Monday, April 20, 2009

Valuation and the Customs Broker Exam

As we continue our series on valuation, this week we will address one of the difficult questions from the April 2009 Customs Broker Exam. Valuation questions included on the exam are usually difficult. The key to answering Question 76 on this exam is knowing what components can be deducted and in what order.

Note: This is not the official answer to Question 76, but an attempt to analyze the question and provide a starting place for discussion.

Question 76
Select the correct answer for calculating the transaction value of a shipment with details as follows:

• $1,750,000 entered amount
• CIF New York Duty Paid, MPF included
• Price includes $25,000 ocean freight, $25 marine insurance, $1500 trucking freight (New York to Baltimore, MD), $100 broker fee in Baltimore, $100,000 customs duties and fees.
• The actual duty rate is 6.5%
• The actual MPF rate is 0.21%

Potential Answers:

A. TV = entered amount minus ocean freight, marine insurance, trucking freight, and customs broker fee; add MPF and 6.5% duty.

B. TV – entered amount minus ocean freight, marine insurance, trucking freight and customs broker fee. Divide remainder by 1.0671. Multiply the remainder by .0021. Subtract $485from the entered amount minus the authorized deductions. Divide the remainder by 1.065.

C. TV = entered amount minus ocean freight, marine insurance, trucking freight, maximum MPF, and 6.5% actual duty rate.

D. Divide out the actual duty rate, and then subtract the ocean freight, marine insurance, trucking freight and customs broker fee.

E. TV = entered amount minus ocean freight, marine insurance, and trucking freight fee and divide by 1.06701, multiply by .0021 for actual MPF; subtract MPF as allowed from the entered amount minus deductions and divide by 1.065 to yield Transaction Value.

Let's determine the status of each component.
1. 25,000 freight - not dutiable [152.102(f)]
2. $2500 insurance - not dutiable [152.102(f)]
3. $1500 U.S. domestic transportation - not dutiable [152.103(i)(1)(ii)]
4. $100 broker fee - not dutiable [152.102(f) - related services]
5. Duties - not dutiable [152.103(i)(2)]
6. MPF - not dutiable [152.103(i)(2)]

Answer A is incorrect because duty and MPF are deducted, not added.
Answer C is incorrect because the brokerage fees should be deducted. This would be the second best answer.
Answer D is incorrect because duty should not be divided out on the amount that includes freight and insurance since these two items are non dutiable and their value should not be included in the amount duty is calculated on. Answer E is incorrect because the brokerage fee should be deducted before calculating the duty.
Answer B is the best answer, as explained below.

Deduct the ocean freight, insurance trucking freight and broker fee. Then divide the remainder by the duty and MPF rate. Since the maximum deduction for MPF is $485and this amount is met due to the value, only $485 should be deducted and then the duty can be deducted.

$1,750,000 - $25,000 - $2,500 - $1,500 - $100 = $1,720,900
$1,720,900/1.0671 = $1,612,689
$1,612,689 x .0021 = $3,386.61 MPF = $485 Max MPF

Go back to the value determined after deducting freight, insurance, trucking and broker fee:
$1,720,900 - $485 = $1,720,415

Calculate Duty Deduction
$1,720,415/1.065 = $1,615,413

Now that the Wizard has provided some thoughts on the potential answer to this question, we would like to hear from our readers. Is this explanation correct? Is there a better answer? We are looking forward to some great discussions on this issue, so please respond with your thoughts and answers for this question.

7 comments:

Anonymous said...

Per the questions the material was delivered "Ocean Freight" to NY. Why is HMF not deducted (or even mentioned in any of the answers???)

Anonymous said...

Why did you deduct MPF twice? You deducted it by adding it to the duty rate .0065 + .0021 for .00671. then you subtracted 485 again later on . . .

Wizard said...

Wizard on MPF

If you look at the calculations closely, you'll see that the MPF was not deducted twice.

We had to deduct MPF and duty the first time to get the actual value to determine if the maximum MPF applied. Since it did, we went back to the amount that resulted from deducting the freight, insurance, etc and that's where the actual MPF was deducted.

Anonymous said...

"WIZARD: If you look at the calculations closely, you'll see that the MPF was not deducted twice.

We had to deduct MPF and duty the first time to get the actual value to determine if the maximum MPF applied. Since it did, we went back to the amount that resulted from deducting the freight, insurance, etc and that's where the actual MPF was deducted."

This is the very issue that messed me up on the exam. The answer reads as if it is deducted twice. It literally took me two days and I don't know how many readings of that answer before I understood what they did. That is a ridiculously poorly phrased answer. I choose C during the exam because B reads like MPF is accounted for twice and A,D and E make no sense. Even during the exam I was aware that C didn't account for the broker fee but I could not make any sense out of B. Very frustrating. All the more so because I got the previous question correct proving I know how to do the calculations. This is not a question of "do you know what to do" its essentially "do you understand the bizarre way Customs phrased the answer". Not sure that gages ones ability to understand the regs.

Do you think this question is protestable?

Anonymous said...

I printed the Wizard's posting, without reading any comments. On day 1 - I worked out the answer numerically. Then on day 2, I read the answers carefully and chose B. And finally, my math results and steps also matched the Wizard's.

I can now spot the confusion with answer B. It reads... "Divide the remainder by 1.0671. Multiply the remainder by .0021. " This wording does not make good math sense. I don't think it's fairly written.

On the exam I picked C, not sure why, I think I was delirious by then. I appreciate the Wizard's discussion, this is helping me to prepare for next go round.

Anonymous said...

The only way you can protest this is if you argue that none of the answers are correct.

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