Monday, June 06, 2005

Customs Valuation: The Saga Ends

I think we have heard enough about customs valuation for now, but I want to make good on my promise to cover three things: deductive value, computed value, and reconciliation. For various reasons discussed below, I am going to give each topic short shrift. Later, I will look up exactly what "shrift" means.

Deductive value is just not used that often. That is not to say it is never used, but it is fair to call it rare. The first reason for that is that Customs rarely rejects transaction value when there is a sale (but it does happen). Next, before an importer can ever get to deductive value, Customs has to find that there is no transaction value of similar or identical merchandise available to stand in as the transaction value for the entry in question. So, not only are we talking about goods that are not sold at arm's length, but goods that really have not been sold to anyone recently. Second, importers have the option of applying computed value rather than deductive value, and that seems to be what people end up doing.

Deductive value is the price of the goods when sold in the U.S. (as always, subject to certain complicated limitation) less a bunch of stuff including:

(i) any commission usually paid or agreed to be paid, or the addition usually made for profit and general expenses, in connection with sales in the United States of imported merchandise that is of the same class or kind, regardless of the country of exportation, as the merchandise concerned;

(ii) the actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States;

(iii) the usual costs and associated costs of transportation and insurance incurred with respect to shipments of such merchandise from the place of importation to the place of delivery in the United States, if such costs are not included as a general expense under clause (i);

(iv) the customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and any Federal excise tax on, or measured by the value of, such merchandise for which vendors in the United States are ordinarily liable; and

(v) (but only in the case of a price determined under paragraph (2)(A)(iii)) the value added by the processing of the merchandise after importation to the extent that the value is based on sufficient information relating to cost of such processing.

That last bit is what is called "super deductive value." Wanna know the customs value of a spring that is never sold as a part but is sold when put inside a watch? Subtract all the stuff listed above, plus whatever is costs to make the watch. That is your spring value. And you wonder why Customs doesn't encourage this.

Computed value is just the opposite. Figure out what it costs to make the product in the foreign location, don't add in all that stuff listed above, make sure to include materials, labor, assists and profits, and you've got your value. As always, the Devil is again in the details.

Computed value is used a lot by maquiladora producers in Mexico. Generally, the reason for that is that there is no sale between the maquiladora and the U.S. importer. Sometimes, the importer can arrange the transaction to include a real live ("bona fide" as we lawyers like to say) sale, so transaction value will apply. But, often Customs uses computed value.

Here's the problem: often, at the time of importation, the manufacturer does not have final costs for materials, labor, overhead, etc. Generally, these figures are estimates based on "standard costs" the cost accountants and industrial engineers have determined. At the end of the fiscal year, companies often review the actual costs and reset standards accordingly. This permits proper budgeting for the next year. The difference between the standard cost and the actual cost is called the variance.

Because of the variances, for customs purposes, it is nearly impossible to accurately state the computed value at the time of entry. After dancing around this issue forever, Customs finally came up with a solution called reconciliation. Under the reconciliation program, an importer can set an electronic flag on an entry. The flag tells Customs that the value information submitted at the time of entry is not completely reliable and will be finalized later. In this case "later" means 21 months later, which should let people get their variances calculated. At that time, the importer files a reconciling entry that basically says, "this is the true value" and, if necessary, deposits additional duties or claim your refund.

Reconciliation has a few other uses. It can be helpful in limited circumstances where there is a classification dispute or where there is a question as to the value of American content in products assembled abroad from U.S.-origin materials. Finally, importers can use reconciliation to make post-entry claims under the NAFTA or the U.S.-Chile Free Trade Agreement. These claims, however, are limited to 12 months from the date of importation.

Now to the important question, what the heck is a "shrift" and why is it sometimes short? Turns out, completely unbeknownst to me, that "shrift" is the confession given to a priest or the absolution given by the priest. No wonder I had no idea what it means. The "short shrift," however, is (according to "a summary, careless treatment, or scant attention." A note on provides further insight:

In early medieval times penances were long and arduous--lengthy pilgrimages and even lifelong exile were not uncommon--and had to be performed before absolution, not after as today. However, less demanding penances could be given in extreme situations; short shrift was a brief penance given to a person condemned to death so that absolution could be granted before execution.

I guess I can still learn something every day.

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