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Pro Forma Invoice for Artwork


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									Valuation of Imported Merchandise
(a/k/a ―How Much is it Worth?‖)

             Kathleen M. Murphy
             Drinker Biddle & Reath

               Reasonable Care

 Customs Modernization Act (enacted 12/93) established the requirement
  that parties exercise reasonable care when importing into the United
 Section 484 of the Tariff Act, as amended, requires an importer of
      ―using reasonable care‖ to make entry by filing such information as is
      necessary to enable the Customs Service to determine whether the
      merchandise may be released from customs custody,‖ and using
      reasonable care - - ―complete the entry by filing with the Customs Service
      the declared value, classification and rate of duty‖ and ―such other
      documentation...or information as is necessary to enable the Customs
      Service to…properly assess duties…collect accurate
      statistics…determine whether any other applicable requirement of
      law…is met.‖ (See ―Reasonable Care,‖ Customs’ Informed Compliance
      Publication, February 2004) (Emphasis Added).

Entry Summary

Overview of Customs Valuation –
5 Hierarchical Valuation Methods

 Transaction Value;
 Transaction Value of Identical or Similar
 Merchandise (based on the transaction value of
 previously imported merchandise);
 Deductive Value (selling price in the US less certain
 post-importation costs);
 Computed Value (foreign supplier cost information
 for materials, processing, profit, general expenses,
 etc.); and
 Fallback Method (methodology based on a modified
 version of one of the first four methods).

Transaction Value Defined

 Price actually paid or payable for the merchandise when sold
 for exportation to the United States, plus certain statutory
 additions to the price.
 ―Price Actually Paid or Payable‖
     the total payment (whether direct or indirect) for the imported
     merchandise from the buyer to the seller.
     General presumption that all payments from the buyer to the
     seller are dutiable. Generra Sportswear Co. v. U.S., 905 F.2d 377
     (Fed.Cir. 1990).
     often the invoice price, but certain upward and downward
     adjustments may be made.
 Must have sale (no consignment shipments).
 Related party sales must be at arm’s length,
     Customs reviews related party transaction to ensure an arm’s
     length sale.
      When are parties ―related‖ in
      CBP’s eyes?

 Family / Work Relations                            Control Relations
 Officers and directors of                    One person owns 5% of
  each other’s businesses.                      voting stock of both parties.

 Partners of same business.  One party controls the
 Employer / Employee.                         Both parties under the
                                                common control of a third
 Members of same family.                       party.

                                               Both parties control a third
Sec. 402(g)(1), Tariff Act of 1930, as amended (19 U.S.C. 1401a (g)(1)).
 Evaluating Related Party Transactions
 for CBP Purposes


                                                   TEST VALUES
             OF SALE

   Based on the circumstances of
 sale indicating that the relationship      Based on previously accepted
between the parties did not influence        customs value for entries of
  the price actually paid or payable.         identical or similar goods.

     Circumstances of Sale Test

 Circumstances demonstrating the relationship
     did not influence the price paid or payable:

        Price settled in a manner consistent with normal
        pricing practices of industry in question;

        Price settled in a manner consistent with how the
        seller settles prices with unrelated buyers; or

        Price is adequate to ensure recovery of all costs, plus
**      a profit that is equivalent to the firm’s overall profit
        realized over a representative period of time in sales
        of merchandise of the same class or kind.

Circumstances of Sale Test              (cont’d)

 Historically, supporting evidence:

    Importer may demonstrate acceptability of
    transaction value through Advance Pricing
    Agreement (―APA‖) and transfer pricing studies.

    APA is a prospective agreement between the
    importer and the Internal Revenue Service
    concerning the acceptability of a firm’s transfer
    pricing practices for tax purposes.

    Transfer pricing study is prepared by outside
    experts for the purpose of setting inter-
    company prices.
       Good News, Bad News

 APA or similar pricing study by itself is not sufficient to show
  that a related party transaction is acceptable for customs
 Information in the APA or transfer pricing study may contain
  information relevant to determining the acceptability of the
  transfer prices for CBP, such as:
       Pertinent information about the way the related parties transact
       Information on sales of similar products to unrelated purchasers.
 If using APA or transfer pricing study to support circumstances
 of sale test, importer must identify the relevant information,
 explain its relevance, and submit supporting documentation to
 See, CBP Informed Compliance Publication entitled ―Determining the Acceptability of
 Transaction Value for Related Party Transactions‖ (April 2007).
Transaction Value Checklist

 ―Price actually paid or payable‖ plus . . .
 Are any of the following statutory additions to
  transaction value related to the imported product,
  but their cost excluded from the invoice price of the
  imported goods?
   1.   Commissions — selling commissions paid by buyer
   2.   Royalty or license fees paid by buyer as a condition for the
        product to be exported to the U.S.
   3.   Assists
   4.   Packing costs paid by buyer
   5.   Proceeds of any subsequent resale of the goods transmitted to
        the seller

 If so, the value of the item must be added to the
  invoice price and the total amount declared to

Selling vs. Buying Commissions

 Selling commissions must be added to the price paid, but bona fide
 buying commissions are exempt.
 Review of all transactions involving a middleman.
 Determine whether the middleman operates as an agent (for buyer or
 seller) or operates as an independent entity.
 Is the agent a buying agent?
      Who is in control?
      Who takes title? Bears risk of loss?
      What does the agent do?
      Written agreement?
 Future of the ―first sale rule‖ is uncertain!
      CBP wants transaction value to be based on the last sale
      occurring prior to entry into the United States (i.e., price paid by
      U.S. importer).

    Additions to the Price –
    Dutiable Royalties

   Customs Headquarters has failed to set clearly defined lines for when
    royalties are dutiable (i.e., reportable).
   Customs currently applies a 3-part test.
   Case-by-case.
   A royalty or license fee is generally dutiable if:
         the imported merchandise was manufactured under patent;
         the royalty was involved in the production or sale of the imported
         merchandise; and
         the importer could not buy the product without paying a fee.
   Customs also looks to identify:
         whether the licensor and seller are one and the same,
         whether the royalty was paid either directly or indirectly to the seller,
         whether the license agreement and sourcing agreement are ―inextricably

        Dutiable Proceeds

 General Rule: Proceeds of any subsequent resale, disposal, or use of the
  imported merchandise that accrue, directly or indirectly, to the foreign
  seller (usually based on a percentage of the net sales of the licensed
  product) are dutiable.
 Where proceeds of a subsequent resale are paid to a party unrelated to
  the foreign manufacturer or seller of the imported merchandise, such
  payments are not likely dutiable as proceeds.
 Warning: All payments made by the buyer to the foreign seller of
  imported merchandise carry a rebuttable presumption that they
  are dutiable. See, Generra v. U.S.

    Packing Costs

 Where importer contracts with the foreign supplier or
 with a third party for separately billed packing charges,
 such additional charges are to be included in the
 declared value of the imported merchandise.
 Packing costs consist of the costs incurred by the buyer
 for all containers and coverings of whatever nature and
 for the labor and materials used in packing the imported
 merchandise, ready for export.
 Examples:
    Separate cost paid to 3rd party to hermetically
    seal chemical supplies for ocean transport.
 Must be included if not otherwise incorporated
 in the invoice price.

   Any of the following items provided
       directly or indirectly
       free of charge or at a reduced cost,
       for use in the production of or the sale for export to the United States of
       the imported merchandise:

   Materials, components, parts and other items used in
   Tools, dies, molds and similar items used to produce
   Merchandise consumed in production of the imported
    merchandise; or
   Engineering, research, development, artwork, design work,
    plans and sketches produced other than in U.S.
   Important Note: Although not technically an ―assist,‖ payments
    for assists are also likely to be considered part of the transaction
    value (e.g., separate payments for tooling) as ―additions to the
    price paid or payable.‖

Examples - Materials, Components, Parts and
Other Items Used In Production

 U.S. importer supplies, at a reduced cost, to its
 overseas related supplier a chemical catalyst used
 to make a finished adhesive product.
 U.S. importer provides, free of charge, packing
 materials to a supplier in Singapore. The packing
 materials are to be used in the production and
 shipment of the finished product.
 U.S. importer supplies, free of charge, plastic
 inserts and metal binder rings to be used in
 the production of plastic binders.

    Examples – Tools, dies, molds and similar items
    used in the production of imported merchandise

   U.S. importer provides cutting dies to manufacturer in
    Canada for use in the production of plastic components.

   Production equipment previously utilized in the U.S. or
    elsewhere is sent free to China to be used in the production
    of parts subsequently imported into the US.
       Sent free of charge?
       Reduced cost?
       Sold at current book value? (no assist)
       Asset maintained on U.S. books? (assist)
       Asset transferred to foreign supplier? (no assist)

Engineering/R&D Assists

Dutiable assists include engineering,
development, design work, plans,
drawings, or sketches that are:
  undertaken outside the United States,
  are necessary for the production of
  imported merchandise.

      Examples - Engineering, development, artwork, plans and sketches
      that are undertaken elsewhere than in the United States and are
      necessary for the production of the imported merchandise

   Japanese parent of a U.S. importer provides
    a Malaysian subsidiary with engineering
    design specifications to redesign a control

   Design drawings and artwork created in
    Canada are sent to China for the
    manufacture of labels.

―Engineering, Development…‖
Not Treated as an Assist

 ―Engineering, development…‖ will not be
  treated as an assist if the work is:
      Performed in the United States,
      Performed by a person domiciled within the
      United States,
      Work is incidental to other engineering,
 **   development, artwork, design work,
      undertaken within the United States.


 Importer provides UK supplier with engineering
 specifications and C.A.D. drawings developed in the
 U.S. for use in the manufacture of an imported article.
 Not an assist because design work developed in U.S.

 U.S. engineering manager, employed by importer,
 flies to Quebec to provide assistance to Canadian
 manufacturer concerning the manufacture of a new
 article designed in the United States. Could be an
 assist if necessary to (and not incidental to) the
 production of the imported article.

What Is the Value of an Assist?

 The value of an assist (whether materials, tools, foreign
 engineering, etc.) is generally either:
    the cost of acquiring the assist, if acquired by the importer
    from an unrelated seller, plus freight costs, or
    the cost of producing the assist, if produced by the
    importer or a person related to the importer, plus freight
 Used capital equipment is generally valued at its
 depreciated value at the time of transfer, plus value of
 any modifications or upgrades.
 Assist value must also include the cost of transporting
 the assist to the place of production.
 If the assist value is incorporated in the unit cost of the
 imported merchandise, no separate declaration is
      How to Value an Assist

Cost of Acquisition         X   X   X   X
(unrelated seller)

Cost of Production          X   X   X   X
(importer/related seller)

Cost of Lease or Rental         X

Value Added                             X
Outside U.S.

Transportation costs to     X   X   X   X
place of production
     How to Apportion the Value of an

   ―Apportionment will be made in a reasonable manner
    appropriate to the circumstances and in accordance with
    generally accepted accounting principles.‖ 19 C.F.R. §

   Total value may be apportioned over:
    1. The first shipment;
    2. The number of units produced up to the time of the first shipment;
    3. The entire anticipated production; or
    4. Any other method of apportionment in accordance with GAAP (e.g., number
       of years of useful life).

   The value of tools, dies and molds can be adjusted to reflect
    use, repairs, modifications and reasonable depreciation. See
    19 C.F.R. § 152.103(d)(2).
Apportionment of Assists (cont.)

                        $100,000 addition
                        to first shipment.

                         $1.00 addition to
                         the value of each of
                         the 100,000 units to
                         be produced.

Top Five Valuation Risks
   Facing Importers

Lack of Knowledgeable Staff, Strategic
Visibility, and Effective Internal Controls

– Staff has little or no familiarity with how
  Transaction Value should be derived or tested.
– If staff lacks subject matter expertise, it is not
  likely to have strategic capabilities or proper
  visibility within the Company.
– There are no formal procedures or control
  mechanisms that are designed to limit or
  alleviate valuation risks.
– There is no periodic audit plan for testing
  accuracy of value.

     Lack of Established Channels of
    Communications Regarding Value

–    No formal (or informal) mechanism for Purchasing,
     Manufacturing, Engineering, Legal, Accounting, etc. to
     provide relevant information to the Import Department to
     ensure value is declared correctly.
                     Distribution           Law     Tax
     Accounting       Services

     Sales &                                           Service
                                 Import                   Receiving
Purchasing                     Department

    Contracts                                        Sub-contracts

    Engineering   Manufacturing       Export      Other

         Failure to Identify Assists

– Remember… if ―items provided free of charge or at a
  reduced cost‖ are already included…no worries!
– Do you:

   Routinely meet with personnel who approve purchase of potential assists
    (e.g., engineers, R&D, purchasing dept.)?

   Monitor General Ledger accounts where accounting personnel may
   record assist payments (―tooling,‖ ―foreign engineering‖)?

   Monitor purchase orders not approved/generated through the import

   Monitor shipping records from engineering or R&D personnel?

   Review supply agreements with foreign suppliers?

   Coordinate with finance personnel to ensure proper allocation of assists?

   Train relevant employees to identify potential assists?
                   Failure to Identify Additions to
                   the Price Paid

 Rebuttable Presumption that all payments made to the foreign
  supplier are dutiable.
 Any payments made to the foreign supplier, or party related to the foreign
  supplier, should be considered.
 Examples:
      Payments for non-recurring engineering (―NRE‖) costs to foreign supplier to
      retool machinery to manufacture imported product.
          If the NRE costs are apportioned and added to the unit price of each product made, the
          NRE costs are properly declared and allocated.
          If the NRE costs are not added to the unit price, the costs must be properly declared and
      Other payments made to the foreign supplier outside the commercial invoice.
          Payments for tooling.
          Payments for packing.
          Payments for raw materials.
          Expedite or handling fees.

       ―The Kitchen Sink‖
       Other Areas of Concern
       and Potential Valuation Problems

 Post-importation price adjustments.
 Retroactive transfer price adjustments.
 Capital equipment imports which incorporate multiple
  shipments and progress payment terms and
       the contract or purchase order provides for project payments to
       the foreign supplier (e.g., 20% up front, 40% on delivery, and
       40% after first production run), and/or
       the equipment is to be shipped on multiple entries rather than
       as a single shipment.

              How These Risks Translate to a
              Valuation Audit

     Control             Risk              Control         Information         Monitoring
Environment         Assessment            Activities     Communication            Company
 The Company        The Company        The Company         The Company        monitors trade
 maintains an      identifies risks   documents and       establishes and       activities to
 environment        to the goal of       implements           maintains          assess the
 that supports           trade           policies and       processes to          quality of
       trade         compliance,      procedures and         ensure that       performance
  compliance,      analyzes them        other control       relevant and      over time, and
                     for possible        activities to         reliable       to ensure that
    provides a       effects, and                          information is        issues and
clear corporate                             ensure
                   designs control     complete and         recorded and     deficiencies are
  mandate for        activities to                       communicated to          promptly
  compliance,                              accurate
                   manage those         reporting, as        those in the      resolved and
     assigns             risks.             well as      organization who     procedures are
   competent                          compliance with    need it, and that      corrected to
    personnel,                        other regulatory       information           prevent
   uses proper                         requirements.      provided to the       recurrence.
  organizational                                          government is       Monitoring will
     structure,                                            complete and        include some
                                                              accurate.           testing of
 and possesses                                                               compliance on a
    adequate                                                                  periodic basis.

              How These Risks Translate to a
              Valuation Audit

     Control        Does management approve written policies and procedures?
 The Company
                       – Corporate Compliance Statement issued by management?
 maintains an
 that supports      Does one individual have authority to ensure that internal controls
  compliance,        are established and followed by all company departments?
    provides a
clear corporate
  mandate for       Do personnel responsible for ensuring the accuracy of declared
     assigns         value have adequate knowledge and training in valuation?
   uses proper      Does the Company encourage assistance from either internal or
     structure,      external experts for value issues, when needed, and are
 and possesses       formal rulings requested?

           How These Risks Translate to a
           Valuation Audit

                       Does the Company identify, analyze, and manage risks
        Control         related to value?
    The Company
    maintains an
 The Company           Does the Company have procedures to ensure that additions
identifies risks
 to the supports
    that goal of        to price actually paid or payable are included for:
                           - Commissions?          - Proceeds?
       provides a
analyzes them              - Royalties?            - Packaging?
   clear corporate
  for possible
  effects, andfor
     mandate               - Assists?
designs control
  activities to
manage those
                       Does the Company have procedures to ensure that the price
      uses proper       actually paid or payable includes:
                          - Indirect payments? - NRE payments?
    and possesses         - Price adjustments? - Currency exchange adjustments?
                       Does the Company confirm that related party transactions are
                        negotiated at arm’s length?
               How These Risks Translate to a
               Valuation Audit

     Control        Does the Company have formally documented internal controls
    Activities       to ensure that the value of imports is properly declared?
 The Company
documents and
   policies and     Has the Company identified any risks related to value and
procedures and
  other control
                     implemented control mechanisms?
   activities to
 complete and       Do written internal control procedures assign duties for ensuring
  reporting, as      the accuracy of declared value to a position rather than a person?
      well as
compliance with
other regulatory
 requirements.      Does the Company have procedures to ensure pro forma invoices
                     are reconciled to actual invoices and corrections are reported to CBP?

                    Does the Company require the customs broker to have written
                     approval prior to making changes to value?

               How These Risks Translate to a
               Valuation Audit

  Information        Does the Company have adequate interdepartmental communication
  The Company
                      about Customs value?
 establishes and
   processes to      Do the Purchasing Department, Engineering Group, Accounting
    ensure that
   relevant and       Department, Law Department and others provide adequate
  information is      and timely information to the Import Department to ensure value
   recorded and
communicated to
                      is declared correctly?
    those in the
organization who
need it, and that    Does the Company use its ERP or other business system(s) to
 provided to the      facilitate communications with the Import Department?
 government is
  complete and

                   How These Risks Translate to a
                   Valuation Audit

                       Does the Company review and update written policies and
   Monitoring           procedures?
 monitors trade
   activities to       Are internal controls for valuation periodically tested and
    assess the
     quality of         results documented? (This should include post-entry reviews
 over time, and         to verify value was properly declared.)
 to ensure that
    issues and
deficiencies are
     promptly          If the Company found weaknesses during internal control testing
  resolved and
 procedures are         of declared value, did the Company correct and/or enhance the
   corrected to         internal control?
 Monitoring will
  include some         Does the Company have procedures to link specific purchase
     testing of
compliance on a         orders, invoices, and payment records to Customs entry
 periodic basis.

                       Does the Company provide adequate customs broker
                        oversight and audit the customs broker’s work?                38


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