Protest and Application for Further Review of Protest No. 2506-23-100695; Reconciliation of Transfer Prices

H338968
May 11, 2026
OT:RR:CTF:VS H338968 AMW
CATEGORY: Valuation Director Apparel, Footwear and Textiles CEE U.S. Customs and Border Protection 555 Battery Street, Room 401 San Francisco, CA 94111 ATTN: John Patterson, Import Specialist RE: Protest and Application for Further Review of Protest No. 2506-23-100695; Reconciliation of Transfer Prices Dear Center Director: The following is our decision regarding the Application for Further Review (“AFR”) of Protest No. 2506-23-100695, timely filed on November 8, 2023, by Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP on behalf of Brioni America, Inc. (“Brioni”). Brioni is protesting U.S. Custom and Border Protection’s (“CBP”) decision to deny refunds requested under two reconciliation entries for which the value of imported merchandise was reduced based on post-importation transfer price adjustments. CBP instead determined the proper valuation of the merchandise to be the value declared at the time of importation. FACTS: This protest relates to two entries of ready-to-wear apparel, leather goods, and accessories imported by Brioni during the year 2020. Brioni purchased the subject merchandise from a related party, Luxury Goods International (“LGI”). LGI, in turn, purchased the merchandise from both related and unrelated suppliers in Europe. Upon entry, Brioni declared the sales price between itself and LGI as the transaction value. Subsequently, Brioni filed two reconciliation entries seeking to have the transaction value adjusted downward based upon values determined following a post-importation transfer pricing study (the “TPS”). In response, your office decided that the documentation provided was insufficient to warrant the reliquidation of the subject merchandise and denied the adjusted transfer price.
2 Brioni asserts that the transfer pricing policy in effect at the time of importation is contained in the “Terms and Conditions of Sale” agreement between LGI and Brioni (the “Terms and Conditions”), which is excerpted in Schedules 6 and 7 of the Franchise Agreement. Specifically, Section 5.8 of the Terms and Conditions, states: The parties acknowledge that the objective is for the Buyer to achieve an arm’s length profit level over the course of a taxable year. Accordingly, notwithstanding the terms set forth in Articles 5.1 to 5.7, in case there is a shortfall or excess in profits or excess in the target EBIT for the Buyer at the end of a taxable year, LGI shall adjust the Prices on Products sold to the Buyer during such a period as agreed to by the parties in order that the Buyer can achieve an arm’s length profit level for the year. Brioni explains that it calculated the subject adjustments based on the results of its TPS for tax year 2020, which was prepared in 2021. The TPS states that the Comparable Profits Method (“CPM”) was selected as the best method to evaluate the intercompany tangible transactions between Brioni and LGI. The CPM tests the arm’s length character of transfer prices by comparing the operating profits earned by one of the parties engaged in a controlled transaction to the operating profits earned by uncontrolled parties engaged in similar business activities. As explained in the relevant Internal Revenue Service (“IRS”) regulations, CPM is calculated by “determining a profit level indicator for an uncontrolled comparable, and applying the profit level indicator to the financial data related to the tested party’s most narrowly identifiable business activity for which data incorporating the controlled transaction is available (relevant business activity).” Further, “[i]f there are any differences between the tested party and an uncontrolled comparable that would materially affect the profits determined under the relevant profit level indicator, adjustments should be made according to the comparability provisions of [26 CFR] § 1.482-1(d)(2).” See 26 CFR § 1.482-5. The TPS states that its CPM analysis was based on a study of a “group of selected retail and wholesale comparable companies.” During the three-year period for which data was available, the TPS calculated the range of operating margins for comparable companies as 3.8% with an interquartile range of 0.7% to 5.5%. According to the TPS, because Brioni’s profitability in 2020 (i.e., “break-even”) did not exceed the interquartile range, the results were deemed to be arm’s length. Brioni asserts that it sought the subject downward price adjustments to bring the company’s profits in line with the interquartile range. In so doing, the protest document states that Brioni arrived at the downward adjustments by using a “reconciliation factor,” which was calculated by allocating the credit/debit note amount to all entries based on the entered value during the year 2020. Brioni provided our office with the following documents to review: • Franchise Agreement Between LGI and Brioni, Executed January 1, 2020 • Terms and Conditions of Sale between LGI and Brioni contained in Schedules 6 and 7 of the Franchise Agreement; • Transfer Pricing Study for the year 2020 (prepared in 2021);
3 • Brioni’s “general journal entries” prepared by the company’s accounting records department relating to the claimed transfer price adjustments; • Credit notes issued by LGI to Brioni; • Summaries of Brioni’s reconciliation entries; • 2011 letter from the former CFO of Gucci America explaining transfer price adjustments made between LGI and several other related brands, including Stella McCartney, Alexander McQueen, and Balenciaga; and • A 2015 Audit Report by CBP of Alexander McQueen’s valuation and reconciliation procedures. • The supporting documentation related to five illustrative entries covered by the reconciliation entry subject to this request. Supporting documentation included the relevant CF 7501 Entry form, proof of payment documents (e.g., bank statements) for all transaction levels, invoices, and purchase orders. In addition to the above, CBP requested Brioni provide additional documentation related to the transfer pricing study provided by Brioni, including, including the attachments and appendices referenced in the transfer pricing study. This includes an “analysis of compared unrelated companies engaged in comparable uncontrolled transaction sot serve as a benchmark….” Despite being asked multiple times over the course of 14 months, Brioni never provided this information. ISSUE: Whether the related party price is fixed or determinable pursuant to an objective formula at the time of importation for purposes of determining transaction value. LAW AND ANALYSIS: Initially, we note that this matter is protestable under 19 U.S.C. § 1514(a)(1) as a decision on the appraised value of the merchandise. The protest was timely filed within 180 days of liquidation of the entry. (Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429, § 2103(2)(B)(ii), (iii) (codified as amended at 19 U.S.C. § 1514(c)(3) (2006)). Further review of Protest No. 2506-23-100695 is properly accorded pursuant to 19 CFR § 174.24(b) because the decision against which the protest was filed is alleged to involve questions of law or fact which have not been ruled upon by the Commissioner of CBP or by the Customs courts. See 19 CFR § 174.24(b). Merchandise imported into the United States is appraised for customs purposes in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). As provided in 19 U.S.C. §1401a(b)(4):
4 (A) The term “price actually paid or payable” means the total payment (whether direct or indirect, and exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. Section 152.103(a)(1), CBP Regulations (19 CFR §152.103(a)(1)) provides, in pertinent part, as follows: In determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. However, rebates, or any other decrease in the price actually paid or payable made or effected after the date of importation are to be disregarded for the purposes of determining transaction value. 19 U.S.C. §1401a(b)(4)(B). CBP has determined that where the price is not fixed at the time of importation, transaction value is not applicable. See e.g., Headquarters Ruling (“HQ”) 545618, dated August 23, 1996; HQ 545242, dated April 16, 1995; HQ 545798, dated October 28, 1994; HQ 546231, dated February 10, 1997; and HQ 546421, dated March 27, 1998. CBP has determined that the fixed price rule is satisfied when the price is determinable by an objective formula agreed upon prior to importation. In applying this provision, CBP ruled in HQ 542701, dated April 28, 1982, TAA No. 47, and in subsequent rulings, that in situations in which the price paid or payable is determined pursuant to a formula, a firm price need not be known or ascertainable at the time of importation. Nevertheless, it is necessary for the formula to be fixed at importation so that a final sales price can be determined at a later time on the basis of some event or occurrence over which neither the seller nor the buyer has any control. See also HQ 545622, dated April 28, 1994. On May 30, 2012, CBP published a notice concerning the treatment of post-import adjustments made pursuant to a formal transfer pricing policy. See Customs Bulletin, Vol. 46, No. 23, dated May 30, 2012 (and incorporating HQ W548314, dated May 16, 2012). In HQ W548314, CBP established a broader interpretation of what is permitted under transaction value to allow a transfer pricing policy/APA to be considered a “formula” in the transfer pricing context provided certain criteria are met. HQ W548314 specifically referred to the adjustments made pursuant to a company’s formal transfer pricing policy or APA. In order to claim the post-importation adjustments (upward and downward), all of the following factors must be met: 1. A written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account;
5 2. The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return; 3. The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted; 4. The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and, 5. No other conditions exist that may affect the acceptance of the transfer price by CBP. Brioni asserts that it meets the factors outlined in HQ W548314, and, as such, the post-entry adjustments may be used to determine the transaction value. We disagree. Specifically, the adjustments were not made pursuant to a written transfer pricing policy in place prior to importation and prepared in accordance with IRS code section 482. In addition, the agreed-upon transfer pricing language did not specify how such adjustments would be determined in advance of importation. Brioni’s TPS is similarly devoid of detail to support the subject deductions. To begin with, the first factor outlined in HQ W548314 requires post-importation price adjustments to be made only when a “written transfer pricing policy is in place prior to importation and the policy is prepared taking IRS code section 482 into account….” In response, Brioni’s protest references Article 5.8 in the Terms and Conditions, excerpted above, which states, “in case there is a shortfall or excess in profits or excess in the target EBIT for the Buyer at the end of a taxable year, LGI shall adjust the Prices on Products sold to the Buyer during such a period as agreed to by the parties in order that the Buyer can achieve an arm’s length profit level….” By implication, Brioni asserts that this clause is sufficient to constitute a transfer pricing policy between Brioni and LGI. We nevertheless determine that Section 5.8 of the Terms and Conditions does not constitute a written transfer pricing policy. In HQ H018314, dated March 18, 2013, CBP clarified that, “[t]he term ‘transfer pricing policy’ refers to Advance Pricing Agreements (‘APA’s), transfer pricing studies prepared in accordance with 26 U.S.C. §482 (the IRS transfer pricing statute) or its foreign equivalent, and/or legally binding inter-company agreements/memoranda.” Such agreements, the ruling notes, “provide the method for determining the transfer price, which may include the setting of an initial price and then making various adjustments to the price after the importation based on specified criteria.” The language provided by Brioni, however, does not constitute such a policy. Although the clause stipulates the parties “shall adjust the Prices on Products sold…in order that the Buyer can achieve an arm’s length profit,” the clause provides no meaningful guidelines regarding the creation of an initial price for which post-facto adjustments might be used. In addition, the clause makes no reference to IRS code section 482, and in no way requires that any eventual price adjustments be conducted in accordance with the IRS regulation.
6 Brioni’s TPS similarly does not satisfy the first factor outlined in HQ W548314. Specifically, Brioni asserts its 2020 TPS is relevant in supporting the subject deductions because, “it was prepared in connection with the requirements under IRS code section 482.” However, the TPS, which relates to tax year 2020, was produced in 2021 and was not in place prior to importation. Next, the third factor outlined in HQ W548314 requires a company’s transfer pricing policy to specify how the transfer pricing and any adjustments are determined. In this respect, the present matter is similar to HQ H157795, dated June 29, 2015, in which CBP considered the applicability of an agreement providing, “[t]he Parties shall review and, if necessary, in accordance with arm’s length pricing principals applicable under U.S. tax laws, adjust the discount…or set off amounts one PARTY may owe another PARTY.” In doing so, CBP determined that there was no specificity regarding how the adjustments would be made. Like HQ H157795, Section 5.8 of the Terms and Conditions provides no specificity regarding how adjustments are to be made. Instead, the agreement provides a vague stipulation that the parties “shall adjust the Prices on Products sold….” Assuming arguendo that the TPS does constitute a transfer pricing policy as referenced in HQ W548314, the document is nevertheless insufficient to support the subject deductions. Brioni’s protest clarifies that the downward adjustments were based on a “reconciliation factor” that considered the credit/debit note amount to all entries based on the entered value during the year 2020. However, this “reconciliation factor” is nowhere to be found in the TPS. Indeed, the TPS contains no analysis whatsoever regarding potential adjustments to the value of imported merchandise. Instead, the study merely provides the opinion of the tax department of a related-party affiliate (not even an independent accounting company) based on information provided by other related parties to determine whether the prices for the sales of goods between LGI and Brioni reflected an arm’s length price and would be appropriate from a tax perspective. As a result, the TPS itself, which was produced after the importation of the subject merchandise, does not provide a fixed, objective formula by which deductions might be calculated. In addition, Brioni failed to provide supporting documentation to confirm the TPS’s CPM analysis. The TPS states that the methodology for finding and reviewing comparable uncontrolled companies is contained in an annexed report prepared by an outside accounting firm. But Brioni did not provide this study. (As noted above, Brioni was given multiple opportunities over more than a year to do so.) This situation is comparable to HQ H016585, dated December 30, 2008, in which CBP considered the applicability of an importer’s TPS that used CPM to compare the importer’s profits to that of 12 competitors. In denying the importer’s protest, CBP noted that the importer had failed to provide “the complete data or any information on the companies used as a comparison….” In the instant case, CBP similarly cannot verify the information underlying the TPS’s determination that the transaction was at arm’s length, including data related to any comparable uncontrolled companies.
7 In summary, the five factors originally outlined in W548314 were developed to determine whether an objective formula is in place prior to importation for purposes of determining the price within the meaning of 19 CFR §152.103(a)(1). The first factor requires that a written transfer pricing policy is in place prior to importation and that the policy is prepared taking IRS code section 482 into account. However, the contract language provided by Brioni is too vague to constitute a transfer pricing policy, and makes no reference to section 482 of the IRS code. Additionally, the third factor requires that the transfer pricing policy establish how adjustments are to be made. Here, the contractual language cited by Brioni contains no guidance outside of a cursory statement that LGI “shall adjust the Prices on Products” to achieve an arm’s length profit. Therefore, we cannot find that the adjustments are made pursuant to a transfer pricing policy. We find that the adjustments are not based on an objective formula and the transaction value originally declared may not be adjusted. HOLDING: Based on the above discussion, the protest should be denied. Because the transfer pricing was not based on an objective formula, we find no basis upon which to grant the Protestant’s request to reconcile the transaction value initially declared. You are instructed to notify the protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/ and other methods of public distribution
Sincerely,
For Yuliya A. Gulis, Director Commercial and Trade Facilitation Division