Customs Valuation 101
What is Valuation and Why Does it Matter? Customs Valuation is a procedure to determine the customs value of imported goods. The customs value is essential to calculate the total duty to be paid on an imported good. Because there was a need for the international community to have a standardized system for valuing imports, many nations became signatories to a World Trade Organization (“WTO”) agreement that established valuation norms known as the Tokyo Round Valuation Code (later amended into the WTO Agreement on Implementation of Article VII of the GATT 1994).
The United States was a signatory to these treaties and currently maintains and enforces a rigorous valuation system. The U.S. Customs valuation methodology (as well as a summary of relevant Customs rulings) are described in detail in the Valuation Encyclopedia. A common customs valuation standard is important because it ensures that:
- U.S. Customs is protecting its revenue
One of U.S. Customs and Border Protection’s (“CBP”) Priority Trade Initiatives is protecting revenue. The goal of CBP’s Revenue Program is to ensure that CBP has effective internal controls to protect the duties and taxes it collects for the U.S. government. Ensuring that imports are properly valued is a key component of protecting revenue because tariffs and fees are based on the stated value upon importation. If an importer were to undervalue an importation, CBP would collect less revenue.
- The importer is exercising reasonable care
Under 19 U.S.C. 1484, importers of record have a duty to exercise reasonable care to enter, classify, and determine the value of imported merchandise and to provide any other information necessary to enable CBP to properly assess duties, collect accurate statistics, and determine whether other applicable legal requirements are met. CBP is then responsible for fixing the final classification and value of the merchandise. An importer of record’s failure to exercise reasonable care could delay release of the merchandise and, in some cases, could result in an investigation, the imposition of penalties, or even referral for criminal enforcement.
For more information on an importer’s duty to exercise reasonable care, please read What Every Member of the Trade Community Should Know: Reasonable Care (we highly recommend a review of the reasonable care checklist).
- U.S. Census trade statistics are accurate
Information submitted to CBP is utilized by the U.S. Census Bureau to compile trade statistics that are analyzed, distributed, and accessible on U.S. trade databases. U.S. and foreign businesses, policymakers, members of Congress, and others rely on U.S. Census trade data to make critical business and trade policy decisions. The U.S. Census Bureau has a duty to provide quality data about Americans and the economy – including reliable and accurate trade data. A systemic failure by importers to accurately declare the correct value of goods can distort trade data.
For more information on U.S. trade data, check out our Introduction to U.S. Trade Databases article.
- Methods of Valuation
CBP permits merchandise to be valued according to one of the six valuation methods listed below. The methods are applied sequentially from first to last until an applicable value is determined. If the first method does not apply, the importer must then evaluate the second, and so on, until an appropriate method applies. The only exception to this sequential evaluation requirement is when evaluating between deductive value and computed value – an importer may choose to use the computed value before the deductive value.
- The Transaction Value of Imported Merchandise
The majority of goods are evaluated based on the transaction value of imported merchandise. “Transaction Value” refers to “the price actually paid or payable for imported merchandise when sold for exportation to the United States” and certain statutory or dutiable additions. The “price actually paid or payable” refers to the “total payment made or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.”
Statutory additions to the price actually paid or payable include:
- Packing costs incurred
- Selling commissions incurred by the buyer
- The value of an assist
- Royalties and licensing fees paid as a condition of the sale
- Proceeds of any subsequent resale that accrue to the seller
- The Transaction Value of Identical Merchandise
Identical merchandise is defined as merchandise that is “identical in all respects” except that “minor differences in appearance will not preclude otherwise conforming merchandise from being considered ‘identical.’” In order to utilize the transaction value of identical merchandise, CBP must have previously accepted the transaction value of identical merchandise and must have physically examined the identical merchandise. If there is more than one previously accepted customs value for identical merchandise, CBP is required to evaluate the current entry using the lowest of previously accepted customs values.
- The Transaction Value of Similar Merchandise
Similar merchandise is defined as merchandise that is “like the merchandise being appraised in characteristics and component material, and commercially interchangeable with the merchandise being appraised.” Like for identical merchandise above, in order to utilize the transaction value of similar merchandise, CBP must have previously accepted the transaction value of similar merchandise and must have physically examined the identical merchandise. Additionally, if there is more than one previously accepted customs value for similar merchandise, CBP is required to evaluate the current entry using the lowest of previously accepted customs values.
- Deductive Value
Under deductive value, valuation is determined by “deducting” from the domestic sales value of the imported goods certain enumerated costs to arrive at a landed cost. In other words, the importer works backward from its domestic sale price, subtracts certain deductions from the price sold.
These enumerated deductions include:
- Commissions, profit, and expenses related to domestic sale
- Transportation and insurance costs associated with the international shipment of the merchandise
- Transportation and insurance costs associated with delivering goods from port to place of delivery
- Customs duties and federal taxes paid upon importation
- Computed Value
Under computed value, valuation is determined by adding together all of the costs and expenses incurred to manufacture the merchandise. Specifically, computed value is the sum of:
- The cost or value of the materials
- Profit and general expenses
- Value of any assists not already included, and
- Packing costs
Computed value is rarely utilized because it needs access to significant confidential financial information up and down the supply chain.
Finally, a catch-all method is fallback. Under fallback, the value is derived from the preceding methods, reasonably adjusted to the extent necessary to arrive at a value. The fallback method does not prescribe a precise formula, but rather encourages importers to apply some adjustments of the preceding five methods when any of those five do not individually apply.
What You Can Do
- Evaluate your valuation practices – It is always a good idea to take the opportunity to evaluate which of the above valuation methodologies you use to report your import value to CBP. Taking a closer look at your valuation practices can provide opportunities for duty savings (like first sale discussed below) and also alert you if you have been inadvertently violating Customs law, (for example by supplying an assist to your supplier without including it in your customs value). Diaz Trade Law and its consultants, which include former customs import specialist and auditors, remain available to review and evaluate your valuation practices.
- Understand the impact of your related party relationships – If you, as the importer, are purchasing merchandise from a related party, (as defined in 19 U.S.C. §1401a(g)), then you have additional valuation-related responsibilities. If you determine that your relationship is, in fact, a related party relationship, then you must report the related party relationship on your entry summary. Furthermore, you must evaluate whether transaction value may still be used when parties are related. The transaction value for related parties may be used when there is an arms’-length transaction between the parties. An arms’-length relationship is demonstrated to CBP via one of two tests: (1) the circumstances of sales test, or (2) the test values test. The circumstances of sales test requires an examination of whether the sales price enables the seller to recover all of its costs plus a profit equivalent to the firm’s overall profit (all costs plus a profit). Alternatively, under the test values, a related party transaction value may be acceptable if the value of that transaction closely approximates one of the following:
- (i) the transaction value of identical merchandise, or of similar merchandise, in
sales to unrelated buyers in the United States;
(ii) the deductive value or computed value for identical merchandise of similar
(iii) but only if each value referred to in clause (i) or (ii) that is used for
comparison relates to merchandise that was exported to the United States at
or about the same time as the imported merchandise.
- The purpose of the two related parties tests is to ensure that the customs value reflects the true value of the transaction between the buyer and seller (i.e., that the relationship between the parties did not influence the price).
- (i) the transaction value of identical merchandise, or of similar merchandise, in
- Ensure you are correctly classifying your imports – In order to exercise your duty of reasonable care, it is important, that to appropriately classify your import based upon the Harmonized Tariff Schedule of the United States (“HTSUS”). Properly classifying your import has important valuation implications because duty rates and other taxes and fees differ based on which HTSUS you are declaring. If you are unsure how to classify your product, Diaz Trade Law can assist you in determining your appropriate classification, or assist in submitting a binding ruling request, if necessary.
- Consider utilizing the First Sale Rule, if applicable – Sometimes, a transaction involves three parties – a foreign manufacturer, a reseller/middleman, and a U.S. importer. In such circumstances, U.S. customs valuation law permits importers to use the price paid or payable in the sale between the foreign seller and reseller/middleman rather than the price paid or payable in the sale between the reseller/middleman and the U.S. importer. In other words, the “first sale” rather than the second sale is used. Effectively utilizing the First Sale Rule can result in a lower transaction value, which can in turn result in a lower duty amount paid. In order to use first sale, the burden is on the importer to demonstrate to CBP that the imported merchandise should be valued based on the first sale rather than the second sale, and all of the following must apply:
- The first sale must be a bona fide sale from the manufacturer/seller to the middleman;
- Merchandise must be clearly destined for the United States at the time of the first sale;
- The first sale price must be an arm’s length price; and
- Statutory additions to the price actually paid or payable must be included in the first sale price.
- File a prior disclosure – If a company or individual believes it has violated the law by making material false statements in connection with their importations (i.e., undervaluing by not declaring an assist), and CBP is unaware of this violation, proactively and voluntarily disclosing the potential wrongdoing via a Prior Disclosure can substantially reduce penalties. CBP encourages proactive import compliance, including the submission of PDs by parties who believe they may have violated 19 U.S.C. § 1592. According to CBP, “Both CBP and the importing/exporting community have a shared responsibility to maximize compliance with laws and regulations.” Details on CBP’s PD program are available in CBP’s publication, What Every Member of the Trade Community Should Know: Prior Disclosures. If a company or individual suspects it has violated 19 U.S.C. § 1592, the importer can proactively inform CBP to benefit from the possibility of mitigated penalties offered by a PD. Delaying submission of a PD could result in CBP notifying you that it is commencing a formal investigation, thereby preventing you from filing a PD.
Diaz Trade Law has significant experience in a broad range of import compliance matters, including customs valuation. To learn more about the services we offer, contact us at email@example.com or call us at 305-456-3830.