HQ 0544644 - Application for Further Review of Protest No. 1303-90-000056; Dutiability of Value Added Tax Refunded After Exportation by Government Authorities - United States International Trade Commision Rulings

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HQ 544644

September 29, 1993

VAL CO:R:C:V 544644 DPS

CATEGORY: VALUATION

District Director
Baltimore, Maryland

RE: Application for Further Review of Protest No. 1303-90-000056; Dutiability of Value Added Tax Refunded After Exportation by Government Authorities

Dear Sir:

The subject application for further review was filed against your decision regarding the appraisement of trucks and components the importer/protestant, Caterpillar Inc. (Caterpillar), purchases from Artix Limited (Artix), an unrelated British corporation. The issue raised by this protest is the dutiability of certain "value added tax" (VAT) payments which are included in the total payment from the buyer to the seller. Various meetings with counsel and OR&R staff were held and numerous submissions by the importer's counsel were made, the most recent of which was July 22, 1993.

FACTS:

Caterpillar purchases trucks and truck components from Artix. Pursuant to its agreement with Artix, Caterpillar acquires title to the trucks while they are still located in the United Kingdom, where they remain warehoused in Artix inventory until their shipment to the United States. Counsel notes that estimating the average time in inventory of the subject merchandise is difficult. Prior to April 1990, most trucks were shipped very soon after manufacturing. More recently, however, as a result of the recession, Artix's inventory levels have been averaging approximately four to five months.

Because the merchandise is not immediately exported after manufacture, Artix is required by the British tax authority to pay the VAT on all goods sold to Caterpillar which are stored in the U.K., notwithstanding that all such goods will be exported to the U.S. On the commercial invoices covering the sale of the goods, the VAT is itemized separately. Caterpillar pays the invoiced total which includes an amount for VAT. After exportation of the goods from Britain, Caterpillar files a notice with the British tax authority, and, on a routine basis, receives a full refund of all VAT payments directly from the governmental tax authority.

According to Caterpillar's counsel, under the British tax system, Caterpillar is not permitted to pay the VAT directly to the government or obtain refunds prior to exportation. Counsel has also indicated that Artix, the British manufacturer, is in no way involved with either the filing for the refund, or with its receipt. Furthermore, attempts to obtain the refund prior to export have been unsuccessful, as have efforts to have Caterpillar pay the VAT initially.

With regard to the protested entries, Customs has taken the position that the VAT charge is dutiable since it is part of the price actually paid or payable for the merchandise when sold for exportation to the U.S., and that Customs has no statutory authority to deduct it under transaction value. The District also cited 402(b)(4)(B) of the TAA, as well as a Headquarters ruling interpreting that provision, to support its position that the statute requires Customs to disregard the post-importation refund of VAT.

Caterpillar protests Customs' refusal to allow it to treat the VAT as nondutiable. It claims that VAT is not part of the "price actually paid or payable" for goods purchased from Artix, and does not form part of the value of the goods. Protestant argues that 402(b)(4)(B) does not cover the VAT refund because it does not constitute a rebate or price decrease, rather the refunds come from the British government, and are not negotiated after exportation but anticipated at the time of sale. In addition, Caterpillar asserts that Article VII, Section 3 of the General Agreement on Tariffs and Trade (GATT) prohibits the imposition of import duties upon internal taxes from which the imported goods have been exempted or relieved by means of a refund.

ISSUE:

Whether the amount for VAT, which, under the circumstances, is included in the price paid by the importer to the seller, and subsequently refunded by the foreign governmental authority to the importer after exportation to the U.S., is considered part of the price actually paid or payable for the imported merchandise.

LAW & ANALYSIS:

Based on statements by the protestant, the parties to the subject transactions are not related. Absent information to the contrary, for the purpose of this decision, we assume that transaction value is the proper method of appraisement.

Transaction value is defined in section 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b);TAA) as the "Price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in 402(b)(1).

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.

402(b)(4)(A) of the Tariff Act of 1930 as amended by the TAA.

Based on information provided by Caterpillar, Caterpillar pays the invoice price to Artix. That price includes an amount for VAT. When asked why the merchandise is stored in the U.K. rather than exported immediately (in which case the merchandise would not be subject to VAT), Caterpillar cited business purposes, and explained that providing funds to Artix for payment of the VAT was a method of helping Artix with its cash flow.

In support of its position, protestant argues that the VAT is not part of the "price actually paid or payable" for the goods purchased from Artix. It further disputes the rationale utilized in a previous Headquarters ruling, 543435MK of January 15, 1985. In June, 1988, Customs in Jacksonville relied on 543435 when it rejected Caterpillars's position that the VAT payment is not dutiable. The ruling cited 402(b)(4)(B) of the TAA. That section provides:

Any rebate of, or decrease in , the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value under paragraph (1).

The ruling relied on the above provision to hold:

...with regard to any merchandise for which you paid a sum which included a VAT and for which you received a refund subsequent to the date you imported the merchandise, the transaction value would be the price you actually paid, inclusive of VAT.

Caterpillar argues that 402(b)(4)(B) of the TAA does not apply to their situation because: (1) the VAT payments were not made
for the goods by the buyer to, or for the benefit of the seller, and as such do not constitute part of the "price actually paid or payable;" (2) the payments, although made to Artix, are immediately forwarded to the British tax authority and should not be characterized as payments for the goods; and (3) the VAT payments made by Caterpillar are clearly not made for the benefit of Artix, but rather the British tax authority -- Artix derives no benefit from the VAT payments.

With regard to the rebate provision, protestant asserts two additional reasons why the VAT refunds should be excluded from the dutiable value of the goods purchased from Artix. First, the language of the rebate provision, 402(b)(4)(B), addresses a subsequent rebate or decrease in price effected between buyer and seller. Here, no rebate has been effected between the buyer (Caterpillar) and the seller (Artix). Instead, Caterpillar has received a refund from the British tax authority.

Second, Caterpillar believes that a reasonable interpretation of the rebate provision supports the conclusion that the refund of the VAT payments is not a rebate under 402(b)(4)(B) because this provision was meant to proscribe price rebates or decreases not agreed upon or negotiated until after importation. Such a reading, Caterpillar argues, accords with other parts of the value code, which make it clear that transaction value can be based on pricing formulas, even if the actual figures are not known at time of entry, so long as agreement is reached between the parties prior to importation. In the case of VAT payments, it is known long before importation that they will be refundable.

While counsel raises interesting points, the arguments are not persuasive to the extent we should disregard the critical fact that an amount for VAT is part of the price actually paid by the buyer, Caterpillar, to the seller, Artix. Here, pursuant to the statutory definition of transaction value ( 402(b)(4)(A) set forth at page 3 herein), the entire payment, inclusive of VAT, makes up the price actually paid or payable. The statutory deductions, set forth in 402(b)(3), and the exclusions in 402(b)(4)(A) do not allow for a deduction of the VAT from transaction value. Our authority to deduct certain costs from transaction value is restricted to those items specified in the provisions of the statute.
Protestant asserts that the VAT is not part of the negotiated price between the parties. Nevertheless, it appears as an element of price which is paid by the buyer to the seller. While we recognize that the rebate is not effected between buyer and seller, which may have the effect of limiting the impact of 402(b)(4)(B) on this transaction, we cannot agree that the VAT is not part of the price actually paid or payable in the instant transactions. In so finding, we rely on the Court of Appeals for the Federal Circuit decision in Generra Sportswear Company v. U.S., 905 F.2d 377 (Fed. Cir. 1990), involving quota charges paid by the buyer to the seller. The court held that as long as the quota payments were made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods. The court stated:

The focus of transaction value is the actual transaction between the buyer and the seller; if quota payments were transferred by the buyer to the seller, they are part of transaction value. That transaction value may encompass items other than the pure cost of the imported merchandise is reflected in section 1401a(b)(3), governing exclusions from transaction value. If excludable costs are not identified separately from the price actually paid or payable, they are included in transaction value.

Generra Sportswear Co. v. U.S. at 380. In so holding, the court recognized that if Congress had intended to exclude quota charges from transaction value, it could have included them among the explicit exclusions enumerated in 402(b)(3). Likewise, under the present circumstances, if Congress had intended to exclude refunded VAT payments from transaction value, it would have done so. The value statute does, in fact, exclude refunded internal taxes imposed by the country of exportation from certain cost elements of computed value. See 402(e)(2)(A) of the TAA, 19 U.S.C. 1401a(e)(2)(A). Had Congress intended, it could have also excluded such internal taxes, refunded upon exportation, from transaction value. It did not include such language in the law.

The Generra court further recognized that when the payment is made to the seller, it is not necessary to determine whether the seller benefited because the statute is written in the alternative: "to, or for the benefit of, the seller." 19 U.S.C. 1401a(b)(4)(A). Accordingly, we need not determine whether the seller benefitted from having the buyer pay a price which included an amount sufficient to cover the VAT. The fact is, an amount inclusive of VAT was paid to the seller.

Another relevant point made by the Court of Appeals for the Federal Circuit in Generra, focuses on the efficiency of Customs' appraisement procedure. It noted that Congress did not intend for the Customs Service to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, are for the merchandise or for something else. In Generra, the court reiterated its view expressed in Moss Mfg. Co. v. U.S., 896 F.2d 535, 539 (Fed. Cir. 1990), that the "straightforward approach [of section 1401a(b)] is no doubt intended to enhance the efficiency of Customs' appraisal procedure; it would be frustrated were we to parse the statutory language in the manner, and require Customs to engage in the formidable fact- finding task envisioned by [appellant]." Generra, supra. at p. 380.

Protestant's argument that Customs interpretation of the value statute conflicts with Article VII of the General Agreement on Tariffs and Trade (GATT), specifically, section 3, is not persuasive. Customs has been delegated the authority to administer 402 of the TAA (19 U.S.C. 1401a), which is the U.S. codification of the Agreement on Implementation of Article VII of the GATT. More commonly referred to as the GATT Valuation Agreement, it establishes a positive system of Customs valuation based on the actual price of imported goods. Customs obligation is to administer 402 of the TAA (19 U.S.C. 1401a), not Article VII of the GATT. We believe our interpretation of the facts presented by Caterpillar in the context of the subject protest is consistent with the plain language of the statute, and judicial interpretations of the same. The statute makes specific reference to the treatment of refunded internal taxes in the context of computed value ( 402(e)(2)(A) of the TAA, 19 U.S.C. 1401a(e)(2)(A)), but does not address them in the context of transaction value ( 402(b) of the TAA, 19 U.S.C. 1401a(b)).

A review of the legislative history by protestant's counsel as well as Customs, revealed nothing concerning legislative history on the issue.

Finally, protestant's argument that pricing, payment and refund arrangements between buyer, seller and government tax authority are akin to a formula consistent with the statute and regulations (19 CFR 152.103(a)(1)) is not persuasive. The price is settled prior to importation and includes an amount for VAT which will be refunded by the governmental authority, provided the buyer files the proper documents with the appropriate taxing agency. As such it is not adjusted between buyer and seller pursuant to a formula.

It is also important to note protestant's recognition in its original protest papers that if the arrangement between Caterpillar, Artix and the British tax authority were slightly different, the VAT payments would not be necessary (if the merchandise were immediately exported after manufacture) or even dutiable (if the VAT payments were not made to the seller).

HOLDING:

Consistent with the foregoing analysis, we find that the VAT payments included in the price actually paid or payable by the buyer to the seller, and refunded after importation by the foreign governmental authority, are properly included in transaction value because the statute provides no authority to deduct them. Accordingly, the subject protest is hereby denied.

A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the subject protest.

Sincerely,

John Durant, Director
Commercial Rulings Division

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