Both the EU and the UK are currently engaged in developing the so-called "Advanced Valuation Rulings" (UK) and "Binding Valuation Decisions" (EU). But what actually is customs value, and why can it be so tricky that we need these AVRs or BVDs? We explore this in this blog entry.
Am I concerned?
If you are engaged in international commerce and are responsible for bringing products into a country or filing customs declarations on behalf of others, then you should read on.
How do you work out the customs value of your imported goods?
When you import goods into a country, you usually must work out the value of your goods to use when working out Customs Duty and import VAT (if applicable). In formal terms, this is known as the customs value.
Customs Value is one of the three crucial compliance areas that businesses and customs officials must pay attention to (the others are tariff classification and establishing the country of origin of the goods). The rules are enshrined in by the GATT Agreements of the World Trade Organization (WTO).
What's the value of my product?
What something is worth is what is meant by the term "value." However, if this were the only definition available, it would be arbitrary, subjective, and uncertain to determine a product's "value" for customs purposes. For businesses that want assurance about the amount of duty that will be imposed on their products or for customs compliance, this may be insufficient. They are looking for legal certainty.
Value determination can be a real challenge
Customs Valuation can be tough. For example, one of our clients recently asked:
Should we use the price that a customer will pay to estimate the true value of goods?
What will you do then with the goods you send abroad if there is no sale? Do "free" goods, for instance, not have taxes that are gathered by customs?
If so, there would be plenty of room for fraud or inventive accounting.
"I'll just put the invoice price! What's so difficult about that?"
Contrary to popular belief, you do not always declare the invoice price to customs.You might assume it's obvious that the value of your business would be equal to the cost of your invoice.
But what if there are special offers or discounts?
What value would you declare if there were royalties to pay?
What if you sold your goods to a related party, e.g. your sister company?
What value do you declare for goods that are being returned to you as defective or rejected?
What is there are other conditions that affect this sale and change the money that exchanges hands?
All of these elements may result in an invoice price that does not reflect the price actually paid or payable. But it gets even trickier than that.
Say hello to the CIF Value
The EU or the UK would like to see the customs value on the import declaration - and we need to clarify that this must be the so-called "CIF value". Put simply, they want to know how much it costs a company to purchase and ship those goods from the factory or warehouse of your supplier to a particular (border) location in the country of the buyer, such as the port. Or, how much did it really cost to import these goods into my nation?
One needs to take a closer look at the Incoterms (International Commercial Terms) to fully understand what "CIF" is all about. We have training on that, too. Please get in touch.
Incoterms matter in Customs Value determination
Incoterms are typical agreements between buyers and sellers regarding the level of risk that each side will bear during shipping and delivery, as well as the degree of control that each side has over shipments at various points.
For instance, if a shipment is shipped "FOB," the person who pays the freight costs is responsible for all risk until they are loaded onboard a vessel in the port of the exporter. However, if a different shipping method, such as "CIP," is used instead — under which responsibility shifts once loading has started — the person who paid for shipping would be in charge entirely until the shipment is unloaded at the destination port.
Note that for the US, the Incoterm to be used for customs valuation determination is not CIF but FOB.
So, what is the customs value to be declared?
The price actually paid or payable for the goods when sold for export to the country of importation, subject to additions and deductions, is typically the value for customs purposes that need to be put on the customs declaration. This is referred to as the "transaction method" or Method 1, the primary valuation method.
The amount paid or payable is insufficient!
As discussed, you typically use the transaction method ("price") to declare your goods to Customs based on FOB (US) or CIF (EU, UK) Incoterms between unrelated parties and where legally permitted (see above). It might not be sufficient, though.
Price is just one element influencing the CIF value (Cost, Insurance, Freight). Freight costs, import duties and taxes, customs clearance fees (if applicable), and insurance costs are additional considerations.
The customs value must also, as needed, include certain adjustments like commissions, brokerage fees, assists, and proceeds.
A fixed order of the valuation methods
There are instances where there is no sale! So, what to do?
The WTO Valuation Agreement, also known as the Marrakesh Agreement, talks about a hierarchy of valuation methods for determining the objective commodities' worth at import to collect duties and taxes.
The transaction price for the same goods is the first method. If this is unsuccessful, we next consider the transaction value of comparable or identical goods. The "deductive value method," "computed value method," and "fall-back method" then follow, which are more complex methods.
Each merits a thorough discussion, but only, if relevant to your business. Schedule a call with our experts to talk it through, or join our customs valuation training throughout the year.
Enter AVRs and BVDs
As there is quite a lot of confusion as regards customs valuation, authorities offer Advanced Valuation Rulings (AVR), also known as Binding Valuation Decisions (BVD). These are written decisions that are enforceable against both parties. Subject to cancellation or withdrawal, the decision will apply for a period of three years to the specified items and situation.
The AVRs / BVDs join the ranks of the AT/-BTI and AOR/BOI - related to tariff classification and the country of origin of products.
How do AVRs / BVDs work and how can I apply for them?
Before products are imported into the UK or EU, businesses will be able to ask for an Advanced Valuation Ruling or Binding Valuation Decision from the UK or EU respectively. This will provide businesses with assurance on how their items would be handled in terms of the implications of import duties. AVRs/BVS's will provide you with the appropriate valuation technique to be utilised in the computation of the Customs duties, ensuring that accurate duty calculations are applied to the products. Businesses wouldn't need to worry too much about determining their customs valuation rate, as Customs authorities would do it for them. Businesses may also depend on a single judgement for a variety of imports if the products and other elements upon which the ruling is based are the same.
We can apply for AVRs and BVDs for you. Please schedule a free call.
How to avoid trouble and how to escape it (if you are in it)
Too late for AVRs and BVDs for your business? Already got in trouble? What to do now? Well, let's recall the basics: Businesses must use the correct customs value per the law, as was previously mentioned. So, the first thing that customs authorities check when you are chosen for a customs valuation audit is that you reported the correct (adjusted) transaction price when there is a sale. When there is no transaction, the hierarchical method from 2 to 6 is put into use, making things more subjective and necessitating a strong line of defence. It would be wise to spend money on outside assistance and have this thoroughly examined: Better to prevent than to treat! Schedule a free call today.
If an audit is conducted on a custom value
The burden of proof is always on the importer, so if your arguments aren't convincing, customs authorities may contest any import value and request additional information. If additional evidence is presented and Customs determines the claimed matter to be inaccurate, they must clearly state why. Once more, this is done for transparency and to give the importer the option of contesting the decision. Again, if this happens, seek assistance and support from local experts in customs.
Increasing Awareness and Investing in Training for Customs Valuation
Training in customs valuation is crucial for businesses. The transaction value method and all other secondary valuation techniques must be thoroughly understood by businesses to guarantee compliance and prevent paying pointless taxes and duties. The Customs Valuation Agreement and how to handle situations and activities in customs valuation, including all six valuation methods emphasising transaction value, are things that staff members in charge of importing and exporting need to be aware of.
At Customs Manager Ltd. we offer a great Customs Valuation Course. Click here to book.
Conclusion
Businesses must comprehend customs valuation and implement systems and procedures that aid in determining the correct value. This is so that the amount of duty and other taxes that must be paid can be calculated based on the value of the imported and exported goods. Additionally, if an implausible customs value is declared, the companies might experience compliance difficulties.
When importing or exporting goods, businesses frequently use the transaction value method to declare the customs value. This is frequently true, but not always! There are five other methods to verify and these should be understood, too.
If in doubt, businesses may also apply for a binding ruling by the authorities, known as a AVR or BVD in the UK or EU respectively.
We hope that by laying out some of the complexities surrounding customs values and how they are determined, this blog post has been able to help. If unsure, seek professional advice. Schedule a call with us today.