The cargo courtyard of the Qianwan United container terminal in Qingdao port in the city of Qingdao, Shandong province, China.
Nurphoto | Getty images
Businesses find a bypass solution to minimize the most important success of prices, using legislation of several decades known as the “first sale rule”.
As part of the American customs law, the first sales rule allows importers to use the price of the first sale in a certain number of transactions to calculate customs duties.
For example, a Chinese manufacturer sells a t-shirt to a Hong Kong seller for $ 5. This Hong Kong seller then sells the T-shirt to an American retailer for $ 10. This American retailer then sells the T-shirt to consumers for $ 40.
Under the first rule of sale, the American retailer can pay import duties on the initial price of $ 5 of the property, rather than the inflated supplier of $ 10, thus removing the cost associated with the benefit of the intermediary.
“What the rules allow you to use this initial sale price from the factory to the supplier to determine the final price,” said Brian Gleicher, main lawyer and member of Miller & Chevalier Chartered, at CNBC by phone.
How does it work
The first sales rule has existed since 1988, but has drawn renewed attention under the first administration of US President Donald Trump and now during his last pricing regime.
“When the first administration had 25% prices (on China in 2018), it was then that we started to receive calls. Now, with the new prices, the first sales rule started to return,” said Sid Paruthi, partner of the American consulting company Moss Adams, on the video call.
Everyone is starting to explore it with more interest.
Brian Gleicher
Senior lawyer and member of Miller & Chevalier Chartered
“It has existed for a very long time but … everyone is starting to explore it with more interest,” said Gleicher.
Here are the criteria that companies must fulfill to apply the rule:
- There must be at least two sales involved: one of a foreign producer and one or more of an intermediary
- Sales must be made on the length of the arm by independent parts and completely unrelated
- There must be proof that the article was intended for the United States, rather than simply finishing there
- There must be documentation of the first sale price
For some companies, it can be easier to say than to do.
As a general rule, the defect right imposed by American customs is based on the import price of a property, which is responsible for evidence on the importer to demonstrate the initial cost of this article. It may not always be something that a seller is ready to reveal.
“If you are an importer, you need to get this first sale price. You must have the data,” said Gleicher. “Sellers may not want to give this information.”
Rich Taylor, a business development consultant based in the Chinese HUB Ningbo who advises Fortune 500 companies on the first sales rule since Trump’s first mandate, noted that “there must be a level of confidence between all parties” due to the risks involved.
However, additional complexities can be worth it, given the potential cost savings.
“You (suppliers) keep your customer. You show them that you are trying to give them all the tools to reduce their cost,” said Taylor.
“If you do not use it, the final cost will increase. And if your competitor uses the rule (first sale), then you will get this advantage over them.”
Who uses it?
Companies seem to settle there.
Although the first sales rule is largely applicable between products and industries, it is considered particularly useful in consumer goods and greater luxury products, where the margins are greater.
Last month, Italian luxury fashion brand Moncler pointed out the first sales rule as offering a “significant advantage” to its cost structure.
The industrial cost … is much lower than the retail price … This is an important advantage.
Luciano Santel
Executive director and business manager and supply managers at Moncler
“The first cost (sale), of course, the industrial cost … is much lower than the retail price, and it is around 50% of the intersocated price. So, of course, it is a significant advantage,” said Investors Luciano Santel, executive director and leaders of the companies and managers of the offer of the MONCLER offer, during a profit call of April 16.
Biotech Kuros Biosciences whose headquarters are in Switzerland declared earlier this month that he changed his operations, which would allow him to adopt the first sales policy.
“What we are going to do now is that we are going to pass between Zurich as a wholesale hub … which means in substance that we can adapt the so-called first method of sale”, Daniel Geiger, financial director of biotechnology to biotechnology at the same time KUROS Biosciencessaid in a call for results on May 13.
During the first quarter of income calls, US BBQ Maker Traeger And the FICTIV manufacturing company also both cited the first sale as “attenuations of the supply chain” and means “minimizing the price and price costs respectively”.
The use of the rule of the first sale, although perfectly legal, could nevertheless undermine the efforts of the Trump administration to increase the income of prices and strengthen the fraternal manufacturing.
The White House did not respond to the request for CNBC comments on the use of the first sales rule and its implications for the pricing policy.
Customs and the protection of American border have said that it could not provide data on the recent use of the first rule of sale by importers.
– Ganesh Rao of CNBC contributed to this report.