KPMG report - CBP’s proposed clarity for “first sale” customs audits unclear 

July 15:  Changes to the rules for the valuation of imports—including the “first sale” valuation method—have been proposed. The following discussion considers what the proposed rules could mean for the import community, cautioning that it might be too early to predict the effect of any changes, but recommending prudent steps be taken in anticipation.

Author of this report: Luis Abad, principal in KPMG’s Washington National Tax practice, specializing in trade and customs matters.

Contributions by Andrew Siciliano, U.S. partner-in-charge, KPMG Trade and Customs, and Todd Smith and John Mcloughlin, principals, KPMG Trade and Customs.

Draft “Informed Compliance Publication”

U.S. Customs and Border Protection (CBP) Assistant Commissioner Rich DiNucci on July 9, 2014, released an updated draft “Informed Compliance Publication” concerning sales for exportation to the United States, which includes “first sale” valuation.

According to the assistant commissioner’s comments, the proposed revisions are intended merely to rectify the “lack of clarity and consistency” in customs audits to substantiate “first sale” claims and do “not reflect a change in policy by CBP.”

Nevertheless, the revised draft audit “ground rules” include an extensive checklist of documentation that may be required during a CBP audit. CBP’s updated draft provides little guidance to ease the import community’s concerns that the checklist may be misused by CBP auditors—particularly regarding verifications of related-party transactions between two foreign companies in the “first sale” transaction.

“First sale”

The “first sale” principle was articulated by the U.S. Court of Appeals for the Federal Circuit in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992). The requirements include:

  • Bona fide sale—circumstances and documentation demonstrate that a “sale” (the transfer of ownership in property for consideration) has occurred between the seller and buyer in the “first sale” transaction
  • Clearly destined for export to the United States—the goods must be clearly destined for exportation to the United States at the time the merchandise is sold by the foreign factory to the foreign supplier
  • Arm’s length price—the foreign manufacturer’s price to a related supplier must be at arm’s length from a customs perspective (sales between unrelated parties are presumed to be arm’s length)
  • Full documentation and recordkeeping—a full documentation trail that supports the above requirements and clearly establishes the roles of each party in the transaction

Customs duties are generally assessed on merchandise imported into the United States on the basis of the commercial value or price paid by the U.S. importer to its foreign supplier. However, under the method known as “first sale” valuation, an importer may instead pay duty based on a lower price paid by its foreign supplier to the foreign manufacturer, if certain requirements are satisfied.

KPMG observation

The Trade and Customs practices of KPMG LLP and the other member firms of KPMG International provide, among other services, audit and valuation services, and in providing these services anticipate and prepare for contingencies such as potentially vigorous challenges by CBP and documentation requests related to foreign companies related to arm’s length issues.

CBP’s recent announcement comes as no surprise because the agency always had the authority to verify “first sale” claims to its satisfaction. This is not news.

For “first sale” audits, KPMG’s Trade and Customs practice has an established extensive audit and risk-based qualification program, with quick response from other KPMG member firms’ customs audit teams in over 80 countries that can assist with record and accounting requests, documentation translations, and audit defense.

It remains to be seen, however, whether CBP would use the revised “ground rules” to request more information than is currently being requested in “first sale” audits—for example, requesting documents concerning issues that may be supportable by more reasonable alternative means. In which case, CBP’s proposed revisions would not be a mere clarification of existing policy, and would be counter to the assistant commissioner’s statements. That would be news. But this remains to be seen.

Importers are reminded that similar concerns were present in the latter part of the 1990s when U.S. Customs established its extensive import record-keeping list (referred to as the "(a)(1)(A) list” under 19 C.F.R. Appendix to Part 163) in response to the Customs Modernization Act, part of the North American Free Trade Agreement Act of 1993.

Thus, CBP’s recently proposed revisions would not deter importers from continuing to make “first sale” claims based on the exercise of reasonable care.

Also keep in mind that the question of whether CBP has the extra-territorial authority to audit or demand documents of a foreign company is a different and separate issue from that of whether CBP has the authority to deny a “first sale” claim that has not been established to its satisfaction. The former is questionable, but the latter is undeniable.

Thus, costly legal challenges to CBP’s authority to request foreign documents could occur, but it may potentially be a situation in which the challenger wins the battle but loses the war. A sound approach could be to invest in a program that is grounded in reasonable care, depending on the importer’s specific facts and circumstances.

Possible action steps

In light of the extensive “first sale” record-keeping list proposed by CBP, importers may consider certain action steps, including, but not limited to:

  • Importers may join CBP’s Importer Self-Assessment (ISA) program to self-manage their own audit and compliance programs to avoid potentially intrusive CBP audits.
  • Importers may consider participating in the Automated Commercial System Reconciliation Prototype to systemically modify the declared “first sale” value in the event post-entry internal reviews merit a change prior to liquidation.
  • Importers need to determine in advance that they have the cooperation of their overseas partners to provide timely records when requested, including potentially sensitive financial information (this can potentially be done contractually as part of the supply negotiations).
  • Importers can take steps to assure their overseas partners confidentiality of their information through third-party record handlers and confidentiality agreements.

Additionally, it is possible that CBP would provide additional guidance in its proposed revisions to set boundaries or context when certain documents can be requested, and train their auditors regarding the checklist. KPMG’s Trade and Customs practice is prepared to work with CBP concerning additional guidance, and shall be submitting comments to the proposed draft.


KPMG’s Trade and Customs practice worked to preserve “first sale” valuation when CBP challenged its existence in 2008, and will continue its efforts today to preserve reasonable “audit” ground rules on behalf of the importing community.

In the meantime, while this issue is being debated and plays out on a case-by-case basis, KPMG’s Trade and Customs practice continues to adhere to the time-tested adage that “an ounce of prevention is worth a pound of cure.” To prepare, importers need to set rigorous “first sale” qualification and record-keeping criteria with their foreign partners and have an audit defense plan and strategy in advance of any potential CBP audit.

KPMG’s Trade and Customs practice services can assist importers with the exercise of reasonable care and compliance with relevant “first sale” rules and regulations on a consistent basis.

For more information, contact a professional with KPMG’s Trade & Customs practice:

Douglas Zuvich

(312) 665-1022

Andrew Siciliano

(631) 425-6057

John L. McLoughlin

(267) 256-2614

Todd R. Smith

(949) 885-5617

Luis A. Abad

(212) 954-3094

Amie Ahanchian

(202) 533-3247

Or your local KPMG Trade & Customs professional.

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