Related Parties

In customs and trade compliance, “related parties” refers to a buyer and seller who have a specific relationship that could influence the price of imported goods. U.S. Customs and Border Protection (CBP) scrutinizes transactions between related parties because the transfer price may not reflect a fair market value. If a parent company in China sells goods to its subsidiary in the United States at an artificially low price, the declared customs value would be understated, resulting in lower duty payments. CBP’s job is to ensure that the transaction value used for duty assessment accurately represents what the goods are worth.

Who Qualifies as Related Parties

CBP defines related parties under 19 USC 1401a(g), which aligns closely with the World Trade Organization’s Customs Valuation Agreement. Parties are considered related if any of the following conditions exist: one party is an officer or director of the other’s business, they are legally recognized partners, one is an employer of the other, one party owns or controls (directly or indirectly) 5% or more of the outstanding voting stock or shares of the other, one party directly or indirectly controls the other, both parties are directly or indirectly controlled by a third party, or the parties are members of the same family.

The 5% ownership threshold is notably low. A U.S. importer that owns just 5% of its overseas supplier is considered a related party for customs valuation purposes. This catches many joint venture arrangements, minority investment positions, and strategic partnerships that the parties might not think of as “related” in everyday business terms.

Why It Matters for Customs Valuation

The default method for determining the customs value of imported goods is the transaction value: the price actually paid or payable for the goods when sold for export to the United States. When the buyer and seller are related, CBP questions whether the relationship influenced the price. If CBP determines that the relationship affected the price, it can reject the transaction value and use an alternative valuation method, such as the transaction value of identical or similar merchandise, deductive value, or computed value.

The burden of proof falls on the importer. When an entry is flagged for related-party review, the importer must demonstrate that the relationship did not influence the price. This is done by providing evidence that the price is comparable to prices in sales between unrelated parties for identical or similar goods, or by showing that the transaction value closely approximates a test value (such as the deductive or computed value for identical goods).

Disclosure Requirements

Every customs entry filed with CBP includes a question about whether the buyer and seller are related. This appears on CBP Form 7501 (Entry Summary) and in the ACE electronic filing system. Answering “yes” does not automatically trigger an audit, but failing to disclose a related-party relationship when one exists is a compliance violation. CBP conducts focused assessments and audits specifically targeting related-party transactions, and an undisclosed relationship discovered during an audit can result in penalties, duty reassessments, and heightened scrutiny on all future entries.

Transfer Pricing and Customs Value

Many multinational companies use transfer pricing methodologies (developed for income tax purposes under IRS guidelines) to set intercompany prices. However, transfer pricing for tax and transfer pricing for customs are governed by different rules and different agencies. A transfer price that satisfies the IRS may not satisfy CBP. The IRS wants to ensure that profits are properly allocated between entities. CBP wants to ensure that the customs value is not understated. These goals can conflict: a high transfer price reduces U.S. taxable income (good for the foreign parent) but increases customs duties (bad for the U.S. importer). Companies must reconcile these competing pressures carefully.

Practical Steps for Related-Party Importers

Importers in related-party transactions should maintain documentation supporting their declared customs values. This includes intercompany pricing agreements, market comparisons showing that the transfer price is consistent with arm’s-length pricing, and any third-party appraisals or studies. Working with a customs broker experienced in related-party transactions is advisable, as the documentation requirements and CBP’s analytical expectations are more demanding than for standard arm’s-length imports.

Filing a ruling request with CBP to pre-approve the valuation method provides certainty. CBP’s binding rulings program allows importers to submit their related-party pricing methodology for review before or during importation. An approved ruling protects the importer from retroactive duty adjustments as long as the actual transactions conform to the methodology described in the ruling.