August 25, 2022
Guide to Declared Value & Customs Valuation | FlavorCloud
Along with other data points, chiefly among them the three international trade data elements (HTS, ECCN/export control classification, and Country of Origin), it is imperative that correct customs valuation is used for each international transaction. Correct trade data points and proper customs valuation streamlines the export and import processes, ensuring your goods flow smoothly and helping to mitigate unnecessary risk and exposure to your organization.
What is Customs Valuation?
Customs valuation is the procedure international customs organizations apply to determine the total landed cost of imported goods. Along with duty, import taxes, import excise fees, and other tariffs/ad valorem import costs will be calculated based on the customs value of the imported goods.
Customs Value—Overview and History
Customs Value is the actual monetary amount of the transaction, the declared value, used by customs organizations as the foundation to calculate total landed cost fees while executing the Customs Valuation process
Beginning in the 1950s and before 1994, many countries utilized the Brussels Definition of Value (“BVD”) or the normal market price in assessing landed costs. This relatively rigid process did not account for the increase in newer products coming to market. Additionally, many major economies did not agree to BVD.
Things fundamentally changed in 1994, under the World Trade Organization (WTO) Agreement on the Implementation of GATT Article VII [we’ll refer to this as the WTO Customs Valuation Agreement going forward]. The new WTO Customs Valuation Agreement was much more flexible, providing multiple different accepted methods to determine customs value. It is also mandatory that most WTO member countries adhere to the WTO Customs Valuation Agreement.
Basic Principle and the Six Customs Value Provision Methods
The six methods or basis of appraisement of customs value outlined in the WTO Customs Valuation Agreement must be applied in their prescribed hierarchical order*. The six methods are:
- Method 1 — Transaction Value
- Method 2 — Transaction Value of Identical Goods
- Method 3 — Transaction Value of Similar Goods
- Method 4 — Deductive Method
- Method 5 — Computed Method
- Method 6 — Fall-Back Method
*This is for reference only, as these would not apply to FlavorCloud shipments: sequence of methods 4 and 5 can be switched at the importer’s request (not, however, at the discretion of the customs officer).
Method 1—Transaction Value
The Transaction Value is the basis of the appraisement principle. Under the new WTO Customs Valuation, the primary method and fundamental principle of customs valuation is based upon the actual price of the imported goods, the Transaction Value, which is generally shown on the commercial invoice. The Transaction Value is the price paid or would be payable by the buyer of the imported goods and is usually calculated on a CIF basis for most countries. Evidence of the export sale to the country of import must be provided, and the commercial invoice, letter of credit, contracts, POs, etc., generally suffice. CIF basis includes the cost of the goods, any insurance, freight/shipping charges, and related transportation charges to convey the shipment.
The Transaction Value must be used as the customs value except in certain other abnormal circumstances. For 99.9% of international shipments via FlavorCloud, the Transaction Value is the proper method to determine the correct customs valuation.
To illustrate the customs value of a standard import shipment, we’ll assume the goods are sold to the importer at $200, with $5 paid for insurance and $20 for shipping by the buyer. The customs value in this example where we must use the Transaction Value will be $225 on the CIF basis. Customs will then apply the duty, taxes, and other import fees from the $225 Transaction Value.
“Would Be Payable”
The second portion of Transaction Value, the price that “would be payable”, applies to consignments being sent as gifts, replacements, or warranties. Generally, the proper customs valuation on these shipments will be the fair market value of the same goods that would usually be payable. For example, unless provided for by specific country regulations, if you export a $200 pair of headphones overseas as a gift, even though there’s no actual financial transaction occurring where the importer/buyer is paying you $200, the correct customs value is $200—as it’s the transaction value of the price that would be payable.
Gifts, Samples, Replacement & Warranty Shipments
Gifts & Samples
Some countries also publish guidance on what to do when importing gifts and samples. This guidance includes clear stipulations which need to be met (labeling, marking, individual to individual, etc.) to enjoy duty/tax-free imports. See this example for Ireland: https://www.revenue.ie/en/tax-professionals/tdm/customs/reliefs/customs-treatment-of-gifts-and-items-of-negligible-value.pdf
In nearly all countries, to qualify for duty/tax-free import, the gift/sample must be below a very low dollar amount and be sent from a private individual in the country of origin to a private individual in the destination country. Since these are being sent from a company (and not a private individual), these will never qualify for duty/tax-free or preferential import.
Replacement & Warranty Shipments
Same as with gifts and samples, countries may publish specific guidance on how to process these anomalous shipments with very stringent parameters on how to potentially avoid duty/tax on the replacement shipment or how to recover duty/tax/fees paid on the original shipment. These stringent parameters are onerous, involve lengthy timelines, and carry requirements that cannot be met without the FlavorCloud merchant/vendor’s already established compliance and financial operations in the destination country. Additionally, it is not uncommon to have the duty/tax/fee applicability dynamically determined by the individual customs agent processing the import. As such, it is almost always impossible to avoid duty/tax/fees on the replacement shipment as well as recover these costs on the original shipment.
For Gifts, Samples, Replacement & Warranty Shipments, Transaction Value is the proper basis of appraisal for the Customs Valuation process. Transaction Value is the actual price paid, or would otherwise be payable, by the buyer to import the goods into the destination country.
The second portion of Transaction Value, the price that “would be payable” is critical here. It applies to consignments sent as gifts, samples, replacements, or warranties. Generally, the proper customs valuation on these types of shipments will be the fair market value of the same goods that would normally be payable. For example, unless provided for by specific country regulations, if you export a $200 pair of headphones overseas as a gift, even though there’s no actual financial transaction occurring where the importer/buyer is paying you $200, the correct customs value is $200 as it’s the transaction value as the price that would be payable.
This is all to say that the correct value that needs to be reflected on the commercial invoice and for customs valuation is the standard sales price of that exact item. If AirPods cost $200 in the US, this is the price that needs to be listed for the shipment to be correctly processed. This applies equally to DDP and DAP/DPU (DDU) shipments.
Representing the value of your gifts, samples, replacements, or warranty shipments as $0 or any other unsubstantiated low value should never be made.
Misrepresentation and/or explicit use of an incorrect value to avoid higher landed costs opens organizations up to financial and other penalties, additional scrutiny from Customs authorities, and the potential of criminal/civil litigation.
Consignments being offered at a discount are also provided for in the Transaction Value under WTO Customs Valuation. WTO regulations do account for and allow for discounts to be reflected in the actual price payable, and customs cannot reject an importer’s declared value based upon, among others:
“It is a sale at a discount (cash discount, volume discount, trade discount, purchase discount).”
This is represented in the following WTO publications:
An important stipulation that accompanies any discounted sales is that it has to be substantiated via some type of invoice, payment, or other financial proof.
You cannot simply say you discounted a $2000 item to $10 if the buyer is paying you $2000 for the item. If customs request verification of price, you’ll need to be able to support the value you represented to them.
WTO Customs Valuation outlines conditions and exceptions to the Transaction Value, which generally only applies to rarer transactions involving royalties, licenses, related parties, and legal import restrictions. To reiterate, as it’s a crucial point, for 99.9% of international shipments via FlavorCloud, the Transaction Value is the proper method to determine the correct customs valuation. We’ll now briefly mention the remaining methods.
Method 2—Transaction Value of Identical Goods
Following the prescribed hierarchy, if the Transaction Value (the actual price paid or would be payable) cannot be used, where there’s no transaction value, or when customs do not accept the transaction value based upon certain conditions, we must proceed to Method 2–Transaction Value of Identical Goods. The transaction value is calculated in the same manner on identical goods provided that they are sold for export to the same country of import that the goods are being valued by customs, and must also have been exported at or about the same time as the goods are being valued. Conditions that need to be met for the Transaction Value of Identical Goods are:
- “the same in all respects including physical characteristics, quality, and reputation;
- produced in the same country as the goods being valued;
- and produced by the producer of the goods being valued.”
Method 3–Transaction Value of Similar Goods
The declared customs transaction value of similar goods includes:
- “goods closely resembling the goods being valued in terms of component materials and characteristics
- goods which are capable of performing the same functions and are commercially interchangeable with the goods being valued
- goods which are produced in the same country as and by the producer of the goods being valued. For this method to be used, the goods must be sold to the same country of importation as the goods being valued.
- The goods must be exported at or about the same time as the goods being valued.”
Method 4–Deductive Value
If Methods 1-3 cannot be applied, Deductive Value is the sequential method. Essentially, deductive value is the resale price in the country of import after importation of the goods, with deductions for particular items. These deductions can include commissions, transportation/insurance charges, customs duties and federal taxes, and further processing costs. Deductive value is generally derived by starting with a unit price and making certain additions to and deductions from that price.
Method 5–Computed Value
Computed Value is calculated by adding subcomponents and manufacturing/processing expenses, profits and general expenses, assists, and packing costs.
Method 6–Fall-Back Method
This method is rarely used and is calculated using reasonable means, generally with the cooperation of customs and data available in the country of import. Numerous different stipulations cannot be used as part of the Fall-Back Method.
What Happens When Customs Organizations Have Reasons to Doubt Truth of Accuracy of Declared Value?
The proper declared value for customs valuation and the exactness of other data points and international trade data elements are integral for ensuring a smooth and rapid import process. There is an export for every import, so there’s the potential for the issues to double any time there’s an issue with the declared value. Incorrect, misleading, or untruthful declared values will nearly always delay your shipments, disrupt your supply chain, exposing your organization to additional scrutiny, and ultimately negatively impact your customers. Incorrect, misleading, or untruthful declared values can lead to significant civil and criminal penalties, fines, seizures, forfeitures, and negative publicity.
As Customs Valuation is based on the declared value represented by the importer and based on the commercial documentation, the WTO Customs Valuation Agreement confers the rights of customs organizations to “satisfy themselves as to the truth or accuracy of any statement, document or declaration.” When there’s any doubt, the first step customs may take is to ask the importer to provide further explanation, verification, and/or verifiable proof that the declared value represents the total amount actually paid or payable for the imported goods.
If reasonable doubt still exists, or if no response is received, “customs may decide that the value cannot be determined according to the transaction value method. Before a final decision is taken, customs must communicate its reasoning to the importer, who, in turn, must be given reasonable time to respond. In addition, the reasoning of the final decision must be communicated to the importer in writing.” This process can take weeks, and your goods will accrue storage fees, fines and may be subject to potential seizure.
Consequences of Improper or Incorrect Declared Value for Customs Valuation
Proper Customs Valuation is the backbone of international trade. Accurate, specific information is essential for determining the correct import and export customs valuation. Erroneous information can lead to:
- Financial, civil, criminal, and other penalties
- Criminal penalties can include up to 20 years of imprisonment and up to $1 million in fines per violation, or both.
- Duty owed plus interest, additional penalties per violation
- Import might have required licensing or other documentation required under the correct declared value
- Customer services issues
- Loss of market, revenue
- Unnecessary resource expenditure
- Overpayment/underpayment of duties
- Affects company revenues and customer purchasing decisions
- Debarment, loss of professional accreditation
- Revocation of export privileges
- Additional scrutiny from Customs authorities
- Audits, audits, audits!
- Scrutiny may extend beyond valuation into other trade practices, including increased border exams, inspections, additional documentation requirements, and procedures that may be imposed upon the importer in the future.
U.S. Customs and Border Protection assesses civil penalties against importers for goods imported into the United States in violation of the law. Customs may also assess penalties on exports from the U.S. for false or negligent export shipment declarations. Fraud, negligence, and gross negligence are considered in any penalty phase, along with aggravating factors and mitigating factors. There exist frameworks and protocols for when a prior disclosure is required.
These regulations and penalties are outlined in:
- 19 CFR PART 171 – Customs Regulations – Fines, Penalties, and Forfeitures
- 19 U.S. Code § 1592 – Penalties for fraud, gross negligence, and negligence
Failure to pay penalties will likely result in a collection action in the Court of International Trade. Customs also can retroactively apply penalties to prior shipments within their statutes of limitations. Criminal penalties can expose your organization and individuals within the organization to $250,000 to $1 million fines per violation. Under the US Export Control Reform Act, criminal penalties can include up to 20 years of imprisonment, up to $1 million in fines per violation, or both.
Once you hit the government’s radar of any attention, focused assessment, or penalty phase, the activities are noted by customs in various databases. Where there’s history of a prior penalty, any future penalties will become aggravated. Once you’re on their radar, it’s an extreme burden and can impact all aspects of your business.
For 99.9% of FlavorCloud transactions, the Transaction Value is the proper method to determine the correct customs valuation. The actual price that is to be paid, or would normally be paid, should be reflected as the correct declared customs value for customs valuation. No one wants to be on the receiving end of customs scrutiny, focused assessments, audits, hefty fines, or potential prison sentences. If you have questions or concerns about what value to present on your shipments, please reach out to a FlavorCloud expert. We’re here to help you navigate these complex challenges and make your international business flow seamlessly.
Whit Bolland is Head of Global Trade Compliance at FlavorCloud, an operations leader and our resident international trade compliance expert. His track record speaks volumes about delivering success in highly complex environments. His deep knowledge of trade compliance is unrivaled and is an essential beacon amongst the team.