Last week we looked at CBSA Valuation in Canada. This week let’s switch gears and head south to look at CBP Valuation. Customs valuation, also known in the US as customs appraisement, is an important topic on both sides of the border. While most companies spend considerable time and resources preparing for tax audits, it’s equally important that the same amount of effort be dedicated to customs appraisement. The laws between countries can be quite different in some ways and yet very similar in others.
The Six Methods Of Appraisement
All merchandise imported into the US is subject to appraisement as codified in the Trade Agreements Act of 1979 at 19 U.S.C. 1401a, et seq., which sets forth the following six methods of appraisement in their order of precedence:
- Transaction Value: the most commonly used principle. It is based on the goods being “sold for export” where the “price paid or payable” is determinable.
- Transaction Value of Identical Merchandise: used when the transaction value is not able to be determined. The goods must be the same in all respects, with only minor differences in appearance.
- Transaction Value of Similar Merchandise: means the goods closely resemble, perform the same function, are commercially interchangeable, and produced in the same country by the same manufacturer.
- Deductive Value: “build down” method - the basic concept of deductive value is the resale price after the importation of the goods, with deductions for certain items. This is usually calculated by starting with a unit price and making certain additions to and deductions from that price. If the sale includes a value for an assist this method can not be used.
- Computed Value: “build up” method - sum of the cost of value of materials and fabrication, profit and general expenses that would be usual for the same merchandise, any assists plus packing costs.
- Residual Value / Derivative / Fall-back Method: when the customs value cannot be determined under any of the previous methods, it may be determined using reasonable means consistent with the principles and general provisions of the Agreement and of Article VII of General Agreement On Tariffs And Trade 1994 (GATT), and on the basis of data available in the country of importation. To the greatest extent possible, this method should be based on previously determined values and methods with a reasonable degree of flexibility in their application.
Informed Compliance Publications (or ICPs) are available for assistance in interpretation and application of the regulations.
When importing goods into the commerce of the US, all importers must provide a “value for duty” to US Customs and Border Protection (CBP) for the goods being imported. Both US Customs and Canada Customs require that the appraisement methods outlined in the regulations be used in order of precedence, as outlined above, with a couple of differences. To explain these we must dive a little deeper into the first method, Transaction Value.
As we mentioned earlier in this blog, the primary method of valuation is referred to as Transaction Value and is based on goods “sold for export” for a “price paid or payable”.
Most often the use of this method is accurate, however in some cases it may be applied incorrectly. We will briefly review what exactly those two phrases mean and what elements must be met in order to use the Transaction Value method correctly.
What Does Sold For Export Mean?
Sold for export means that for goods to be appraised under the transaction value method, the importer must be able to show the goods presented to Customs have been "sold" and are "for export to the receiving country”.
This can be difficult to determine. In many cases, a commercial importation involves more than one sale, at different prices, before the goods are ultimately purchased by the party in the importing country. Since the price of goods generally increases each time they are sold, determining the correct “sale for export” is important.
So, what exactly does “sold” mean? It is a qualified sale, in other words evidence of a sale, which includes transfer of ownership for a price or other consideration. Evidence of a sale may come in the form of invoices, purchase orders, contracts, etc.
Let’s take a quick look at examples of situations that do not meet the definition of “sold for export”. In a situation where between the time the decision to export the goods was made and the time of importation, no actual agreement to sell the goods was made between a purchaser and vendor, there is no sale for export.
- Free goods (samples, gifts)
- Goods imported on consignment
- Goods imported by intermediaries, who do not purchase the goods and who sell them after importation
- Goods imported by branches which are not separate legal entities (related)
- Goods imported under a hire or leasing contract
- Goods supplied on loan, which remain the property of the sender
- Goods (waste or scrap) imported for destruction in the country of importation with the sender paying the importer for the services
What Does Price Paid Or Payable Mean?
These terms are the same in both countries where the term "price paid" is the total of all payments made directly or indirectly by the purchaser to the vendor, and the term "price payable" is the total of all payments that are owed and will be made directly or indirectly by the purchaser to - or for the benefit of - the vendor.
Can Adjustments Be Made?
Yes, adjustments can consist of both additions and deductions where additions can be in the form of…
- Transportation costs TO the place of direct shipment
- Assists: goods and services, provided free of charge or at a reduced charge by the purchaser for use in connection with the production of imported goods, such as tools and dies, or materials and certain engineering work
- Commissions: generally, selling commissions form a part of the value for duty; buying commissions do not
- Packing costs/charges
- Royalties and license fees
- Subsequent proceeds
… and deductions can come in the form of:
- Transportation costs FROM the place of direct shipment
- Costs incurred in the import country such as construction or assembly if it is identified separately with an actual verifiable value
- Duties and taxes (for example on DDP incoterm®): if identified separately with an actual verifiable value
- US Customs Brokerage charges
- Discounts: there are many types such as warehouse, advertising, quantity, resale, volume, cash, and trade level to name a few
Note: If the obligation or condition is met prior to importation, the amount of the discount should be considered when calculating the price paid or payable; however, any discount which is taken after importation, other than a cash discount, may not be deducted from the price paid or payable.
Pro tip: All deductions from the transaction value must be the actual charges paid or payable for the service, must be accounted for on the commercial or customs invoice, and fully supportable by a bill or proof of payment at the time of entry. Keep all records!
Are There Limitations?
Yes, there are four main limitations to Transaction Value which include:
- Restrictions on the disposition or use of the goods
- Conditions placed upon the sale
- Subsequent proceeds
- The vendor/purchaser relationship
This is Transaction Value in a nutshell.
Now that we have that foundation laid, we can take a look at the areas in which the US and Canada differ in regards to determining whether or not the transaction value can be used. These are the “purchaser in Canada” and “first sale” concepts.
Purchaser In Canada
The Canadian Government amended the Transaction Method definition in 1995 to include the words “to a purchaser in Canada”. Since then, it has been virtually impossible to use and apply the “first sale” concept to determine the value of imported goods into Canada, a concept broadly used and applied in the US.
The concept of “first sale” is only permitted in the US by the US Customs and Border Protection (CBP), not by the IRS nor in Canada by the CBSA or CRA. As you can imagine, this can cause quite a bit of confusion for importers, accountants and customs brokers alike!
The term “first sale” refers to transactions where there may be multiple sales of the goods prior to the first import. Thus, importers can value their merchandise based on the price paid by a foreign intermediary to the foreign manufacturer, rather than the price paid by the US importer to the foreign intermediary.
The World Trade Organization (WTO) did not clarify its interpretation of "sold for export" until 2007, leaving countries to interpret the phrase on their own. Australia and Canada interpreted it to be the last sale before importation. Some countries even adopted the phrase "sold for import" to depart from the "first sale" principle; however, prior to the WTO's clarification, the US, Japan, and European Union all allowed importers to use the "first sale" value if certain requirements were met.
It may be on its way out though as both the EU and Japan no longer use it, and the CBP is very strict about justification for the first sale claims. If you cannot provide supporting documentation that is air-tight, they will deny the claim and you will need to use the higher valued second (or last) sale.
As you can see customs appraisement is an integral and intricate part of international trade and can very quickly get nuanced. In this and last week’s blogs we have only scratched the surface. We highly recommend joining the waitlist for our next webinar How To Value A Product For Customs to get a more in-depth look of all six methods as well as other concepts like transfer pricing, reasonable care, related party transactions and much more.