Related party imports: what the valuation file should contain

Where the buyer and the seller are related, the price they agree is not automatically accepted as the value for duty. It is examined. The framework sits in the valuation rules Customs Valuation Rules 2007, and the examination is carried out by the Special Valuation Branch.

Businesses receiving their first reference tend to read it as an accusation. It is not. It is a process, and the outcome depends almost entirely on the quality and the timeliness of the file put in front of it.

What is actually being asked

Two questions, and they are separate.

First, has the relationship influenced the price. Relationship alone does not displace the transaction value. What displaces it is a finding that the relationship affected what was charged. Demonstrating that the price is set on the same basis as it would be for an unrelated buyer, and showing the basis, is the core of the reply.

Second, are there additions to be made to the price under the rules. Royalties, licence fees, the value of materials or tooling supplied free or at reduced cost, and any part of the proceeds of resale that accrues to the seller are all capable of being added where the conditions in the rules are met.

The second question is usually the harder one, and it is where most loadings come from.

Royalties are the difficult part

A royalty is added to the price where it is related to the imported goods and is paid as a condition of the sale of those goods. Both limbs have to be met, and the analysis is fact heavy.

The agreement matters, but so does what actually happens. A royalty computed on net sales of a finished product manufactured in India, payable whether or not any component is imported from the licensor, sits differently from one that the supply agreement makes a precondition of shipment. The two limbs are argued from the documents, and the documents have to say what you believe they say. Reading the agreements properly, before the reference rather than after a loading is proposed, is the single most useful thing to do here.

What goes into the file

• The complete set of agreements, including distribution, licence, technical assistance and any side letters, in their current versions.
• The basis on which the price is set, explained in writing, with the internal workings behind it.
• Comparable evidence where it exists: prices to unrelated buyers in the same or a comparable market, or the group's own pricing policy.
• The transfer pricing study, where there is one, with an explanation of what it establishes and what it does not. It is useful evidence and it is not determinative for Customs purposes, and saying so yourself is better than having it said to you.
• A schedule of every payment made to the related seller and to its affiliates, with the basis of each, so that no payment surfaces later as an undisclosed one.
• Product literature and the manufacturing flow, where the imported goods are inputs rather than finished goods.

Why speed matters more here than almost anywhere

While the reference is pending, consignments are typically assessed provisionally. That has three consequences. Bonds and security are running. The finalisation of every one of those assessments is waiting on the outcome. And the longer the reply takes, the more the file reads as reluctance.

A loading accepted or imposed at the end of a slow reference does not stay in that year. It is applied prospectively to every consignment, and it is applied backwards to the provisional assessments waiting to be finalised. The cost compounds in both directions.

The provisional assessments have their own clock

Provisional assessment under the Customs Act is not open ended. A statutory time limit for finalisation has been introduced by recent amendment, with provision for extension. That cuts both ways: it protects importers from indefinite provisional treatment, and it means the department will be working to a date. Confirm the position applicable to your assessments Section 18, Customs Act 1962, as amended.

Renewal and change

An order in a valuation reference is not permanent. It rests on the facts as they were. Where the agreements change, the pricing basis changes, or the relationship changes, that has to be disclosed. A loading carried forward on facts that no longer exist is worth revisiting, and an undisclosed change in facts is the kind of thing that supports an allegation of suppression later.

What to do on receiving a reference

1. Diarise the date for the reply and treat it as a real one.
2. Collect every agreement and every payment stream to the related party before drafting anything.
3. Analyse the royalty against both limbs of the rule, honestly, and decide the position you will hold everywhere.
4. Explain the pricing basis in writing, with the workings, rather than asserting that the price is at arm's length.
5. File once, completely. A file that arrives in instalments invites questions that a complete one does not.
6. Track the provisional assessments so that finalisation follows the order promptly.

A valuation reference answered well in three months is an administrative event. The same reference answered in instalments over two years is a loading, a backlog of provisional assessments, and a premise the department will use in every future examination.