CBE Study Tip 10: Valuation

Customs Valuation (19 CFR 152) is one of the most complex parts of the regulations. This section is one of the most frequently tested on the exam, and the questions are often long and time consuming to answer. When reading Part 152, it would be wise to read each section slowly in order to understand the complex terms discussed. Pay close attention to any examples provided because they help explain and demonstrate the complicated concepts. Highlight important areas of text. Make notes and lists in the margins. Locate the valuation questions in old exams and work through the questions. Make sure to mark each section of the regulations that was used in determining the answers.

Click HERE to view an outline of the most important valuation information found in 19 CFR 152. Read and highlight these sections in your copy of the regulations. Take this outline to the exam with you for a quick reference tool.

Stay tuned to Boskage Trade News for more helpful hints on studying for the Customs Broker Exam! Please feel free to add your comments, suggestions for topics you would like to see covered and other useful information to the blog.

Non-Dutiable Components of Valuation: Post Importation Charges

For the last few months, we have devoted Monday’s blog to issues related to valuation of imported merchandise. Last week the blog addressed packing, a dutiable component of valuation. The answer to last week’s multiple-choice question can be found at the end of this article. This week, we will look at post importation charges as non-dutiable components.

19 CFR 152.103(i) provides a list of items that should be excluded from transaction value. When occurring after importation, the following constitute items that are not part of transaction value; however, the costs of these items must be identified separately.

• Construction
• Erection
• Assembly
• Maintenance
• Technical assistance
• Transportation after importation
  

Example
Tin Man Industries imports special metalworking machinery from Sammy Scarecrow for $500,000. In order to learn the proper methods of operating the complicated machinery, Tin Man’s employees require on-site training. The cost of this training, $25,000, is included in the value of the merchandise; however, if the cost is identified separately, then the training expenses will not be included in the transaction value. These fees are considered for "the construction, erection, assembly or maintenance of, or the technical assistance provided with respect to, the merchandise after its importation into the United States."


Question
Assume the duty rate of the machine in the previous example is 5%. How much does the importer save by being able to deduct the cost of the training expenses?

The answer will be provided next Monday when we continue to discuss the topic of valuation.



Answer to Packing Example – Monday May 11, 2009

Answer B
The shipping cartons and individual boxes are packing and the value of $1,500 is dutiable. Since these cartons are sufficient for international transportation and vacuum packaging is not necessary, the costs of $2,000 are extra and do not need to be included in the dutiable value. It does not make any difference that the invoice was submitted separately.

Components of Valuation

For almost two months, we have been discussing valuation of imported goods. Now that we’ve discussed the various methods of valuation, we’ll look at the various components of valuation.

You may remember reading that transaction value is the price paid or payable for the imported products. Sounds simple, right? Well, it does provide us with a basis to start, but now we must determine if the "price paid" actually includes everything that is required. Then we must also determine if there are items included that could be deducted. Why would we want to do this? Why can't we just take the value on the sheet of paper and use it? The short explanation is that the price paid may not include items that must be included in order for the value to be reported according to CBP requirements. If we fail to add these required items, then the value is understated and CBP will not collect the correct amount of duties. Undervaluing merchandise means CBP collects LESS duty than required and being cheated out of monies will not make CBP happy. Then again, you probably wouldn't be too happy if your employers didn't pay you the proper amounts. Many of the valuation components fall into the categories of dutiable or non-dutiable. Some of these components fall into only one category, while others may fall into both, depending on how the transaction is structured. This article introduces you to the concepts of dutiable and non-dutiable components to value. Over the next few weeks, the articles will cover some of these components in more detail.

Dutiable Components

What costs are considered dutiable? Although transaction value may seem to be the price actually paid or payable for the merchandise, there are often arrangements between the buyer and seller that include supplementary agreements which can affect transaction value. Take a close look at the invoice to determine if dutiable components have been properly included. If not, then their values must be added. What are some of these dutiable components?

· Assists provided by the buyer
· Packing costs incurred by the buyer
· Selling commissions incurred by the buyer
· Repairs and warranties
· Proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller


Non-Dutiable Components

Transaction value of imported merchandise should not include any of the following if identified separately from the price actually paid or payable. We refer to these items as the non-dutiable components.

• International transportation costs
• Cost of transporting the goods after they have been imported
• International insurance
• Cost of any prepaid customs duties and other federal taxes
• Costs of constructing, erecting, assembling, maintaining, or providing technical assistance for goods after importation into the U.S.
• Buying Commissions

Next Monday we will start to explore the dutiable components. Join us tomorrow as we start a new series called "Trade Term Tuesdays."

CBP Proposes Elimination of First Sale Rule

In the January 24, 2008 edition of the Federal Register, CBP announced its proposal to change the interpretation of “sold for exportation to the United States”. CBP proposes that in a transactions involving a series of sales, the price actually paid or payable for the imported goods when sold for exportation to the United States is the price paid in the last sale occurring prior to the introduction of the goods into the United States, instead of the first (or earlier) sale.

The WTO Valuation Agreement, formally GATT, provides that the customs value of imported merchandise "shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation, adjusted in accordance with the provisions of Article 8.” The WTO Valuation Agreement, which all members of the WTO are required to implement, does not define the phrase "sold for export to the country of importation.” Neither 19 U.S.C. 1401a, nor the implementing regulations set forth in part 152 of title 19 of the Code of Federal Regulations (19 CFR part 152), defines the phrase "sold for exportation to the United States.''

When the import transaction involves only one sale, it is usually easy to identify the sale for exportation to the United States to determine the price actually paid or payable. In this situation, there is only one buyer, usually located in the United States, and one seller, usually located in another country. The problem arises when the import transaction involves a series of sales between parties in different countries. CBP's current interpretation bases transaction value on the price paid by the buyer in the first or earlier sale (e.g., the sale between the manufacturer and the intermediary) provided the importer can establish provide evidence that the sales was made at arm's length and that, at the time of such sale, the merchandise was clearly destined for exportation to the United States. See T.D. 96-87.

In April 2007, the Technical Committee on Customs Valuation (Committee) adopted Commentary 22.1, which provides clarification on the meaning of the phrase “sold for exportation to the country of importation” in a series of sales. The Committee found that member countries might find it difficult to verify the information related to the first sale. The Technical Committee concluded that in a series of sales situation, the price actually paid or payable for the imported goods when sold for export to the country of importation is the price paid in the last sale occurring prior to the introduction of the goods into the country of importation.

As a result of the Committee’s decision, CBP examined the decision and the current application of the first sale rule in the U.S. and concluded that the current interpretation as set forth in T.D. 96-87 is not correct. Seeking to comply with the Committee’s findings and Commentary 22.1, CBP proposes the use of the price paid or payable for the imported goods when sold for exportation in the last sale occurring prior to the introduction of the goods into the United States instead of the first (or earlier) sale.

CBP provides detailed information concerning the reasons for the change the Federal Register publication. CPB indicates that adopting the new standards will:

· Assure components of value such as commissions, packing and assists that may not be included when using the first sale are properly included in the value.
· Reduce the amount of time and resources spent by the importer or CBP to verify the requirements of T.D. 96-87 have been met.
· Provide a straightforward rule for determining value in a series of sale.
· Reduce post entry audit verification issues including production of records.
· Reduce importer’s burden for compliance in properly declaring the value 19 U.S.C. 1484.

Specifically, CBP is proposing that in a series of sales situation, the price actually paid or payable for the imported goods when sold for exportation to the United States is the price paid in the last sale occurring prior to the introduction of the goods into the United States, instead of the first (or earlier) sale. As a result, transaction value in situations involving a series of sales will be determined based on the price paid by the buyer in the United States. In order demonstrate how the proposed new interpretation would apply to U.S. valuation law, the Committee’s example was provided at the end of the Federal Register document.

If this proposed interpretation is adopted, it will result in the revocation of T.D. 96-87, the modification or revocation of administrative rulings that have analyzed the series of sales issue using the first-sale criteria, and the revocation of any treatment previously accorded by CBP to substantially identical transactions. In addition, the application of the court decisions in McAfee, Nissho Iwai and Synergy would be limited to the specific entries at issue in those cases. Of course, the most important result is the potential for increased duty payments for importers currently using the provisions allowed by the first sale rule. Consider the following scenario:

Scenario
Company A in the United States purchases widgets from Company B in Canada for $500,000. Company B purchases the Widgets for Company A from Company C in Germany for $300,000. Company C ships the widgets to Company A in the United States. Widgets are dutiable at 5%.

Option 1 – First Sale Rule
Using the first sale rule, Company A could use the value of the “first sale” between Company B and company C. The amount of duty paid would be $15,000 ($300,000 x 5%).

Option 2 – Last Sale Rule
Using the proposed last sale rule, Company A must use the value of the sale between Company A and Company B. The amount of duty paid would be $25,000 ($500,000 x 5%).

Results
As you can see, application of the last sale rule results in an increase in duty for the importer of $10,000.

This proposal has extremely important ramifications for the trade community. Importers and other members of the trade are urged to provide comments to CBP. Instructions for submitting comments are found in the Federal Register Notice and must be received on or before April 23, 2008.