Source: http://itctradelaw.com/articles/buying-agency-part1.html
Timestamp: 2019-04-26 16:39:12+00:00

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From time to time I have learned that it makes sense to revisit topics that have not been directly addressed for some time. I cannot flatter myself by thinking that a discussion from, say, ten years ago will still be fresh for most or, even many, readers. With the passage of time, there will be a corresponding need to lay out some of the principles again in an updated presentation.
So it is with buying agency, a topic that I last addressed directly in July 2008.1 The use of intermediary parties for sourcing can be as compelling today as it was then. Despite the migration to a Limited Risk Distributor model, often driven by income tax and transfer pricing considerations, the buying agency structure remains a valid business strategy. The subject is especially topical since we discussed the sale vs. agency split in last month’s article.
In this first part, we shall discuss buying agents in a more general way. In part 2, we shall discuss buying agents’ activities in the context of specific activities and especially as they involve the providing of dutiable assists.
Determining the customs value of imported goods is accomplished pursuant to the WTO Valuation Agreement.2 The WTO Valuation Agreement has been in force and effect for nearly 40 years, and over 160 countries have adopted and applied its principles. In fact, the implementing statutes on customs valuation law and the administrative application of those statutes must be presumed to fully adhere to the WTO Valuation Agreement.3 As a result, in any discussion arising from the application of the customs valuation laws in any given country we may profitably refer to the WTO Valuation Agreement and interpretative instruments published by the Technical Committee on Customs Valuation of the World Customs Organization (TCCV) with the assurance that they prescribe controlling authority in the case of the former and, while not dispositive in all jurisdictions, they provide valuable guidance in the case of the latter source.
In similar fashion, while not controlling, interpretations by other customs authorities of their domestic customs valuation statutes which are also faithful to the WTO Valuation Agreement may provide useful guidance. A primary source of normally well-reasoned and sound administrative interpretation of customs valuation law precepts is to be found on the website of US Customs and Border Protection (“CBP”). It is well-known that both private sector traders and customs authorities in other jurisdictions often refer for guidance to the rulings and other publications that are promulgated by CBP, even though they may not overtly cite such rulings as authority.
The normal starting point for determining the PAPP is the commercial invoice for the sales transaction in question. In its turn, the customs valuation statutes require the parties to look beyond the commercial invoice, specifying adjustments to take into account several categories of payments or services that may be missing from the commercial invoice but that are deemed inextricably a part of the PAPP.7 If such payments or services are missing they must be added to the invoice price in order to make dutiable value or customs value.
A percentage of the resale proceeds being shared with the foreign seller.
With that general background it is important to set forth the customs valuation law principles which pertain to the involvement of buying agents.
fees paid by an importer to the importer’s agent for the service of representing the importer abroad in the purchase of the goods being valued.
The agent (also referred to as an “intermediary”) is a person who buys or sells goods, possibly in his own name, but always for the account of a principal. He participates in the conclusion of a contract of sale, representing either the seller or the buyer.
9. A buying agent is a person who acts for the account of a buyer, rendering him services in connection with finding suppliers, informing the seller of the desires of the importer, collecting samples, inspecting goods and, in some cases, arranging the insurance, transport, storage and delivery of the goods.
10. The buying agent’s remuneration which is usually termed “buying commission” is paid by the importer, apart from the payment for the goods.
You will note that even in 1982, there was a recognition that a buying agent’s role was somewhat open-ended, rendering many and various services to the buyer.11 In fact, at para. 15 of EN 2.1 the TCCV noted that what was decisive in ascertaining the role of a buying agent was the role played by the intermediary and not on the term (“agent” or “broker”) by which he is known.
The TCCV revisited the subject of buying agents generally in 1990, issuing Commentary 17.1. This instrument focused on the status of the buying agent himself as well as the status of the commissions paid to that agent. The TCCV expressly used the term “totality of the circumstances” to describe the standard for the customs authority review of buying agent status. As will be shown, this standard is identical to that employed by the United States and Canada in their review of all the relevant facts and circumstances in determining an intermediate party’s role.
The obvious point here is that, since buying commissions are nondutiable, some amounts paid to the agent that are termed commissions, or which are subsumed within a commission payment, might in fact be dutiable. That would be the case if that embedded portion of the commission payment is, in fact, for other services that would be inconsistent with agent status and which should be properly dutiable. The Commentary cited (at para. 15) the example of an agent who not merely arranged for transportation from the factory to the port or place of exportation but actually provided that transportation himself. The cost of the inland transportation service in the foreign country is typically a part of the PAPP and, by including the charge within the commission, duty would not be paid on that portion which is bundled within the commission charge. In that instrument, the TCCV noted that the charges typically associated with a buying agent services remained intact and nondutiable, because an apportionment might be done so as to capture duty only on that transport charge.
Indeed, it is important to note what the TCCV did not say. Notably, the TCCV did not state that any service provided by or payment made to a buying agent that appeared to go beyond an agent’s role would disqualify the buying agent status, with the result that the entire buying agent commission would become dutiable. Of course the point that we had first made, i.e., that the range of activities of buying agents has always been quite broad, must be the starting point in any inquiry into this subject. Secondly, as stated above, the TCCV did not state that it was necessary or even appropriate to deduct any portion of the buying agent’s commission associated with the transport charge that went beyond the actual cost of the dutiable transport service.
We must also recognize that the TCCV was dealing with charges included within a commission. The TCCV stated that the customs authority had the right to examine the commission payment to determine if any portion of that commission payment was identifiable as a dutiable charge. The example given of a dutiable charge embedded within the commission payment was of a charge for transportation services provided by the intermediary, which clearly had PAPP implications. But we will show below that the agent’s role is much broader today than 25 years ago when this Commentary was issued, with the result that many if not most of those services are nondutiable.
The US Customs and Border Protection (CBP) has issued many dozens of rulings over the course of some 40 years and there have also been several US court cases on the subject of buying agents and question of the dutiability of commissions paid to them. We may learn from some of these earlier discussions by the US authorities.
The first point to learn is that the US view on buying agents is fully consistent with the views expressed by the TCCV in the cited instruments. One of the striking features of that body of US law is that CBP will look for a written buying agency agreement setting forth the rights and responsibilities of the parties, and another is that CBP will examine whether the parties have been acting in conformity with that agreement. In all events, CBP will apply a “totality of the circumstances” standard in its review. It may be helpful to note here that CBP rulings on any and all customs valuation issues are centrally and exclusively promulgated by a specially-charged branch within CBP Headquarters in Washington, DC. There is no possibility of any such rulings being issued by CBP officials at the ports of entry who may not possess the requisite level of experience in this substantive area.
We submit that the US jurisprudence in this area is faithful to the WTO Valuation Agreement precepts and as such is entirely congruent with other countries’ perspectives on customs valuation law principles to the extent that the latter, too, follow those WTO principles. Under the US customs jurisprudence, fully as much as that which obtains at the international level, i.e., at the WCO’s TCCV deliberations, the overriding characteristic marking a buying agent status is that the intermediate party is acting under the direction and control of the buyer/principal, essentially acting on behalf of the latter.12 If that is not the case, then the intermediate party will be seen as acting for the seller (selling agent role) or as acting for its own interests, i.e., it is an independent buyer and re-seller.
[T]he services TSSL will perform under the third scenario merely involve placing a purchase order with the foreign vendor, taking title to the goods, assuming risk of loss, and making payment to the vendor. Even though TSSL will be performing these services under the direction and control of Target, without more, they are not typical services provided by a buying agent. Instead, they indicate that the parties are performing as buyer and seller.
CBP noted that typical buying agent services (such as finding foreign vendors and arranging delivery terms) were missing. This logic is entirely consistent with that of the TCCV’s Commentary 17.1. Both cases dealt with a single form of payment to the buying agent, i.e., in the nature of commissions. In the case of the Commentary 17.1 example of the agent paid a commission which included an amount for dutiable transport charges, only the transport charges themselves were regarded as outside the role of a buying agent and were dutiable. In the case of the US ruling, there were none of the activities of the agent that are considered typical of an agent and, consequently, buying agent status was denied and the entire payment was dutiable. It is important to note at this juncture that the widened recitation of services that are typical for an intermediate party acting as a buying agent is discussed at length below.
While the US published administrative rulings on customs valuation are unique, other jurisdictions such as Canada do offer administrative guidance which is helpful for this discussion.
In the case of Canada, we do not have a body of published administrative rulings but we do have one instructive pronouncement from among the Canadian “D Memos” on buying agency. Memorandum D13-4-12 on Commissions and Brokerage, issued in 2008, closely follows Explanatory Note 2.1 and we find there (at para. 12) a discussion that is consistent with the US and the TCCV authorities.
(b) an element of the price paid or payable as required by subsection 45(1) of the Act [corresponding to Article 8 of the Valuation Agreement].
This discussion should not proceed without a thorough understanding of companies’ use of intermediate parties, and particularly the expanded role of those parties.
Over the course of the past several decades, many importers have made use of separate companies, both related and unrelated to them, in their purchase of imported foreign-made goods. At the same time, those same and many other companies have also made use of separate companies for assistance in their export sales of finished products. In both instances, these separate companies are “intermediate parties” in the sense that they are interposed between the importing buyer and a vendor (in the case of a “buying agent” or between the exporting seller and its customers (in the case of a selling agent).
This practice of employing intermediate parties in the international sourcing of products is part of a wider trend away from a commitment to an older industrial model of a single commercial enterprise “doing it all,” in the sense that the company will be operating as a fully self-contained, fully-integrated company. In that older model, the company would itself perform most or all of the myriad functions from initial design to final delivery of its products to its customers--design the goods, own the intellectual property, manufacture the goods, market the goods, sell the goods, transport the goods, etc.
Under the newer, more streamlined model, the company will allocate various functions to separate companies, among both related and unrelated companies. This “outsourcing” of functions is accompanied by many “build vs. buy” decisions, in which the company will decide whether it is more efficient and cost-effective to perform a specific function itself (“build”) vs. purchasing it from another party (“buy”). As noted, that other party might be related to the first company, the newly created company having been established so that it could have a narrow focus on providing that product or services. A classic example would be automobile manufacturers who set up separate affiliates to make auto parts.
All of these models have been evolving over the decades, and that evolution of strategy can sometimes be traced as circumstances change and different phases of a company’s maturity are reached. For instance, companies will often initially make use of (i) an unrelated company to act as a buying agent for assistance in the purchasing of parts, raw materials or finished products or (ii) another unrelated company to act as a selling agent or as a buy/re-sell distributor for the distribution and sale of finished products in a given market. As experience is gained, and volumes have increased or as the business matures and a target market share has been achieved, the company may move to the use of a related company that is set up to specifically to take over that product sourcing or that sales function.
This evolution is not limited to the structural change of a company’s business model from an unrelated company to a related company, or vice-versa. In fact, the functions themselves that are assigned to, or performed by, these outside service providers have been evolving over time. For example, the role of a distributor or selling agent now demands greater expertise in marketing and more sophisticated product forecasting than ever before. For another example, the exploitation of the market is not simply about selling more of today’s product—anticipation of future trends in the market so that tomorrow’s product may be developed is a major task for the distributor or the selling agent.
Of direct relevance to this inquiry, we find that, in exactly the same fashion, the role of a buying agent has been evolving over time. A wider range of services—and in some instances a much wider range of services--than simply finding a potential vendor and assisting in the purchase is required of a buying agent.
It is vital to understand that the buying agent’s responsibilities today may be, and often are, far greater than the already broad reach of responsibilities undertaken in, say, 1980 or 1990. The valid business reasons for this development are usually greater centralization, increased efficiency and lowered costs.
We also note, parenthetically, that with these expanded services, the buying agent is often required to make an initial outlay of the agent’s own funds and look to a subsequent reimbursement by the buyer/principal for those incurred expenses.
[The importer] pays the parent company a monthly management fee based on its portion of the parent company’s orders. The parent company provides the following services: marketing, financing, IT, which combines the orders for both companies into their ERP system, production planning, production management, quality control, and purchasing of raw materials. Protestant further states that the parent company has a long-term relationship with sourcing agents who determine acceptable manufacturers. Protestant provided an e-mail from the parent company’s controller, dated October 23, 2012, which states that the amount it charges Protestant is its proportion of purchase and procurement of raw materials, production planning, production management and quality control, which is “usually around 8%.” Protestant also provided a letter from the parent company’s Head of Accounting, dated February 4, 2014, outlining its management functions. The letter identified the specific services and stated that the services are performed by the Material Management Team, Production Planning Team and the Product Management Team. The Material Management Team plans raw material purchases with the materials and garment manufacturers to make an appropriate decision based on their production needs. After the materials and garments are chosen, the Material Management Team communicates with the raw material vendors on overall quantities based on Protestant’s orders and determines which manufacturers will order from the material vendors. The Production Planning Team places the production orders with the manufacturers for the styles and quantities of the different divisions, based on all of the subsidiaries’ orders, and also communicates order confirmations and other production timing and shipping issues between the manufacturer and subsidiaries. Lastly, the Production Management Team is responsible for quality control, which consists of periodic spot checks at the factory, and ensures timely delivery. The letter reiterates that the Production Management Team does not send a technical design manager to monitor production and is not involved in manufacturing, design, and development.
[W]e find that the services provided by the parent company are similar to services generally provided by a buying agent. The following services included in the management fee paid to the parent company are not dutiable: marketing, financing, IT services, quality control, purchasing raw material, placing orders and negotiating with vendors, production planning, production management, and shipping arrangements. Therefore, the management fees paid by Protestant to the parent company need not be included in the price actually paid or payable to determine the transaction value of the imported merchandise.
We emphasize that buying agent status was found even in the absence of an expressly claimed “buying agent” role for these management services.
Having established that the range of buying agent services encompasses a wide array of activities, we will turn to the substantive question of the amount of a buying agent commission that is to be accorded commission status and, later, the role of buying agents in the furnishing of dutiable assists.
1. Neville, “Offshore Buying Agents: Customs and Tax Considerations,” 18 JOIT (July 2008) at 12.
3. In the United States, the legislation is in the Tariff Act of 1930, codified at 19 USC § 1401a. In the case of the European Union, that role is played by Union Customs Code (UCC), Regulation (EU) No. 952/2013, Arts. 69-76.
4. In the US, this is set forth at 19 USC § 1401a (a) (1); in the EU, this is set forth at Articles 70 and 74 of the UCC.
5. 19 USC § 1401 (b), Art. 70.1 of the UCC. The WTO Valuation Agreement analogue is at Art. 1.
6. 19 USC §§ 1401a (b) (1) and (h). Art.71 of UCC. The WTO Valuation Agreement analogue is at Art. 8.
7. 19 USC 1401a (b), Art. 71.1 of UCC.
8. 19 USC 1401a (b) (1), Art. 71.3 of UCC. The WTO Valuation Agreement analogue is Art. 8.4.
9. The WTO Valuation Agreement analogue is Art. 8.4.
10. Art. 72 (e). To be sure, the UCC posits that selling commissions and brokerage are adjustments to the PAPP. Art. 71.1 (a) (i).
11. Over time these various services, taken together, have come to be referred to under the heading “sourcing”.
12. This is under classic agency law principles. See, e.g., Pier 1 Imports, Inc. v. United States, 13 CIT 161 (1989).
13. Ruling no. H098419 (Oct. 26, 2010).
14. See, e.g., ruling nos. 548380 (10/23/03) and 546820 (9/28/02).
15. For references to these buying agent services in US administrative rulings, see, e.g., ruling nos. 546341 (Nov. 12, 1996), 547117 (Aug. 31, 1998), 547286 (Mar. 8., 2000), 548002 (June 13, 2002), W548568 (Oct. 19, 2004), H148196 (Mar. 28, 2011), H353767 (Mar. 30, 2015).
16. Parenthetically, we note that the commission rates paid to buying agents who are obligated to perform this broader array of value-added services for their principal may be much higher than a commission rate for a narrower range of such services. These rates have been the subject of much review by both income tax and customs authorities, with many significant commission rates being fully justified on the strength of the functions performed.

References: § 1401
 § 1401
 § 1401
 Art. 70
 Art. 1
 Art.71
 Art. 8
 Art. 71
 Art. 71
 Art. 8
 Art. 8
 Art. 72
 Art. 71
 v.