Sunday, May 01, 2005

Valuation Part 1--Transaction Value

Customs entry . . . $100
Commercial invoice . . . $100
A cancelled check . . .$100

Customs compliance relating to valuation . . . Priceless.

Basically, that is it 98% of the time. Your entered value should correspond to the price you agreed to pay for the goods. That amount should be what is shown on the invoice, reported to customs and paid to the supplier.

Of course, it is a lot trickier than that when you start looking at the details.

Most entries are appraised on the basis of the transaction value of the merchandise. Transaction value is defined as the price paid or payable for the merchandise when sold for export to the United States. To that amount, there are certain specified additions that must be reported to account for elements of value not included in the price.

Why is this important? For two reasons. First, the practical answer is that most duties are calculated on an ad valorem basis. We say things like ad valorem when we want to prove we went to law school and that this is too complicated for the average Joe. All it means is that the duty is based on a percentage of the value of the merchandise. If you have a 2.5% rate and the goods cost $100, the duty is $2.5. But, if the goods are really worth $150, the duty is $3.75. So, Customs has reason to be suspicious that value is under reported and importers have a good reason to want to avoid over reporting.

The second reason is less practical. Keep in mind that a lot of what enters the U.S. is duty-free. So, the value is irrelevant for duty calculation purposes. But, it is still the law that the duty be reported properly. Customs does do some calculations based on the duty--Harbor Maintenance Tax and Merchandise Processing Fee for example, may be applicable. Both are ad valorem taxes. Because of this, and for other reasons, Customs want the data to be right. As a result, it still counts as a compliance error to get it wrong, even it there is no real consequence on the revenue collected. If you want to get really technical about, there are potentially serious implications any time you provide false or incomplete information to the federal government.

You also need to keep in mind that the transaction value is the total price whether paid directly or indirectly. This means that an invoice price of $10 per unit plus an off-invoice payment of $2 per unit sold adds up to a $12 appraised value. And, an additional $2 paid to the brother of the owner of the factory is probably going to count as an indirect payment and force your appraised value up to $14. See how it can creep up on you?

The required additions to transaction value are:

  • The packing costs incurred by the buyer with respect to the imported merchandise;
  • Any selling commission incurred by the buyer with respect to the imported merchandise;
  • The value, apportioned as appropriate, of any assist;
  • Any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
  • The proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.
Keep in mind that none of these are added to the invoice price if they are already in there. Also, there are exceptions for engineering work undertaken in the U.S. That is part of government policy to keep engineers off the street. We all thank the government for that.

Hands down, the item that causes the most grief for importers and the most work for Customs auditors is the "assist." An assist is defined as:

any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:

  • Materials, components, parts, and similar items incorporated in the imported merchandise.
  • Tools, dies, molds, and similar items used in the production of the imported merchandise.
  • Merchandise consumed in the production of the imported merchandise.
  • Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
If you think about it for a while, it makes sense. If the buyer in the U.S. gives the seller in Taiwan all the buttons and zippers necessary to make coats, the seller does not have to go out and get them. That means the costs associated with that material will not be included in the invoice price. It also means that the invoice price is less than the actual value of the goods to the buyer. So, the buyer needs to report those materials as an assist.

Same thing applies if the buyer says, "Look, I don't have a bunch of buttons and zippers laying around. Go buys some and I'll reimburse you." Technically, this is not an assist because the buyer did not provide materials, but it is treated the same way.

Assists can be reported as a lump sum on the first entry or the value can be apportioned over a number of entries. It is up to the importer.

The value of the assist itself is the value to acquire it plus the value to transport it to the place of production. That results in the cool phenomenon that used and fully depreciated production equipment sent abroad for use in production has no value other than the cost of transportation.

This all gets very sticky very fast. For example, what about a multimillion dollar research program in Japan funded by a U.S. buyer? Or, what happens when the assist is not provided by the importer but by subsequent buyer in the U.S. Like I said, it gets sticky. I will not even venture an off-the-cuff generalization.

The other additions are important, and each has its own charm that could merit a post of their own. Maybe I'll do just that.

Stay tuned for royalties and commissions.

No comments: