“Any adjustment made under this paragraph shall be based on sufficient information.”).
17. Commentary 1, para. 7, Example 5.
18. Commentary 1.1, para. 5.
19. Valuation Agreement, Arts. 2.1 (a) and 3.1 (a), 19 USC § 1401a (c) (1) (B).
20. Four Seasons Produce v. United States, 24 ITRD 1022 (CIT 2001).
21. Valuation Agreement, Art. 2.3 and 3.3; 19 USC § 152.104 (d). This practice was approved by the CIT in Four Seasons Produce which noted that if there were several transaction values provided for the merchandise being appraised the exact or closest date of exportation, the lowest value for that date should be utilized. See also ruling nos. 546217 (4/8/98) and 546999 (4/12/99) and 547168 (4/12/99).
22. Advisory Opinion 2.1.
23. Commentary 1.1, para. 7, Example 2.
24. See Neville, Reference Pricing, A Disturbing Trend in Customs Valuation, 25 JOIT at 21 (Dec. 2014).
25. The subject of flash sales was discussed at length in Neville, The Customs Valuation Status of Flash Sales, 29 JOIT at 31 (Feb. 2018)
26. Explanatory Note 1.1, para. 12.
27. Commentary 1.1, para. 6.
2. Of course in those many customs jurisdictions which include international freight and insurance in customs value, per Art. 8.2 of the Valuation Agreement, it would be necessary to adjust an invoice price if the sales term did not already include such elements. Examples would be an ex works price or an FOB price.
3. For an extended introductory discussion of the customs valuation process, see Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, chapter 5.
4. Of course, a related party sale will not automatically qualify for a transaction value appraisement, as the price must be shown not to have been influenced by the relationship. Valuation Agreement, Art. 1.2 (b), 19 USC §1401a (b) (2) (B). Further, if there is a sale but there are elements of value that cannot be quantified, transaction value will not lie. See, e.g., ruling no. 547738 (11/13/01) (insufficient information to value assists).
5. Valuation Agreement; 19 USC § 1401a (a) (1). The only deviation allowed is for computed value to be used as an alternative before deductive value.
6. Valuation Agreement, Arts. 2 and 3; 19 USC § 1401a (c).
7. For example, if there are dutiable assists but they cannot be quantified, then the imported goods cannot be appraised on the basis of transaction value and an alternative basis of appraisement is necessary. CBP will look to appraisement on the basis of the transaction value of identical or similar merchandise. See ruling no. 547738 (Nov. 13, 2001).
8. 19 USC § 1401a (h) (2).
9. 19 CFR § 152. 102 (d) and (i), 19 CFR § 152.104 (b).
10. Valuation Agreement, Art. 15.2 (a).
11. Commentary 1, para. 7, Example 5.
12. 19 USC § 1401a (h) (4).
13. Valuation Agreement, Art. 15.2 (b).
14. 19 USC §§ 1401a (h) (2) and (4), 19 CFR §§ 152.102 (d) and (i); Valuation Agreement, Art. 15.2 (c).
15. Not surprisingly, the US customs regulations provide for the same bases of comparison.
16. This finds expression in the US statute at 19 USC 1401a (c) (2) (“Any adjustment made under this paragraph shall be based on sufficient information.”).
17. Commentary 1, para. 7, Example 5.
18. Commentary 1.1, para. 5.
19. Valuation Agreement, Arts. 2.1 (a) and 3.1 (a), 19 USC § 1401a (c) (1) (B).
20. Four Seasons Produce v. United States, 24 ITRD 1022 (CIT 2001).
21. Valuation Agreement, Art. 2.3 and 3.3; 19 USC § 152.104 (d). This practice was approved by the CIT in Four Seasons Produce which noted that if there were several transaction values provided for the merchandise being appraised the exact or closest date of exportation, the lowest value for that date should be utilized. See also ruling nos. 546217 (4/8/98) and 546999 (4/12/99) and 547168 (4/12/99).
22. Advisory Opinion 2.1.
23. Commentary 1.1, para. 7, Example 2.
24. See Neville, Reference Pricing, A Disturbing Trend in Customs Valuation, 25 JOIT at 21 (Dec. 2014).
25. The subject of flash sales was discussed at length in Neville, The Customs Valuation Status of Flash Sales, 29 JOIT at 31 (Feb. 2018)
26. Explanatory Note 1.1, para. 12.
27. Commentary 1.1, para. 6.
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.