Retrospective price adjustments and price review clauses
Information about retrospective price adjustments and price review clauses.
In commercial practice some contracts may include a price review clause, or the contractual arrangements may provide for an adjustment to the price. Initially the price is provisionally fixed. Final determination of the price payable is subject to certain factors which are set out in the provisions of the contract itself (WCO Commentary 4.1). In the case of contracts containing a review clause or providing for a retrospective price adjustment, the transaction value of the imported goods must be based on the total final price payable in accordance with the contractual stipulations.
Cases arise in which the contract of sale is verbal or in which variation of a written contract is agreed verbally between the parties concerned. In principle such verbal contracts and variations are to be accepted providing both buyer and seller are prepared to furnish written confirmation or, in cases of doubt, sworn statements.
This situation can occur in a variety of ways, for example:
Plant and capital equipment made specially to order
The goods are delivered some considerable time after the placing of the order. The contract specifies that the final price will be determined on the basis of an agreed formula. The formula recognises increases or decreases of elements such as cost of labour, raw materials, overhead costs, and other inputs incurred in the production of the goods.
Goods delivered over a period of time
The quantity of goods ordered is manufactured and delivered over a period of time. As a result of contract specifications, the final price of the first unit is different from that of the last unit and all other units.
Goods are provisionally priced
The goods are provisionally priced, because, in accordance with the provisions of the sales contract, final settlement depends on examination or analysis at the time of delivery, for example, acidity level of vegetable oils, the metal content of ores, or the clean content of wool. This would also apply where the contractual arrangements provide for the goods meeting a standard of quality stipulated by the buyer, for example, textiles or garments.
Where the price review clause has already produced its full effect by the material time for valuation that is, time of entry of the goods to free circulation, no problems should arise since the price actually paid or payable is known. However, if, for some reason, the effect of the price review clause is not taken into account when the customs value is declared, it would be necessary to take remedial action at the post-importation stage.
Potential difficulties arise where price review clauses are linked to variables which come into play some time after the goods have been imported. One practical solution is for the importer to arrange for the goods to be released under security arrangements, that is, duty would be taken on deposit. However, this would only apply in instances where the value of the potential adjustment is determinable at the time of importation, but where it is not known at the time of import whether such a condition will be applied.