First sale rule under pressure
The first sale rule (FSR) remains one of the most effective duty-saving mechanisms in global trade. By calculating customs duties on a foreign manufacturer’s price to an intermediary rather than the higher final invoice to the importer, multinational supply chains can significantly reduce their dutiable baseline.
However, the availability and application of this strategy vary dramatically across jurisdictions, making it both a limitation for domestic imports and a vital opportunity for outbound supply chains.
For companies importing goods into the Philippines, the first sale strategy is unavailable. The Philippine Bureau of Customs (BOC) strictly adheres to the World Trade Organization Valuation Agreement, as codified in section 701 of the Customs Modernization and Tariff Act.
When evaluating multi-tiered transactions, the BOC interprets the “price actually paid or payable” as the direct, final sale that brings merchandise into Philippine territory. Despite the unavailability of the FSR, Philippine importers face intense related-party transfer pricing (TP) scrutiny.
The BOC collaborates with the Bureau of Internal Revenue (BIR) to cross-reference customs values against official TP documentation under BIR Revenue Regulations No.2-2013 and No.19-2020. Related-party import prices that cannot be justified at the transaction level risk being discarded in favour of higher fallback valuation methods, exposing importers to back duties, taxes and penalties.
While the FSR offers no relief for imports entering the Philippines, it becomes critical when trade flows reverse, particularly for Philippine manufacturers exporting to the US. For exporters selling into the US market through a middleman or foreign intermediary, the FSR can make their goods significantly more competitive by reducing US importers’ duty burden.
This advantage is vital given recent US reciprocal tariffs, which have increased the cost of market entry.
To claim first sale privileges under 19 USC 1401a, an importer must maintain a solid, line-item paper trail demonstrating three legal elements: a bona fide sale in which title and risk actually transfer to the middleman, clear evidence that the goods were destined for the US at the time of manufacture and an arm’s-length price.
For related parties, meeting this standard requires passing the “circumstances of sale” test with detailed cost records rather than broad tax TP reports. A robust FSR setup protects US buyers from compounded tariffs and keeps landed costs manageable.
A recent US Customs and Border Protection (CBP) ruling underscores how closely regulators scrutinise first sale setups. In HQ H357206 (issued on 7 August 2026), CBP rejected an importer’s FSR claim for mixing equipment because its TP documentation was flawed and related-party transactions could not be traced under 19 CFR 152.102(g).
The importer sought to support its first sale price using a model based on forecasted direct costs, allocated indirect overhead and a standard 7% profit markup. CBP rejected this approach, reiterating that broad corporate TP studies prepared for income tax purposes, which assess overall profitability using methods such as TNMM (transactional net margin method) or CPM (comparable profits method), do not meet customs valuation requirements under 19 USC 1401a(b).
Unlike tax compliance, customs law requires importers to show, through the “circumstances of sale” test or “test values”, that the relationship did not influence the specific price of the imported merchandise. This requires “transaction-by-transaction” or “line-item” verification.
The gaps highlighted in HQ H357206 clearly indicate what Philippine exporters and US buyers must avoid. CBP identified two critical failures: unverified “forecasted direct costs” and bulk monthly payments made by the middleman instead of invoice-by-invoice settlements.
The importer’s inability to link these lump-sum wire transfers to individual factory shipments ultimately invalidated the entire first sale claim.
This decision marks a clear shift in how US CBP scrutinises first sale claims. Early precedents, such as Nissho Iwai American Corp v United States (1992), focused on establishing an arm’s-length transaction irrevocably destined for the US, while more recent cases, such as Meyer Corp, US v United States (2022), addressed government market interventions.
In contrast, HQ H357206 involved a purely internal bookkeeping failure. Under current US trade policy, reinforced by directives like Executive Order 14411 (3 June 2026), customs authorities now treat incomplete records as a compliance violation.
For Philippine exporters, preserving US first sale privileges requires shifting from high-level corporate documentation to an unbroken, invoice-by-invoice audit trail. With the EU abolishing FSR under article 70 of the Union Customs Code and Japan restricting valuation to the final sale, the US mechanism faces mounting pressure.
Any move toward a mandatory “last sale” regime or tighter audit enforcement will immediately increase US duty liabilities on Philippine goods unless supply chain contracts are proactively restructured.
MARK ANTHONY P TAMAYO is a CPA-lawyer and a partner of Mata-Perez, Tamayo & Francisco Law Offices (MTF Counsel). He was named among the Asia Business Law Journal’s Top 100 A-List Lawyers in the Philippines for 2026 and received the 2016 Asia Tax Practice Leader Award from the International Tax Review.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments regarding this article, you may email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com
The article was published on the Asia Business Law Journal website on October 27, 2026. Please see this link.
https://law.asia/philippine-exporters-first-sale-rule-reciprocal-tariff-compliance/