This Alert is one in an occasional series of articles providing tips about various topics which arise routinely with import and export transactions. These tips are published with the intention to aid international traders in their on-going efforts to get their declarations right the first time, and are based on situations we commonly see occurring. Whether it is reasonable care on the import side or not self-blinding on the export side, compliance is a key for many different reasons, including protecting your bottom line.
Given the ever increasing attention being paid by the U.S. government to compliance by companies of all sizes, and especially in light of the recent informed compliance letter sent out by CBP’s Regulatory Audit in Houston, TX, now is the time to review how to value goods correctly.
The same basic value code is used throughout the world, at least among all the World Customs Organization member countries, although most assess duty on the C.I.F. value of the imported goods, whereas the U.S. assesses duty on the F.O.B. cost of goods. While admittedly each country has its own interpretation and they vary a tad, the basics are:
1) transaction value;
2) transaction value of identical or similar merchandise;
3) deductive value;
4) computed value; and
5) other values.
These are applied in order. For ease of calculation and documentation alone, everybody prefers transaction value. Transaction value simply means the price paid or payable for the merchandise when sold for export to the U.S., plus packing costs, the selling commission, the value of any assist, any royalty or license fee, and the proceeds of any subsequent resale, disposal or use of the merchandise that accrues, directly or indirectly, to the seller, if not already included.
The bottom line is all of the value elements must apply to reach an F.O.B. cost of goods. If the F.O.B. price cannot be established, you go through each other option in order until one is satisfied.
What is the price paid or payable for the goods?
Typically, it is exactly what the definition implies – the F.O.B. cost of the shipment. The amount must be revised if the importer is given a credit on the current shipment to offset a shortage or quality problem on an earlier shipment, whereas the reasonable cost for constructing, erecting, assembling, maintaining, or providing technical assistance after importation, transport of goods post-importation and the duties, user fees and other federal taxes paid by the importer may be deducted, if previously added to the invoice price. Just don’t jump the gun and start deducting any of these costs unless you have actual invoices. Similarly, where there are restrictions on the use of the goods; the value cannot be determined, proceeds accrue to the seller, an adjustment cannot be made or the relationship between the parties influences the price, there are challenges to establishing a proper transaction value.
Assists are a topic unto themselves, but basically cover anything provided to the seller to make the goods which was provided free of charge or at a reduced cost. The one broad exclusion is for engineering, development, artwork, design work, and plans and sketches that are undertaken in the United States. Additional challenges arise when you must apportion the cost as the design work is created in the U.S. and at least one other country or all the units produced are not exported to the U.S. Also worth keeping in mind is the impact if that design work is subject to an export license under the deemed export rules.
Royalties and license fees can be another serious challenge. Any company that owns a trademark, copyright or other form of intellectual property wants to protect it, but trying to determine whether the amount paid is or is not dutiable can be a major headache and often turns on exactly what is provided in the royalty agreement and the actual relationship between the parties – arms’ length or related.
Transaction value of identical or similar merchandise can be a challenge to an importer because you typically do not have access to the acquisition cost of your competitors, assuming your products are identical or similar, and how is that similarity to be defined? Computed value is typically used for related party transactions and deductive value generally applies to consigned goods such as produce. Since this article is intended as a refresher, we will avoid the complexity of these categories of value!
Value Tips For Compliance:
1) Verify the INCOterm of sale of the deal match your invoices and periodically verify how your value is structured;
2) Conduct knowledgeable reviews of your import and export transactions.
3) Provide regular reminders to employees to double-check value issues apparent on documents, such as a term of sale which conflicts with how freight is charged (e.g., an F.O.B. invoice with prepaid freight or C.I.F. invoice with collect freight);
4) Provide training to refresh knowledge and address any issues spotted during previous document reviews;
5) Always vet business partners carefully. Establish the right to make entry or routed transaction is properly documented.
6) Periodically verify that value determinations are correct and current, and reflect actual terms and conditions, and, if any errors are discovered, take immediate corrective action; decide if the error must be disclosed to the government and, in so doing, seek legal advice before making a final decision.
8) Purely on the export side –
- a) the value reported is the selling price by the U.S. Principal Party in Interest to the foreign buyer or cost if not sold;
- b) plus the cost of inland freight, insurance, and other charges incurred in moving the goods from their U.S. point of origin to the U.S. port of exportation;
- c) but the import price is whatever else the buyer’s country requires to be added to reach transaction value.
If you have a topic on which you are interested in receiving tips, please let us know.