When goods travel across global borders, one of the most critical aspects of the customs clearance procedure is determining the correct customs value. Correct customs valuation ensures adherence to trade regulations, prevents penalties, and even influences how competitive you are in the market. However, the procedure can all too frequently appear overwhelming, especially for small business proprietors and trade professionals managing several aspects of supply chains.
In this guide, we'll go through the most used customs valuation method---transaction value---and the other methods you may need to utilize. Regardless of whether you're an SMB owner, logistics coordinator, or trade compliance officer, this article will simplify the intricacies of customs valuation and allow you to identify the most compliant and accurate way to value your products.
Customs valuation determines the financial value of imported or exported products. The value is not arbitrary; it forms the basis for the calculation of customs duties and taxes and ensures fair and uniform trade practices globally.
There are six methods of customs valuation under the World Trade Organization (WTO) valuation rules (which are also adhered to by most customs authorities globally). These are hierarchical methods, so you'll use them in sequence, starting with the transaction value.
Inaccurate customs valuation will result in outcomes you'll certainly want to prevent:
For first-time business exporters, it's essential to learn about valuation methods not only for cost-saving purposes but also for maintaining a good reputation with the customs authorities.
The transaction value method is the most extensively used customs valuation method internationally. It's based on the actual price paid or payable for goods at the sale location for export to the country of destination.
Major Components of Transaction Value:
This is the total monetary value agreed upon between the buyer and seller. It includes direct payments (e.g., cash) and indirect ones, such as credits against future purchases.
The customs authorities may require adjustments to account for:
Post-importation transportation costs, domestic taxes, or construction services for industrial equipment are excluded from the transaction value.
Example:
Consider the case of importing a shipment of 1,000 T-shirts from Vietnam. When the invoice value is $5,000, and the shipment also contains $200 worth of packing materials, the customs value is raised to $5,200. This will be the foundation for the assessment of customs duties.
Although the transaction value method is the ideal method, there are some cases when it will not be applicable:
If the goods are provided free (e.g., promotional samples), there is no sale upon which to establish valuation.
If the price is influenced by the buyer-seller relationship (e.g., parent company selling to subsidiary at a lower price), the transaction value may not be acceptable.
Customs officials require proof of price paid (e.g., invoices). If not forthcoming, alternative methods are applied.
If transaction value is not possible, customs officials will progress through the subsequent alternative methods (in order):
If the imported goods are the same as a previous shipment that has been valued (and the same condition of sale prevails), customs can use that transaction value.
Example:
When you're importing a second shipment of car parts that are the same as a prior shipment, the previous customs value can be used.
Here, customs value is ascertained by comparing goods of the same kind. The similarity could be in function, material, quality, or origin.
Example:
An importer of electronic tablets from China could utilize the customs value of tablets with the same or similar specifications that are similarly priced.
Under this method, customs determine the value by subtracting from the selling price of goods in the importing country. It adjusts for items like profit margins, inland freight, and import duties.
Example:
If a smartphone imported is sold for $700 in the destination market, customs will deduct profit margins, local costs, and taxes to determine the customs value.
This approach is determined from the price of goods manufactured, e.g.:
Example:
A furniture exporter from Indonesia can declare a customs value of a table based on production invoices that itemize wood, labor, and finishing costs.
If the above methods are not applicable, customs can adopt a flexible method by borrowing components from previous methods. However, the fallback method should be in accordance with WTO guidelines.
Maintain Detailed Records:
Maintain invoices, packing lists, and contracts. Adequate documentation is extremely crucial for the ascertainment of customs value.
Deal with Professionals:
Employ a customs broker or trade compliance expert to assist with valuation problems and ensure adherence.
Stay Up to Date with Regulations:
Customs regulations can vary from country to country or region to region, so stay informed about changes affecting your transactions.
Understand Free Trade Agreements (FTAs):
FTAs can impact customs valuation by reducing or eliminating import duties. Ensure that your imports qualify to benefit from such agreements.
Audit Your Customs Declarations:
Regularly review past customs filings to flag any anomalies or errors that need to be rectified.
Wading through customs valuation methods can appear daunting, yet it's such an important aspect of global trade. Not only does having correct customs values save you from penalties, but it also makes you a reliable player in the global markets.