[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