Valuation of Imported Merchandise
(a/k/a ―How Much is it Worth?‖)
Kathleen M. Murphy
Drinker Biddle & Reath
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).
Overview of Customs Valuation –
5 Hierarchical Valuation Methods
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
Computed Value (foreign supplier cost information
for materials, processing, profit, general expenses,
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
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
When are parties ―related‖ in
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
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-
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
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.
4. Packing costs paid by buyer
5. Proceeds of any subsequent resale of the goods transmitted to
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?
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
Additions to the Price –
Customs Headquarters has failed to set clearly defined lines for when
royalties are dutiable (i.e., reportable).
Customs currently applies a 3-part test.
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
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
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.
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.
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
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?
Sold at current book value? (no assist)
Asset maintained on U.S. books? (assist)
Asset transferred to foreign supplier? (no assist)
Dutiable assists include engineering,
development, design work, plans,
drawings, or sketches that are:
undertaken outside the United States,
are necessary for the production of
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.
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
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
Cost of Production X X X X
Cost of Lease or Rental X
Value Added X
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.)
to first shipment.
$1.00 addition to
the value of each of
the 100,000 units to
Top Five Valuation Risks
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
Sales & Service
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.
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
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
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
Control Does management approve written policies and procedures?
– Corporate Compliance Statement issued by management?
that supports Does one individual have authority to ensure that internal controls
compliance, are established and followed by all company departments?
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
Does the Company identify, analyze, and manage risks
Control related to value?
The Company Does the Company have procedures to ensure that additions
to the supports
that goal of to price actually paid or payable are included for:
- Commissions? - Proceeds?
analyzes them - Royalties? - Packaging?
mandate - Assists?
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
Control Does the Company have formally documented internal controls
Activities to ensure that the value of imports is properly declared?
policies and Has the Company identified any risks related to value and
implemented control mechanisms?
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?
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
Information Does the Company have adequate interdepartmental communication
about Customs value?
processes to Do the Purchasing Department, Engineering Group, Accounting
relevant and Department, Law Department and others provide adequate
information is and timely information to the Import Department to ensure value
is declared correctly?
those in the
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?
How These Risks Translate to a
Does the Company review and update written policies and
activities to Are internal controls for valuation periodically tested and
quality of results documented? (This should include post-entry reviews
over time, and to verify value was properly declared.)
to ensure that
promptly If the Company found weaknesses during internal control testing
procedures are of declared value, did the Company correct and/or enhance the
corrected to internal control?
include some Does the Company have procedures to link specific purchase
compliance on a orders, invoices, and payment records to Customs entry
Does the Company provide adequate customs broker
oversight and audit the customs broker’s work? 38