Source: http://itctradelaw.com/articles/buying-agency-part2.html
Timestamp: 2019-04-26 16:39:59+00:00

Document:
In last month’s discussion we presented the basic customs valuation law status of buying agent services and compensation therefor. With this discussion we turn first to the amount of such commissions which should be accorded duty-free status. We then turn our attention to the role of buying agents as that role intersects with services provided and activities undertaken that might be regarded as dutiable assists furnished to foreign manufacturers.
As previously noted, Art. 72 (e) of the EU’s Union Customs Code (UCC) directs that buying commissions are not dutiable. In other customs valuation law statutes, such as in the US, that point is implied, as only selling agent commissions are deemed dutiable.
As we have seen, buying commissions are defined in the Valuation Agreement, with which the UCC and all other implementing statutes must be consistent, as “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.” This does not allow for any disallowance of any portion of the commission payment unless the disallowed amount itself is nondutiable, as in the example of the transport charges discussed in the World Customs Organization’s Technical Committee on Customs Valuation (TCCV) Commentary 17.1. In fact, this is the lesson of Commentary 17.1: the buying agency status remains undisturbed and only the costs directly identified with the additional dutiable services would be reviewed for dutiability.
In order to be a buying agent, the entity must be neither a seller in its own right nor an agent acting on behalf of, i.e., under the direction and control of, the foreign seller. The only compensation paid for those services must be in the form a nondutiable buying agent commission.
There is no authority for a customs office to accord nondutiable status only to the portion of the commission payment that reflects the agent’s cost, or to shift some or all of the agent’s “profit” into a dutiable category, whether as a part of the PAPP or as a dutiable adjustment.
In connection with inspection services, we note that they will be nondutiable if they are to ensure that the quality and condition of the merchandise corresponds to the contract specifications. In contrast, in ruling no. 545038 (Feb. 17, 1993), US customs authorities held the relationship between the importer and the agent did not meet the criteria of a bona fide buying agency relationship. In that case, the importer stated that the agent’s inspection function was substantially more comprehensive than usual where the agent monitored production throughout the entire production process, and not just upon completion of production.
The fact that the consultant acts both as "consultant" with respect to woven fabric sourcing, for a flat fee, and as a "buying agent" with respect to knit garment sourcing, for an amount based on the FOB value, does not per se vitiate the existence of a bona fide buying agency between the importer and the consultant for the services performed as a consultant. Our ruling is limited to the questions regarding the inclusion of the consultant fees in the price actually paid or payable and whether they constitute assists to be included in the transaction value.
While the consultant's activities as the importer's consultant are separate and distinct from his function as a principal of the buying agent and the terms of the consulting agreement between the importer and the consultant are different, the activities performed as the consultant, in connection with woven fabric sourcing, are similar to those performed by a bona fide buying agent.
Because of the limited nature of the consultancy services, they did not arise to the level of a dutiable assist nor, equally of importance, did they affect the buying agency status.
We hasten to add that a buying agent can be called upon to procure a dutiable assist. The fact that a buying agent is entrusted with the task of procuring an assist does not imperil the buying agent status. Indeed, in at least one instance recorded in the US corpus of published customs valuation rulings the procuring of assists was a primary function for the agent. Ruling no. 544396 (May 14, 1990) (commissions to be paid to a foreign agent for the services of aiding in the purchase of fabric to be provided to the Mexican assembler as well as aiding in the purchase of finished garments).
If buying agents are involved in procuring or in delivering assists, then the question arises, how should those assists be valued? More directly, should any of the payments that represent commissions to the agent become dutiable?
It is quite clear from the applicable statutory texts and from authoritative interpretations that dutiable assists are to be valued only on the basis of their cost of acquisition (purchasing price) or cost of production. Stated otherwise, there is no basis for the inclusion of profits in the case of assists produced by the importer or a person related to the importer.
This is made clear both by what the texts state as well as what the texts do not state.
Where a buyer supplies any of the goods or services listed in Article 71(1)(b) of the Code to the seller, the value of those goods and services shall be deemed to be equal to their purchasing price. The purchasing price shall include all the payments which the buyer of the goods or services listed in Article 71(1)(b) is required to make to acquire the goods or services.
Where those goods or services were produced by the buyer or a person related to him, their value shall be the cost of producing them.
It is certainly true that the cost of acquisition or the cost of production should include all associated costs. In other words the same rule of looking to the fully loaded cost should apply to all assists.
The United States authorities may be instructive and should be cited as authority according to their inherent correctness and their power to persuade. In the United States practice, all costs must be accounted for in valuing assists7 and its customs authority has issued a ruling which clearly states that all acquisition costs must be accounted for.
If the importer had to pay a license fee to have access to technology that was used to produce an element that constituted an assist then the license fee should be included in the cost of production of that assist. Ruling no. W548568 (Oct. 19, 2004). This position is entirely consistent with the Commentary 24.1 of the World Customs Organization’s Technical Committee on Customs Valuation (TCCV). That instrument interpreted the cost of acquisition for the elements named in Art. 8.1 (b) (ii) as including all the costs incurred by the importer in respect of acquiring the element. In connection with this instrument, we point out that the analysis should apply consistently on a mutatis mutandis basis to all of the various categories of assists. It was limited to subparagraph (b) (ii) only because it was interpreting the phrase “given cost” which appears therein. The TCCV Case Study 8.1 is to the same effect. The cost of a license fee that was required to be paid for patterns that were used in making garments was to be included in valuing the assist. Likewise, the TCCV Case Study 8.2 included a 5% license fee when valuing the assist.
In this case the costs incurred by the importer's Purchasing Department are costs incurred for activities prior to the acquisition of the material. These expenses are not part of the price that the importer will pay the unrelated seller for the merchandise. Therefore, these expenditures are not includable in the value of the material assists.
It is the position of the Customs Service that buying commissions paid to [a] bona fide buying agent for acquiring merchandise to be imported are not dutiable. Where the agent has the dual role under an agency agreement of procuring assists as well as the finished merchandise, any commissions paid to the agent arising out of the such an agreement will not be dutiable. However, commissions paid to an agent whose sole obligation is to acquire assists for the buyer, are part of the cost of acquiring an assist and will be added to the price actually paid or payable.
In other words, to make use of the language of the EU’s Implementing Regulation, Art. 135, if there is a bona fide buying agency relationship, no portion of the buying agent commission paid to that agent ever becomes part of the purchasing price of the assist.9 An agent’s role can certainly include the sourcing of assists and should play no part in the valuation of the assist. By referring to the recitation of typical buying agent activities that we had shown in the part 1 discussion last month we can test the validity of this proposition.
In the same fashion, we may refer to the criterion of 19 USC §1401a (b) (1) of “sufficient information”10 as well as Art. 71.2 of the UCC, as well as the discussion in the Valuation Agreement at the Interpretative Note subparagraph 8.1 (b) (iv), to “objective and quantifiable data” in fixing the additional costs contemplated under Art. 71 of the UCC.11 This requirement, as well as the formidable, even daunting, fact-finding task of ascertaining relative costs and profits associated with a buying agent’s activities, may be a valid reason for abstaining from the effort. Any such effort is bound to be an arbitrary exercise.
We also note that there is no role for profits in valuing a self-produced assist.
It is undeniably true that valuing an assist on the basis of the its Purchasing Price or “cost of acquisition” differs in one marked respect from a cost of production valuation. That is that the Purchasing Price or the cost of acquisition will invariably include a seller’s profit in the price paid to acquire the assist.
But the term “cost of producing” the good or service perforce invokes any reference to profit. Indeed, the term itself precludes any such profit consideration. It can only be assumed that the use of “cost” as the only valuation metric here was done deliberately. Perhaps the reason for this deliberate drafting was that there was a recognition that to have included a profit element would have demanded an intensive inquiry and would have resulted in announcing a profit that would need to be either assigned by the customs authority in the first instance or, if assigned by the importer, would need to be reviewed and approved by the customs authority. Any such endeavor would be impracticable to the point of bring unrealistic and, thus, would collide with the “objective and quantifiable data” or “sufficient information” standard that applies to all aspects of any customs valuation inquiry.
This approach appears to be correct. If an activity that falls within the definition of a self-produced assist, such as design work, is discerned, then the value of the assist might include the associated salary costs of the buyer or party related to the buyer, on a narrowly defined and closely circumscribed basis of allocation. Again, were it otherwise, then the valuation of self-produced dutiable assists would be skewed or improperly calculated by the simple expedient of supplying them via an entity with buying agent status.
On no account should there be any excursion into profit or any other accounting category outside these associated costs when valuing self-produced assists.
Indeed, it would be a mistake to assume that the inclusion of an element for profit in valuing a dutiable assist on a production cost basis should nevertheless be acceptable. Such a profit-inclusive valuation approach was explicitly rejected in a United States Court of International Trade decision dating to 1996. Merck, Sharp & Dohme v. United States, 20 CIT 137 (1996). There, the importer provided sufficient documentary evidence to show the production cost. As a result the customs authority’s valuation of the cost of production that included a profit element was rejected by the court.
Because the customs valuation legal texts are essentially identical, it is presumed that reviewing customs authorities in other jurisdictions would apply the same careful textual analysis, follow the same logical path and come to the same legal conclusion. In consequence, those customs authorities should similarly refrain from including a profit element in any valuation of assists produced by the buyer or by a person related to the buyer.
The very model of a modern buying agent, if not of a modern major general, is such that wide-ranging functions will be undertaken for the benefit of the principal. Because many agents in these latter days are tasked with assisting in the procurement or deployment of dutiable assists, it was useful to review the customs valuation rules that govern the valuing of assists and the intersection with the rules governing buying agents’ status. We have seen a distinction between the treatment accorded to agents’ undertakings in third party and in self-produced assists.
1. Ruling no. H235895 (Aug. 22, 2014).
2. Ruling no. 544396 (May 14, 1990).
3. Ruling nos. 548540 (Jul. 28, 2004) and 547006 (Apr. 28, 1998).
4. Ruling no. W563326 (Nov. 3, 2006).
5. Ruling no. 548002 (June 13, 2002). See also ruling no. 544876 (Sept. 3, 1993) (Buttons supplied free of charge to manufacturers of wearing apparel in India, through the importer's buying agent and at the importer's expense, are dutiable assists).
6. Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015.
7. Consistent with this “all costs” approach, you will note that the United States always includes the cost of transporting the element comprising the assist to the production site. This is provided for in the customs regulations at 19 CFR §152.103 (d).
8. Ruling no. 544323 (Mar. 8, 1990).
9. These 1994 and 1995 rulings depart from two 1993 rulings which held that commissions for procuring the assists did comprise part of their valuation, ruling nos. 545266 (June 30, 1993) and 544976 (Mar. 17, 1993). We should note that these rulings, both authored by the same Headquarters attorney, mischaracterized the rationale of ruling no. 544323 and thus they are outliers with questionable authority.
10. Defined in the statute as “information that establishes the accuracy of such amount, difference, or adjustment.” 19 USC § 1401a (h) (5) and in the regulations at 19 CFR § 152.102 (j).
11. At the international level, this standard is embedded in Art. 8.3 of the Valuation Agreement, which applies with equal vigor to all of the provisions of Art. 8. This notion of a consistent interpretation of Art. 8.1 (b) across all of its subparagraphs is embedded in TCCV Case Study 5.2.
12. Pursuant to 19 CFR § 152.103(d)(2).
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.

References: Art. 72
 Art. 8
 Art. 135
 §1401
 Art. 71
 Art. 71
 v. 
 §152
 § 1401
 § 152
 Art. 8
 Art. 8
 Art. 8
 § 152