A recent opinion (March 1, 2021) from the International Trade Tribunal (“CIT”), Meyer Corp. v. United States,1has potentially broad implications for global supply chains, as it challenges the use of the “first sale” rule with respect to “related party” transactions involving non-market economies such as China or Vietnam.
Meyer’s importer purchased Chinese-origin cookware and Thai-origin cookware, including components of Chinese origin. Both sales channels involved an associated intermediary in Thailand, although a second intermediary in China was also sometimes involved. One of the issues in dispute was whether the importer’s calculation of the dutiable value could legally use the “transaction value” price that a related intermediary paid to a related manufacturer, even though both were located in Thailand (ie the “first sale” price).
The court in Meyer suggests that US customs law might prohibit importers from basing the declared assessed value on the “transaction value” of the goods, if the sale to an intermediary is between related parties and the goods were either:
- Produced in a country without a market economy like China and Vietnam;
- Produced in a market economy country like Thailand, but incorporating non-market inputs; or
- Bought or sold by a non-economic market entity, regardless of the origin of the goods or the inputs they incorporate.
The language in question is broad and has potentially wide implications for global supply chains: “… This court has doubts as to the extent to which, if any, the” first sale “test … was intended to be applied to transactions involving non – participants or market economy inputs. “2
If subsequently upheld by a higher court for the same reasons expressed by CIT, the ruling could affect many global supply chains, which often involve not only related party transactions, but also inputs, a transformation, suppliers and intermediaries not linked to a market economy Importers may have to re-evaluate either their valuation methodologies or their supply patterns.
Current legal framework for U.S. customs valuation
The method preferred by law to assess the assessed value of imported goods is the “transaction value” method.3 “Transaction value” is defined as “the price actually paid or payable for the good when sold for export to the United States”, plus certain additions listed and less certain deductions required by law. However, an importer may only use the “transaction value” method in certain circumstances. More specifically, the importer should normally be able to show:
(1) that the invoiced transaction used to determine the value of the imported goods was a bona fide sale, that is, in the transaction someone effectively “sold” the imported goods;
(2) If so, this sale of the imported goods – even though it is upstream of a multilevel sales and resale chain – was “intended for export to the United States” (a.k.a. the “first sale” rule);
(3) This “sufficient information” supports the additions and deductions required by law to the prices charged for this sale; and
(4) While the buyer and seller of the imported goods were “related” entities, this “price actually paid or payable” nonetheless reflects arm’s length principles.4
Reframing by Meyer Court of the current legal framework regarding goods that non-market economies could “influence”
With regard to the four main conditions precedent to the application of the “transaction value” method, the Meyer court finally held that the “first” sales at issue in the case:
(1) were in good faith, and
(2) were intended for export to the United States; But
(3) did not have sufficient documentation to refute the existence of any potentially hidden subsidies resulting from China’s non-market economy, and
(4) Did not have prices which the importer could prove to reflect arm’s length principles.5
The Meyer Tribunal’s decision on points (3) and (4) is based on an extensive reading of a sentence in Nissho Iwai Am. Corp. v. United States,6which stipulates that the buyer and the seller must have reached their price “at arm’s length, in the absence of any non-market influence affecting the legitimacy of the sale price”.7 The Meyer court interprets the expression as referring to greater economic forces and apparently considers “the absence of non-market influence on prices” as a required additional element, to be distinguished from the fourth element. CBP and the courts have previously interpreted this fourth element as requiring only that the relationship between the seller and the buyer does not unduly lead one of them to act against its own interest.8
Further, the Meyer tribunal assumed that, since the United States does not yet recognize China as a market economy, an importer of goods either (a) originates in China, (b) incorporates inputs of Chinese origin, or (c) obtained from a China-based intermediary has an “additional burden of demonstrating” that the buyer purchased the goods “at undistorted prices”.9 The court appeared to assume a bias, writing, “the actual input costs of the PRC are suspect, given its status as a non-market economy country.”ten
Because of this alleged distortion, the tribunal concludes that the non-market economy context makes it too difficult to determine whether a related party price truly reflects arm’s length principles. That said, the ruling only examines related party pricing, as the facts of the case did not present any sale between an unrelated buyer and seller. Thus, the tribunal questioned the costs of Chinese inputs because they are “clearly critical” to the “all costs plus benefits test”, which relates only to related party prices.11 Likewise, when the tribunal notes that “the broader concern here is the distorting influence of the market, either as regards the complainant directly or as regards the provision of inputs in general”, it is in the context of the analysis of the possible influence of the parent holding company on its subsidiaries. .12
Importers should take note of the Meyer decision (and any related history) but do not necessarily need to act on it yet, for several reasons.
- First, the decision could be interpreted as limited to the factual circumstances of the case (i.e. the importer failed to provide sufficient documentation in the form of financial statements to show that the parties’ prices linked reflected arm’s length principles). According to this interpretation, the major concluding statements of the Meyer tribunal constitute mere assertion or speculation and do not support the proposition that importers in a like situation can never use “related party” prices or apply the “rule of thumb” first sale “.
- Second, the importer can appeal the decision to the United States Court of Appeals for the Federal Circuit, which could overturn it.
- Third, even if upholding the decision, the higher court could provide a different reasoning, focusing on specific information and documents that were lacking in the present case, rather than suggesting that the dutiable value calculations by the importers might never use the “first sale” rule when tied – transactions between parties involve non-market economies such as China or Vietnam.
1 sheet op. 21-26 (Ct. Int’l Tr. N ° 13-00154, March 1, 2021).
2 Slip Op. To 120.
3 19 USC §§ 1401a (a) (1) (A) and 1401a (b).
4 19 USC § 1401a (b).
5 Slip Op. At 116-20.
6,982 F.2d 505, 509 (Fed. Cir. 1992).
7 Slip Op. At 13 (citing Nissho Iwai, 982 F.2d at 509) (emphasis added).
8 See Slip Op. At 2-3, 106 and 115.
9 Slip Op. At 15-16 and 106.
10 Slip Op. To 117 (emphasis added).
11 Slip Op. At 107 and 117.
12 Slip Op. To 118.