Customs Valuation: Transaction Value and What Is Added to It

How customs value is calculated under the WTO Valuation Agreement: transaction value, assists, royalties, freight (CIF vs FOB basis) and the six methods.

Customs value is the figure on which ad valorem duties, and very often import VAT, are calculated. Declare it too low and you face a reassessment, interest and penalties; declare it too high and you pay duty you did not owe. Yet many exporters and importers assume it is simply the amount on the invoice. Sometimes it is. Often it is not.

Almost every trading country values goods under the same rules: the WTO Agreement on Customs Valuation, formally the Agreement on Implementation of Article VII of the GATT 1994. Even countries outside the WTO, such as Algeria, have largely aligned their customs codes on its principles. In this lesson you will learn how transaction value works, which costs must be added or removed, why the treatment of freight differs between the EU and the United States, and what happens when customs refuses the declared price. A worked example puts it all together.

What is customs value?

Customs value is the value of imported goods for the purpose of applying ad valorem customs duties. It is defined by the importing country's law, following the WTO Agreement, and expressed in the national currency at the exchange rate set by customs (in the EU, a monthly rate based on the rate published on the penultimate Wednesday of the previous month).

The Agreement provides six methods, which must be used in a strict hierarchical order. The first, transaction value, covers the vast majority of imports.

Method 1: transaction value

Transaction value is "the price actually paid or payable for the goods when sold for export to the country of importation", adjusted under Article 8. Three ideas sit inside that phrase:

• A sale for export: there must be a sale, and it must cause the goods to be sent to the importing country. Free samples, consignment stock, leases and goods sent between branches of one company are not sales and cannot use this method as such.
• Actually paid or payable: the total payment made or to be made by the buyer to, or for the benefit of, the seller. It includes indirect payments, such as the buyer settling a debt of the seller or paying a third party for something the seller owes.
• Adjusted: certain elements are added (Article 8), others excluded.

When can transaction value be used?

Article 1 sets four conditions:

1. No restrictions on the buyer's use or disposal of the goods, other than restrictions imposed by law, limits on the geographical area of resale, or restrictions that do not substantially affect the value.
2. The price is not subject to a condition or consideration whose value cannot be determined (for example, "this price only if you also buy product X at an inflated price").
3. No part of the proceeds of resale accrues to the seller, unless an adjustment can be made.
4. Buyer and seller are not related, or, if they are, the relationship did not influence the price. The importer can show this through the circumstances of the sale (the price was set as between unrelated parties) or by comparison with test values.

What must be added to the price?

Article 8.1 lists the elements to add, only when they are borne by the buyer and not already included in the price:

The value of an assist can be apportioned over the production it serves, using a reasonable method accepted by customs: spread over the first shipment, over the units produced, or over the expected run.

Freight and insurance: CIF basis or FOB basis?

Article 8.2 leaves each country free to include or exclude the cost of transport and insurance up to the port or place of importation. Two families exist:

In practice this means you must adjust the invoice to the importer's basis, whatever the Incoterm:

• Sale EXW or FCA into the EU: add the pre-carriage, the main freight and insurance up to the EU border (even if the buyer paid them separately).
• Sale CIF or DAP into the EU: keep freight and insurance to the EU border, but remove the part of the transport that takes place after entry into the EU, if it is shown separately.
• Sale CIF into the United States: deduct the international freight and insurance.

For air freight the EU uses a table that fixes the percentage of the air transport cost to include according to the airport of departure, because air routes do not follow a clean "border" logic.

What is excluded from customs value?

Provided they are distinguished from the price (shown separately on the invoice or in the contract), the following are not part of customs value:

• Transport and insurance after arrival at the place of import (unloading at destination may also be excluded, depending on national rules)
• Construction, assembly, maintenance or technical assistance after importation
• Import duties and taxes of the importing country
• Interest charges under a financing arrangement for the purchase, if shown separately and at a normal market rate
• Buying commissions
• Design and development work done in the importing country itself

The worked example: Algerian shoes for an Italian brand

When transaction value fails: the other five methods

If there is no sale, the conditions of Article 1 are not met, or customs rejects the price after giving the importer a chance to justify it, the next methods apply in this order:

At the importer's request, methods 4 and 5 can be reversed. The fall-back method may not use minimum values, arbitrary or fictitious values, the selling price of domestic goods, the domestic price in the exporting country, or the higher of two alternative values. Under a WTO decision, when customs doubts a declared value it must first ask the importer for explanations and documents, and give its reasons in writing if it still rejects the value.

Common valuation mistakes

• Declaring the EXW or FCA price into a CIF-basis country without adding freight to the border
• Forgetting assists, especially moulds and buyer-supplied packaging
• Treating every royalty as non-dutiable, or every royalty as dutiable, without checking the condition-of-sale test
• Invoicing a "customs value" lower than the commercial price at the buyer's request (this is undervaluation, and both parties are exposed)
• Lumping freight, interest or assembly into one total instead of showing them separately, which makes them dutiable
• Ignoring year-end transfer pricing adjustments between related companies

The calculation of the duty itself, and of VAT on top, is in duties, VAT and landed cost. How the value is presented on the commercial invoice largely decides how easy the declaration will be. The full text of the Agreement and its interpretative notes is published by the World Trade Organization.