Posts Tagged ‘Valuation’


 

6 Methods of Determining Customs Valuation

Six Methods of Determining Customs Valuation

 

 

 

 

 

 

 

 

 

 

 

Are you uncertain of how to properly declare the value of your goods when importing into Canada? You are not alone, many importers are. This lack of clarity is partly due to the many rules and factors when determining value for duty. With an expectation to be compliant,  customs valuation is one of the three main targets for a Canada Border Services Agency (CBSA) audit. Unfortunately, we see many importers spending the least amount of attention to this area. Valuation can be an intricate area to navigate if your foreign purchases involve situations which could change the declared value to CBSA.

So, let’s take a look at the 6 Methods of Determining Customs Valuation by first understanding what valuations are.

What is Valuation?

Valuation is the determination of the correct value of goods. CBSA requires all goods imported and declared into Canada have a value for duty which is the base figure on which you must calculate the duty and taxes you may owe the CBSA on your imported goods.

With items like samples, replacements, warranty items, short-shipped goods, you are still required to declare a fair market value although in the end payment of duties and taxes may be unnecessary.

How is Customs Value Determined?

The Customs Act identifies six methods of customs valuation.

The World Trade Organization’s Valuation Agreement is the basis of the requirements of each of these methods. These rules ensure the value of the imported goods are in accordance with commercial reality, and they prohibit the use of arbitrary or fictitious customs values.

 

 

 

 

 

 

What is Transaction Value?

Importers should use this method when determining the value for duty on the price paid or payable for imported goods with consideration to certain adjustments. This method is the most commonly used. When selling goods for export to Canada to a purchaser in Canada, the Transaction valuation applies. We have outlined the difference between the price paid and payable below:

Price Paid is the total of all payments made directly or indirectly by the purchaser to the vendor.  Price Payable, however, is the total of all payments that are owed and made directly or indirectly by the purchaser to the vendor.

You must use the transaction value method whenever possible to determine the customs value of imported goods.

What is Transaction Value of Identical Goods?

When you cannot use transaction value, you must use an established value for duty of identical goods. Identical goods are considered the same in all respects as the goods being appraised. They have one exception however and that is for minor differences in appearance. These difference cannot affect the value of the goods. For goods to qualify, production would have to be in the same country as the identical goods.

What is Transaction Value of Similar Goods?

When you cannot use transaction and identical goods, you must use an established value for duty of similar goods. For goods to qualify, the value of goods must be:

  • Closely resembling the similar goods
  • Capable of performing the same function
  • Commercially interchangeable
  • Produced in the same country and by the same manufacturer as the similar goods

What is Deductive Method of Valuation?

If none of the above methods apply, the deductive value method is the next method to consider. The basis of this method is on the Canadian importers most common selling price (per unit) of the goods sold to Canadian customers.

What is Computed Method of Valuation?

The computed value is the cost of production, profit and general expenses of the imported goods. These must be realized by producers in the exporting country when selling the same type of goods to Canadian importers.

What is Residual Method of Valuation?

The residual method does not identify specific requirements for determining a value for duty. Instead, the value is based on one of the other methods (considered in sequence). It also requires the least amount of adjustment. The value must be fair market, and reflect commercial reality.

In the end, the final value for duty can also be influenced by:

  • The relation between the parties involved.( i.e. a related buyer and seller)
  • Condition where the goods were provided to the Canadian consignee at no charge (i.e. consignment)
  • Allowable additions or deductions to the value of the goods
  • Used goods
  • Goods not sold in Canada (i.e., for rent or lease)

Now that you understand the 6 different methods of determine value for duty, the next step is to learn how to calculate your value for goods and why it’s important to get it right. Receive in-class training from one of Sr. Trade Advisors. To be notified of the next Customs Valuation seminar, you can subscribe to our mailing list below. 

Subscribe here

 

 

 

 

 

 

 

 

If you have reason to believe that you have valuation situations which have the potential to raise flags during an audit leave a comment below and I will be happy to reply.

 

Are you Prepared If Selected For a Customs Audit?

Performing Customs AuditWhether your business is exporting or importing goods as a resident or Non-Resident Importer, you should be aware that at some point you are likely to be selected for an audit. The majority of Canada Border Services Agency (CBSA) audits cover tariff classification, duty assessments, verification of origin, and NAFTA. Some audits are random verifications where an importer is randomly chosen to undergo an audit. The other audit practice employed by CBSA is through verification priorities where they target specific industries or products. In both situations, they are auditing to ensure importers are compliant and observing all rules and regulations. Out of the major areas audited, the one most commonly overlooked by importers is the subject of valuation.

What is valuation?

As it relates to imported goods, valuation means determining the correct value to declare to Customs. This is also known as the value for duty.

The most common valuation method used is transaction value, however the final value for duty could be influenced by:

  • The relation between the parties involved (i.e. a related buyer and seller)
  • Conditions where the goods were not purchased by the Canadian recipient (i.e. consignment)
  • Allowable deductions to the price paid
  • Additions or other costs which must be added to the price before Customs duty and taxes are calculated
  • Used goods
  • Goods sold while in Canada on a temporary basis

Why should you be concerned?

Primarily as this is an area reviewed and regulated by CBSA. Importers generally spend the least amount of time worrying about valuation, but it is still an area where you are expected to be compliant. As an example, a recent CBSA bulletin indicated that Customs has determined the following are current verification priorities targeted on imports of: fresh cut flowers, apparel, footwear, yachts for pleasure or sport, and preparations & pastry cook products.

Secondly, there are 40 sections of the Department of National Revenue (Customs & Excise) memoranda that deal with valuation. It can be an intricate area to navigate if your foreign purchases involve situations which could change the declared value to Canada Customs.

While this subject is extensive, let’s review a couple of the key valuation topics that may have been easily overlooked when making customs declarations.

Assists

An “assist” is defined as goods or services provided free or at a reduced charge by the purchaser for use in the production of imported goods.

  • Materials, components, parts and other goods incorporated in imported goods.
  • Tools, dies, moulds, and other goods utilized in the production of imported goods.
  • Any materials consumed in the production of imported goods.
  • Engineering, development work, art work, design work, plans and sketches undertaken elsewhere than in Canada and necessary for the production of imported goods.

For example, if a Canadian purchaser contracted a U.S. company to bottle juice where the Canadian company provided the packaging materials, the additional costs of the packaging would need to be included in the declared value of the juice.

Parties involved in a transaction

Many transactions involve two parties – a buyer and a seller, which usually makes it is easy to determine the value for duty. However sometimes there are numerous parties: manufacturers, exporters, distributors, buying and selling agents, vendors, consignees and purchasers. The involvement of many parties could make it difficult to identify the correct value for duty and additional care should be exercised.

In many cases, the results of assigning correct values are “revenue neutral” with CBSA; in other words, the goods may be duty free which means that the importer will not incur additional expenses. Like all importations however, the onus is still on the importer to make accurate Customs’ declarations or potentially expose themselves to fines and penalties under the Administrative Monetary Penalty System (AMPS).

If you have reason to believe that you have valuation situations which have the potential to raise flags during an audit, please give us a call to discuss this further.

To learn more and gain insight on what CBSA is assessing consider attending  an upcoming  Canada Customs Audit Seminar. If you are importing and exporting goods into the United States, it might interest you to attend the U.S. Customs Audit Seminar.
 
Do you have questions around a Customs audit? Ask them in our comments section below.

CBP VS CBSA Valuation History

Shipments to Canada - Non-Resident Importers The direct to market program for Non-Resident Importer’s (NRI) can be key if you have the sales volume. While this is an excellent way to take advantage of lower duty rates for importing directly from an offshore country,valuation for Customs declaration remains a critical component of your customs compliance.

The United States and Canada differ on interpretation of the valuation rules. Lets take a look at the history and review how we arrived with customs valuation rules as they are today.

History:

Governments have collected customs duties since the beginnings of international
trade. It is recorded that Athens applied 20 percent import duties on
corn and other goods, while the Romans, from well before the time of Julius
Caesar, depended upon customs revenues to support the expansion and maintenance
of their empire. And, where a tax must be collected, there will be
disputes over rates and methods….

Today: In 1947, the General Agreement on Tariffs & Trade (GATT) negotiations concluded that the customs value should not be arbitrary or fictitious. Since then, there are agreements on how to determine the value for customs declarations.

Currently the valuation rules on are based on the implementation of the GATT Agreements. In 1994 the World Trade Organization established and implemented (based on those existing GATT agreements) the Customs Valuation Agreement (CVA) that all WTO members must abide by.   Valuation rules are necessary for many reasons and are valuable for use in:

  • Determining and collecting revenue
  • Producing trade statistics
  • Implementing and monitoring trade agreements
  • Monitoring quantitative restrictions (quota)

Still the interpretation of these rules are different for different countries.

The basic method for determining value is the transaction value method: the price paid or payable of goods being imported with certain adjustments when sold for export to the country of importation. This is where the interpretation has been the subject of many reviews and debates.

This is another significant difference between Canada and the USA with respect to a US company acting as a NRI and thinking they can use the ‘first sale rule’ for their direct imports into Canada.

In the US the “first sale rule” allows (under certain conditions) for the importers to use the price payable by the buyer (middleman) for imports into the USA. For example: a buyer (middleman) secures a sale of merchandise bought for $20,000. and then in turn sells the goods to the retailer for $30,000. The goods in the meantime are being exported from China into the USA with the final buyer being the importer. The value used meets the condition for using the valuation under the first sale rule. (lesser value of $20,000.).

Some countries in the World Trade Organization (WTO) have legislated and refined the interpretation of these valuations rules successfully while some have not.

Take the USA, Japan and the European Union, while they have had much discussion and even congressional reviews and debates, these countries still allow (with certain conditions met ) the “first sale rule”. Canada and Australia have already abolished the “first sale rule” through legislation 10 years ago.

Canada deems under the transaction value method that the value for customs be: the price paid or payable (with adjustments) by the first purchaser IN   Canada. In other words the value should be the last sales value before import and not the first sale. How does this change the example given above ?

In order to declare the lesser value ($20,000.) the importer must be the middleman and must reside in Canada.   If the middleman happens to be a USA company acting as a NRI for their sales to Canada and has their goods shipped directly from the offshore country they buy from, the value used for customs must be the price paid or payable by the first Canadian purchaser, not the price paid by the middleman under the “first sale rule”

This is critical to the NRI and compliance under valuations rules for doing business in Canada. Many USA companies do not realize this difference and declare the sales price they paid, leaving them at risk in the event of an audit by CBSA.

If you are a NRI selling to Canada, review your procedures and ensure you are using the correct valuation for Canada. When in doubt contact Pacific Customs Brokers for a complete review of the valuation methods and regulations for your imports into Canada.

 

 

 

 

 

 

Foreign Vendors Sending Free Samples… Maybe Not

Every commodity that crosses the border requires specified details for customs clearance, including the free of charge commercial samples.

Through the course of business, importers commonly receive commercial samples from suppliers and vendors from both the U.S. and overseas.   Many vendors would deem these shipments as zero value (free of charge) to their Canadian clients. But for Canada Customs purposes, the shipper must declare a fair market value. If not, improper declaration may lead to penalties (Administrative Monetary Penalty System – AMPS) or possible seizures by Canada Border Services Agency.   When in doubt, we highly recommend speaking with your customs broker.