Customs duties are "above the line" expenses which can be planned for and managed like any other expenses. Once duties are paid they are difficult to recover. Unlike income taxes which provide loss carry forward provisions, and a three-year opportunity to amend returns, the opportunity to obtain Customs refunds has a much smaller window of opportunity. This makes planning of Customs transactions even more important.
This article will address a number of valuation concepts that can be considered in planning purchase transactions. Because the U.S. is a signatory to the International Valuation Code, the value law applied by our trading partners is the same as the law applied by U.S. Customs (now U.S. Customs and Border Protection). Accordingly the techniques that we apply here have broad based application to a number of import jurisdictions.
Alternative Bases Of Appraisement
The value code provides a number of bases of appraisement which must be applied in hierarchal order to determine the value of imported goods. The first basis of appraisement, Transaction Value, is used to appraise goods in over 90% of Customs transactions. The remaining bases of appraisement are as follows: Transaction Value of Identical or Similar Merchandise; Deductive Value; Computed Value; Value derived by all reasonable means.
It is important to understand that some importers have flexibility in the selection of the basis of appraisement that will be used. The occurrence of certain events will eliminate Transaction Value from consideration: the goods are not imported as a result of a sale (i.e., consignment or lease); the price of the goods is "tied" to the price of other purchased goods; the price of the goods is subject to a condition for which a value cannot be determined; or the price between related parties is not shown to be an arms length price.
If Transaction Value is eliminated, Customs is bound to explore Transaction Value of Identical or Similar merchandise, but Customs rarely has information of this nature and moves on down the line. The importer, on the other hand, may be in a position to know whether this analysis can result in a favorable appraisement and may be able to move the government in this direction.
The next basis of appraisement, Deductive Value, is based on resale price in the Customs jurisdiction less local markups, transportation costs, and duties. However, at the time of entry the importer can opt to have merchandise appraised under the Computed Value basis of appraisement which relies on a cost accounting approach (labor, materials, "usual overhead and profit"), and this formula is often very favorable.
The last basis of appraisement is what we call surprise value, but Customs often arrives at value under this provision by accumulating all of the payments to the seller of the goods. The point here is that there may be room to maneuver in selecting a basis of appraisement. Various options should be considered before goods are entered.
Transaction Value - Generally
Because Transaction Value is most frequently used to value goods, we thought it best to explore a number of issues in this area. That is not to say that the other bases of appraisement are not without room to structure and debate.
Transaction Value is defined as the price paid or payable for merchandise when it is sold for exportation to the U.S. [or other importing country]. The statute excludes certain costs from dutiable value, and also states that certain costs incurred by or for the buyer's account must be added to the price paid or payable to determine dutiable value. Customs presumes that all payments made by the buyer to the seller are part of dutiable value. The importer has an opportunity, however, to rebut this presumption and make claims for non-dutiability of certain expenses. Set out below is a short discussion of a number of expenses and payments that have been held to be non-dutiable.
International Freight And Related Charges
The definition of the term price or paid or payable specifically excludes "costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States." Thus, fees relating to these costs would be non-dutiable if paid to the seller, and accordingly, they should be non-dutiable when paid to a third party. Of course, such expenses must be properly documented.
Post Importation Charges
The statute further provides that certain post importation charges are not dutiable. These charges relate to "the construction, erection, assembly, maintenance of, or technical assistance provided with respect to, the merchandise after its importation into the United States; the transportation of the merchandise after such importation; and Customs duties, and other Federal taxes." Thus, fees relating to these costs, when paid to the seller, would be non-dutiable (if they are reasonable and separately identified). They also should be non-dutiable when paid to a third party.
Certain Interest Payments Are Not Paid "For The Merchandise"
Customs has had to answer the question whether interest charges on a buyer's delayed payment for imported merchandise are to be included in Transaction Value. Interest charges are not one of the specified additions to price listed in 19 U.S.C. §1401a(b)(1). Therefore, they may be included in Transaction Value only if they are considered to be part of the "price actually paid or payable for the merchandise," as defined in 19 U.S.C. § 1401a(b)(1).
Based on an international agreement, interest payments paid to the seller can be non-dutiable where the following criteria are satisfied:
(1)The interest charges are identified separately from the price paid or payable for the goods;
(2)The interest payments are part of a financing arrangement between buyer and seller that has been reduced to writing, and
(3)Where required by Customs, the buyer can demonstrate that
The goods undergoing appraisement are actually sold at the price declared as the price paid or payable,
The claimed rate of interest does not exceed the level for such transactions prevailing in the country where, and at the time when, the financing was provided, and
The payments have been recorded as interest and not merely as part of cost of purchases.
Buying Commission Payments Are Not "For The Merchandise"
There is no statutory exclusion for "buying commissions" in the customs valuation statute. Transaction Value includes an addition - if not already included - for "any selling commission incurred by the buyer with respect to the imported merchandise." 19 U.S.C. § 1401a(b)(1)(B). The Customs regulations define "selling commission" as "any commission paid to the seller's agent, who is related to or controlled by, or works for or on behalf of, the manufacturer or seller." In the absence of any relevant legislative history, Customs and the courts have relied on principles of the common law of agency to determine whether an agency relationship exists and whether the agent is controlled by the seller (selling commission) or by the buyer (buying commission).
It is axiomatic that a bona fide buying agent provides non-dutiable purchasing services to the importer. Transactions between buying agents and importers are routinely recognized to be separate and apart from purchase transactions between buyers and sellers of merchandise. Payments to bona fide buying agents have consistently been held to be non-dutiable even where the merchandise is sourced through a seller or sales agent that is related to the buying agent.
Trademark And Copyright Royalties Are Selling Expenses Of The Buyer
The legislative history with respect to the royalties provision of the value law states that royalties or license fees are dutiable when the buyer is required to pay them as a condition of the sale for exportation of the merchandise to the U.S. This statutory requirement is analogous to the requirement in the definition of "price paid or payable" that the consideration be "for the merchandise." As a general rule Customs distinguishes between dutiable payments for patents and non-dutiable payments for copyrights and trademark rights. Payments to the seller or parties related to the seller may also be non-dutiable but litigation is likely necessary to achieve this end.
Advertising And Marketing Expenses Are Not Payments "For The Merchandise"
Customs regulations dealing with indirect payments distinguish certain expenses incurred by the buyer from "indirect payments" made to or for the benefit of the seller and provide a source of authority for the argument that marketing and advertising expenses are not dutiable. 19 C.F.R. 152.103a(2) states "activities such as advertising, undertaken by the buyer on his own account, other than those from which an adjustment is in Section 152.103(b), will not be considered an indirect payment to the seller though they benefit the seller. Those activities will not be added to the price actually paid or payable in determining the Customs value of the imported merchandise." Once again payments to the seller or to a party related to the seller will be questioned by Customs, but this issue is worth pursuing especially where complex transfer pricing agreements combine payments for goods and services.
Short Fall Payments/VAT Payments
As noted above all payments made by the buyer to the seller are presumed by Customs to be dutiable. Where the seller can show that the payments are not "for the merchandise" they should not from part of dutiable value. Toward that end the Customs Courts have held that these payments were not part of dutiable value. Short fall payments were payments for goods that were not ordered or imported. VAT payments were refunded after goods were exported and hence they were not part of the "price paid for the merchandise" when it was sold for exportation.
The point here is that it is legitimate to restructure purchase transactions to identify and unbundle non-dutiable charges and to eliminate the duty on these items.
First Sale Rule
While Transaction Value is based on the price at which goods are sold for export, it is not uncommon for there to be more than one sale for export. In those cases where goods are sold by manufacturers to trading companies who resell them to others there may be two sales for export.
The Custom Courts have acknowledged that in these instances the value of imported goods may be based on the lower factory price ("the first sale"). It is important for importers to comply with the documentation and other requirements that Customs has imposed before the benefits of this program could be received. In addition, where the buyer and seller are related Customs will require the importer to prove that the price between the companies meets an arms length price standard. The statute provides a number of tests that can be used to ascertain whether the intercompany price is acceptable as a basis for Customs valuation. Customs will place road blocks which will make the implementation of this program more difficult, but these benefits will come with proper planning.
Published May 1, 2004.