IMPORT ADMINISTRATION POLICY BULLETIN


Number 94.4

Date of Issue  3/25/94

Topic:         Treatment of Related Party Transactions for the
Cost of Production and Constructed Value Calculations

Author:        Neal Halper


Approved:       (Signed 3-25-94)                         
               Joseph A. Spetrini
               Acting Assistant Secretary
                for Import Administration


Statement of Issue

Should transactions with related parties (as defined in section
773(e)(4) of the Tariff Act of 1930, as amended ("The Act")) be
reported at transfer price or cost of production when determining
the cost of production ("COP") and the constructed value ("CV") of
the product under investigation?


COP Analysis

The Act does not explicitly address the treatment of related party
transactions when calculating COP to perform a sales-below-cost-test. 
However, in view of the legislative history, when determining the 
actual costs of production, the Department normally adheres to 
generally accepted accounting principles ("GAAP") of the respondent's 
home country.  

In accordance with GAAP (International Standards, and GAAP in
virtually all countries), economic activities are consolidated for
all companies that have direct or indirect common ownership of
greater than fifty percent.  A consolidation is performed to
eliminate the effects of all intercompany transactions.  The
consolidation effectively shows the actual costs of production of
the entity group as if the parent company and its subsidiaries were
a single company with one or more branches or divisions.  


COP Statement of Policy

Applying the above accounting principle in determining a company's
cost of production as used for dumping purposes, the actual costs
of production should be used to value inputs acquired from
companies that are directly or indirectly related by more than
fifty percent.  For those companies directly or indirectly owned
fifty percent or less, inputs should be valued using transfer
prices, unless control of one party over the other can otherwise be
demonstrated. 


CV Analysis

For CV, the Act specifically addresses the treatment of related
party transactions.  Section 773(e)(2) of the Act states that:

     For the purpose of this subsection, a transaction
directly or indirectly between persons specified in any one of the
subparagraphs in paragraph (4) of this subsection may be
disregarded if, in the case of any element of value required to be
considered, the amount representing that element does not fairly
reflect the amount usually reflected in sales in the market under
consideration of merchandise under consideration.  If a transaction
is disregarded under the preceding sentence and there are no other
transactions available for consideration, then the determination of
the amount required to be considered shall be based on the best
evidence available as to what the amount would have been if the
transaction had occurred between persons not specified in any one
of the subparagraphs in paragraph (4) of this section.

Additionally, section 773(e)(3) of the Act states that:

     If, regarding any transaction between persons specified
in any one of the subparagraphs of paragraph (4) involving the
production by one of such persons of a major input to the
merchandise under consideration, the administering authority has
reasonable grounds to believe or suspect that an amount represented
as the value of such input is less than the costs of production of
such input, then the administering authority may determine the
value of the major input on the basis of the best evidence
available regarding such costs of production, if such costs are
greater than the amount that would be determined for such input
under paragraph (2). 


CV Statement of Policy

For CV, in determining whether or not to use transfer prices for
transactions between related parties, as defined under section
773(e)(4) of the Act, the Department should compare the amount paid
to the related company, with prices paid for similar transactions
between unrelated parties.  If no comparable market price for
similar transactions between unrelated parties is available, the
Department may use the actual cost of production incurred by the
related supplier as an indication of market value.  If the transfer
price between the related companies occurs at a price determined to
be less than market value, the Department may value the input using
the best evidence available (i.e., market value).  

Additionally, for major inputs to the merchandise considered, if
the Department has reason to believe or suspect that the price of
the input is less than its cost of production, the Department may
investigate whether the transfer price between related parties is
above the supplier's actual cost of producing the transferred
product or service, even if it has been determined that the
transaction occurred at market value.  If it is determined that the
transaction occurred at a below cost price (even though it occurred
at market value), the Department may use the actual cost of
production to the related supplier as the cost to the respondent
company for the input.  


Implementation

The above policy on the treatment of related party transactions for
determining the cost of production and constructed value should be
used in all investigations and reviews for which a preliminary
determination has not been reached by the issue date of this
bulletin, and in all final determinations in which the issue has
been raised in comments from interested parties.  If an action
following this policy is challenged in comments after a preliminary
determination, you should use the reasoning expressed in the
bulletin, as well as citing to any appropriate cases.  In
responding to the comment, the bulletin itself, standing alone,
cannot be cited as authority for an action, as it is not a
regulation.