Elements Necessary To Demonstrate To U.S. Customs & Border Protection
That An Agent May Qualify As A Bona Fide Buying Agent
The primary method of appraising imported merchandise 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. The additions include packing costs and any selling commissions incurred by the buyer with respect to the imported merchandise; the value, apportioned as appropriate, of any assist; and any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States.1
Although selling commissions are specifically enumerated as a cost to be added to transaction value, bona fide buying commissions are not so enumerated and the courts have confirmed that they are not an addition to the price actually paid or payable. However, the importer has the burden of proving that a bona fide agency relationship exists and that any payments to the agent do constitute bona fide buying commissions.
Obviously enough, “buying commissions” are fees paid by an importing buyer to its agent for the service of representing it abroad in the purchase of the goods being appraised. Whether they are bona fide buying commissions depends upon the relevant factors of the individual case. Although no single factor is determinative, the primary consideration is the right of the principal to control the transaction vis a vis the agent’s conduct with respect to those matters entrusted to the agent. That is, the agent cannot act independently or without the express authorization of the principal with respect to those matters.
Functions performed by an agent such as searching the market for the best available prices for sale to the importer, vendor negotiations (e.g., price, delivery, quantities), making quality control inspection of merchandise prior to shipment, arranging shipment, and making payments on behalf of the buyer (e.g., for product, freight and samples, etc.), none of which inure to the benefit of the agent, are all indicia of a purchasing agency.
In analyzing the agent’s performance, the courts have examined such factors as whether the purported agent’s actions were primarily for the benefit of the principal; whether the agent was responsible for the shipping and handling and the costs thereof; whether the language used in the commercial invoices was consistent with a principal-agent relationship; whether the agent bore the risk of loss for damaged, lost or defective merchandise; and whether the agent was financially detached from the manufacturer of the merchandise.
Accordingly, the following elements are ones that in our opinion demonstrate that the agent functions as (1) a representative (rather than a principal) and (2) an agent for the buyer (as opposed to the seller) and should be present in such an agreement:
- Principal’s appointment of the agent and agent’s acceptance of the role;
- Certification by the agent that it is not affiliated with, nor does it have any financial interest in or control of, any of the possible suppliers or vendors;
- Certification by the agent that no part of any of the payment to the agent will inure to the benefit of the supplier or vendors;
- Confirmation by the agent that it will provide proof of payment for all payments made on the Principal’s behalf;
- Confirmation that, in the event that officials of the U.S. Customs and Border protection request evidence supporting the non-dutiable status of agency commissions paid pursuant to the Agreement, the agent shall fully cooperate with the Principal and U.S. Customs by providing such requested evidence to the extent that it is in agent’s possession and/or control;
- Confirmation that the agent will keep, at all times, during the term of the Agreement and for six (6) years thereafter, complete and accurate books and records with respect to its services;
- Confirmation that that the Principal will be the importer of record, bears the risk of loss and that absolute title to all Merchandise procured by the agent on behalf of the Principal will immediately vest in the Principal.
In general, all pertinent paperwork (purchase orders, invoices, etc.) must comport with the understanding of the parties and reflect the relationship. Accordingly, all purchase orders should identify the manufacturer or vendor as seller and the manufacturer’s invoice should identify the Principal as the buyer. If purchase orders are placed by the Principal with the buying agent, the agent should always be identified as acting “for and on behalf of” the Principal. Correspondingly, the agent’s orders placed with the vendor on the Principal’s behalf should identify the agent as acting “for and on behalf of” the Principal. Invoices for billing and Customs clearance should be issued by the vendor to the Principal, with payment being remitted directly to the vendor against the vendor’s invoice. The separately billed commission should be disclosed to Customs at the time of entry.
In this regard, the manner of invoicing is an important factor impacting the dutiability of the bona fide buying commissions. Although bona fide buying commissions are not to be added to the price actually paid or payable, if they are included in the seller’s price, there is no statutory provision to allow their deduction from the price2. Thus, the commission amount remains a part of the transaction value and is subject to duty if it is included in the Principal’s invoice from the supplier.
Accordingly, payments for a bona fide buying commission should always be separately invoiced by the buying agent to the Principal and paid for directly to the buying agent by the Principal.
Since the issue of invoicing and payments are also taken into consideration in determining the bona fides of an agency relationship, we also recommend that the manner of payment and invoicing be detailed. For example:
Unless otherwise specifically agreed, all payments for merchandise sourced under the agreement will be made by the Principal directly to the vendor/supplier against invoices issued by the vendor/supplier directly to the Principal.
The Agent’s commission will be payable against invoices issued by the Agent to the Principal and supported by detailed statements.
Additional factors in deciding whether a bona fide agency relationship exists consist of an analysis of the relationship and the transaction documents. Customs and the courts examine:
(1) whether the importer could have purchased directly from the manufacturers without employing an agent;
(2) whether the importer specifies the manufacturer or factories from which it buys; and,
(3) whether the principal has demonstrated control over the agent or control over the transactions, such as by directly engaging in price negotiations with manufacturers, or at least giving direction to the agent.3
Thus, in addition to documenting the existence of a bona fide buying agent relationship through an agreement, of equal importance is documenting the transaction to demonstrate that the agent’s actions are consistent with that of a bona fide agent; the relationship is crucial in demonstrating the bona fides of the buying commission. In this regard, Customs routinely requires presentation of the vendor’s invoice (identifying the Principal as buyer), and payment thereof, in substantiation of the direct sale between the vendor and importer.