The proper rate of exchange of currency: contract rate vs. official rate

HQ 544940 May 13, 1992 VAL CO:R:C:V 544940 ILK CATEGORY: Valuation District Director of Customs 423 Canal St. New Orleans, LA 70130 Re: The proper rate of exchange of currency: contract rate vs. official rate Dear Madam: This is in response to your request for internal advice dated January 23, 1992, concerning the appraisement of merchandise, the price of which is arrived at by use of a contractual rate of currency exchange. FACTS: xxxxxxxxxx xxxxxxx, Ltd., UK (hereinafter referred to as "the seller") and xxxxx xxxxx xx xxxxx xxxxxxx, Incorporated (hereinafter referred to as "the importer") have entered into a distributorship agreement. Both the seller and importer are subsidiaries of xxxx xxxxx UK, Ltd., and are thus related. Pursuant to the distributorship agreement the importer purchases vehicle parts from the seller in U.K. pounds at a fixed exchange rate. Pursuant to the Currency provisions of the distributorship agreement, the seller and importer negotiate an exchange rate each year, covering a period of twelve months or more. The present rate of $1.58 has been in effect since 1990. According to the importer, this practice locks in the importer's purchase cost at a fixed rate and transfers currency fluctuation risks to the seller. The seller then invoices the importer in U.K. pounds, with a note on the invoice stating "Converted to U.S. dollars at $1.58 to the pound (followed by the invoice value in dollars)." The importer pays the seller in U.S. dollars. The importer intends to continue this practice in the future. The $1.58 fixed rate was scheduled to be reviewed in January, 1992, at which time either it was to be extended for another year or a new fixed rate was to go into effect for 1992. The importer is prepared to provide its customs brokers with letters certifying the existence of a negotiated fixed rate and its duration. ISSUE: Whether the merchandise may be appraised under transaction value using the contractually fixed currency exchange rate. LAW AND ANALYSIS: The preferred method of appraisement is transaction value which is defined by section 402(b)(1) of the Trade Agreements Act of 1979, (19 U.S.C. 1401a(b)(1)) as "the price actually paid or payable for the merchandise when sold for exportation to the United States..." plus certain specified additions. In this case, the invoiced price in U.K. pounds converted to U.S. dollars represents the price actually paid or payable, and is ascertainable at the time of importation. Therefore, it is not necessary to determine whether at the time of exportation there is in place a set formula to establish the price paid or payable. This issue was addressed in Headquarters Ruling Letter (HRL) 543437 dated May 17, 1985. In HRL 543437 the importer had the option of paying the Canadian seller in either Canadian or U.S. currency. The merchandise was invoiced in Canadian currency. If Canadian currency was chosen, that amount, converted to U.S. dollars in accordance with sections 159.31-38 of the Customs Regulations, constituted the price actually paid or payable. If U.S. currency was chosen the price was determined by applying the seller's weekly fixed rate of exchange, which was specified in the invoice. HRL 543437 specifically ruled that transaction value looks to "the price actually paid or payable for the merchandise when sold for exportation to the United States" (emphasis supplied), thus conversions to U.S. dollars are not required to be made in accordance with sections 159.31-38 of the Customs Regulations when payments are made in U.S. dollars. With regard to converting the Canadian currency invoice price to U.S. dollars, Customs ruled that: If, at the time of entry, the purchaser has paid or intends to pay for a particular shipment in United States currency, then that amount calculated in accordance with your client's fixed rate of exchange, constitutes the price actually paid or payable. Based on the foregoing, conversion of the invoice price from U.K. pounds to U.S. dollars pursuant to the currency provision of the distributorship agreement in the instant case is allowable, and the invoice price in U.K. pounds, converted into U.S. dollars in accordance with the fixed exchange rate and paid in U.S. dollars, constitutes the price actually paid or payable. This ruling makes no determination pertaining to the reasonableness of the fixed exchange rate or the appropriateness of transaction value in this case. The parties are related, therefore pursuant to section 402(b)(2)(B) of the TAA, transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between the buyer and seller did not influence the price actually paid or payable or if the transaction value closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the United States or the deductive or computed value for identical or similar merchandise. HOLDING: The invoice price in U.K. pounds, converted to U.S. dollars in accordance with the contractually fixed exchange rate, when payment is made in U.S. dollars, is the price actually paid or payable for the imported parts. Sincerely, John Durant, Director Commercial Rulings Division cc: Chief, National Import Specialist Branch 1 New York Seaport