Source: http://itctradelaw.com/articles/buying-agency-part1.html
Timestamp: 2019-04-26 16:39:12
Document Index: 130706166

Matched Legal Cases: ['art 2', 'Art. 8', '§ 1401', '§ 1401', '§ 1401', 'Art. 70', 'Art. 1', '§ 1401', 'Art.71', 'Art. 8', 'Art. 71', 'Art. 71', 'Art. 8', 'Art. 8', 'Art. 72', 'Art. 71']

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.
Customs Valuation Law Principles
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.
Echoing the WTO Valuation Agreement, the domestic legislation will set forth a hierarchy of methods for the appraisement of imported merchandise. 4 The preferred method is transaction value, defined as the price actually paid or payable when the goods are sold for export to the customs territory, adjusted, where necessary (the “PAPP”).5 Parenthetically, we note that these adjustments are in accordance with statutory provisions.6
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.
The terms of the statutes establish five such “statutory additions.” The underlying notion behind the dutiable status of each of the additions must surely be that their exclusion would artificially lower the purchase price for the goods. These categories are
A separately paid amount for packaging;
Dutiable assists, whereby a foreign manufacturer is being furnished with tooling, molds or other materials used to make the imported goods;
Royalties and license fees that are related to the transaction and whose payment is a condition of sale;
A percentage of the resale proceeds being shared with the foreign seller.
It is important to note that only these five categories of payments and none others can be added to the PAPP.8
With that general background it is important to set forth the customs valuation law principles which pertain to the involvement of buying agents.
Buying Agent Defined
The very first point to make here is that, to my knowledge, neither the customs valuation statutes nor the WTO Valuation Agreement define the term “buying agent.” Indeed, the term “buying agent” is not employed per se in these compilations, the references being to “buying commissions.” The Interpretative Note to Art. 8.1 (a) (i), which is an integral part of the WTO Valuation Agreement,9 explains that “buying commissions” as used in Article 8 means
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 next point that must be recorded is that, unlike the WTO Valuation Agreement and the United States statute which make the point indirectly, the UCC affirmatively establishes that buying commissions are not dutiable.10
It may be beneficial to note that the TCCV came to define both “buying agent” and “selling agent” in its very early (1982) Explanatory Note (EN) 2.1, where it stated (at para. 4) that the buying (or selling) agent might even buy or sell goods in its own name
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.
This is an extraordinarily important statement. The TCCV is stating that the buying agent might even appear to be buying the goods in its own name but-- if it is acting “for the account of a principal”-- it is nonetheless not a buyer and reseller, earning a profit that is dutiable, but a mere agent remunerated with a buying agent’s commission. In other words, if the intermediary is being controlled and directed to act by a principal, the range of services can be so wide as to include some actions which might otherwise be consistent with status as a seller of the goods. Some examples of those typical buying agent services are provided later in EN 2.1 at paras. 9-11
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.
11. In this case [i.e., where the agent is paid a commission apart from the goods], under the terms of paragraph 1 (a) (i) of Article 8, the commission paid by the buyer of the imported goods must not be added to the price actually paid or payable. (Emphasis added)
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.
A typical introduction to a US examination into a buying agency relationship may be obtained from a 2010 ruling, no. H098419 (Oct. 26, 2010)
The existence of a bona fide buying commission depends upon the relevant factors of the individual case. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95, C.D. 4741, 451 F. Supp. 973, 983 (1978). Although no single factor is determinative, the primary consideration is the right of the principal to control the agent’s conduct with respect to those matters entrusted to the agent. Id.; Pier 1 Imports, Inc., 13 Ct. Int’l Trade at 164; Rosenthal-Netter, Inc., 12 Ct. Int’l Trade at 79; and Jay-Arr Slimwear, 12 Ct. Int’l Trade at 138. The alleged agent performs duties on behalf of its principal, the buyer. It may not act as an independent seller, or as a representative of the manufacturer. United States v. Manhattan Novelty Corp., 63 Cust. Ct. 699, A.R.D. 263 (1969). In addition, the courts have examined such factors as the existence of a buying agency agreement; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the agent was financially detached from the manufacturer of the merchandise; and the transaction documents. See J.C. Penney Purchasing Corp., 80 Cust. Ct. at 95-98. The courts have also examined whether the purported agent's actions were primarily for the benefit of the principal; whether the agent bore the risk of loss for damaged, lost or defective merchandise; whether the agent was responsible for the shipping and handling and the costs thereof; and whether the intermediary was operating an independent business, primarily for its own benefit.13
In this ruling, the United States proceeded to validate a buying agency relationship in two of the three hypothetical scenarios posed, because the requisite direction and control over the agent were in evidence but found that in the third case that the purported commission was dutiable. Close attention is required. The payment to the intermediary in the third scenario was dutiable only because the intermediary was acting like a 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.
…If charges or amounts payable to an agent other than an agent’s commission are identified but are itemized separately, then the individual charges or amounts may be:
(a) an addition to the price paid or payable of the goods under an alternative provision of subparagraph 48(5)(a) of the Act [corresponding to Article 1 of the Valuation Agreement]; or
(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 clearly advises that the Canadian customs officer will review any separate payment on a separate basis and not within the context of the commission—which seems appropriate given the fact that it is, in fact, not included within the commission. Moreover, it sets a test on dutiable status, which will require for dutiable status that the payment falls within the confines of either Article 1 or Article 8. And that also appears to be appropriate because it is consistent with the Valuation Agreement and UCC requirements. As a final point, we should be mindful that Canada will also follow an “all facts and circumstances” review to determine questions of buying agency status.14
Intermediate Party Sourcing Strategy
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.
Typical Buying Agent Services
For an updated recitation of typical buying agent services we may refer to the following expansive but not exclusive index of such services: compiling market information,
identifying potential vendors and requesting price quotes from these vendors for the production
of fabrics or garments,
placing orders and negotiating with suppliers,
advising the buyer on the sources and prices of merchandise,
preparing and negotiating purchase contracts,
monitoring the status of purchase orders,
ensuring the preparation of import documents,
obtaining samples,
assisting with financial arrangements, shipping, and inspecting merchandise,
surveying potential markets,
investigating buying possibilities using best efforts to verify that potential suppliers are reputable, have acceptable credit ratings, and are able to meet the requirements set forth in the purchase contract;
obtaining market intelligence and information on trends in imported product sector and provide such information to buyer;
preparing for and assisting buyer in connection with meetings and negotiations with suppliers, assisting buyer in preparation of purchase contracts,
letter of credit applications and/or other paper necessary for export of the product from country of manufacture and import into the country of importation, assisting buyer in the development of product specifications reflecting instruction to the supplier or manufacturers as to what to produce,
recommending manufacturers/sellers and assisting in price negotiations; supervising the quality control of food products,
using its best efforts to obtain satisfaction from suppliers concerning defective or rejected footwear,
expediting shipment of the footwear from the supplier or manufacturer's factory to buyer's consolidator or ocean carrier,
assisting with financial arrangements,
shipping and inspecting merchandise,
directing processes for defective merchandise,
preparing necessary shipping and customs documents,
inspecting the quality of merchandise to be shipped,
ensuring that sample products and product raw material are made available to principal in adequate quantities for testing;
assisting in the return of defective merchandise,
instructing the manufacturer/seller in the preparation of commercial invoices,
providing the principal with invoices and other receipts from the manufacturers which verify the amounts shown on the export invoices,
periodically visiting factories,
arranging for laboratory testing, as required,
periodically inspecting merchandise in production,
providing inspection certificates, as required.15
We emphasize that these dozens of tasks do not comprise an exclusive list but are illustrative only of the wide-ranging variety of services that are typically furnished by buying agents. Taken altogether, we submit that it should be clear that buying agents today are called upon and do in fact provide a range of services going well beyond those discussed almost 40 years ago in 1982 in the context of the TCCV’s EN 2.1 (“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”) and nearly 30 years ago in the TCCV’s Commentary 17.1.16
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.
If we were to look for a thoughtful discussion of buying agent status we might turn to ruling no. H253767, Oct. 30, 2015, where a parent company was paid, inter alia, management service fees, the underlying activities undertaken by the parent described as follows:
[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.
Based upon the index of buying agent services we presented above, we submit that the discussion of these services comprises a fair recitation of some of the services that have come to be recognized as typical of a buying agent. In fact, this was the very conclusion reached by the US customs authorities. Overruling the regulatory auditors, CBP Headquarters concluded in ruling no. H253767:
[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.
2. Formally the “Agreement on Implementation of Article VII on the General Agreement on Tariffs and Trade 1994.”
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.