Declared Value & Customs Valuation

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 along with proper customs valuation streamlines the export and import processes, ensures your goods flow smoothly, and helps mitigate unnecessary risk and exposure to your organization.

Transaction Value

The Transaction Value is the basic basis of appraisement principle and is generally communicated to customs on the commercial invoice. The Transaction Value is defined of the price actually paid or would be payable by the buyer of the imported goods and is generally calculated on a CIF basis for the majority of countries. Evidence of the export sale to the country of import must be provided, and 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 anomalous circumstances. For 99.9% of international shipments via FlavorCloud, the Transaction Value is the proper method to determine correct customs valuation.

“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. 

Discounts

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:

• https://www.wto.org/english/thewto_e/acc_e/customs_valuation_agreement_accessions_seminar_12_february_2019.pdf
• https://www.wto.org/english/tratop_e/cusval_e/cusval_info_e.htm

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.

What Happens When Customs Organizations Have Reasons to Doubt Truth of Accuracy of Declared Value?

Proper declared value for customs valuation along with 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, expose your organizations to additional scrutiny, and ultimately negatively impact your customers. Incorrect, misleading, or untruthful declared values can also lead to significant civil and criminal penalties, fines, seizures, forfeitures, and negative publicity.

When there’s any doubt, the first steps 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 the 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 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 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 and revenue
• Overpayment/underpayment of duties
  • Affects company revenues and customer purchasing decisions
• Debarment, loss of professional accreditation
• Revocation of export privileges
• 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
• 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 may be imposed upon the importer in the future.

U.S. Customs and Border Protection assesses civil penalties against importers for goods that are imported into the United States in violation of 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 taken into account in any penalty phase along with aggravating factors and mitigating factors. There exist framework and protocols for when a prior disclosure is required.

Failure to pay penalties will likely result in the initiation of a collection action in the Court of International Trade. Customs also has the ability to retroactively apply penalties to prior shipments within their statutes of limitations. Criminal penalties can expose your organization as well as 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 and 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.

Summary

For 99.9% of FlavorCloud transactions, the Transaction Value is the proper method to determine 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. In the event 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 as seamlessly as possible.