A good understanding of valuation matters is one of the most crucial aspects of customs compliance and customs planning. Valuing your goods effectively for customs purposes is likely to help reduce your import costs and avoid errors that may lead to additional duties and penalties.

Issues surrounding what should or shouldn't be included in the customs valuation of goods are not only one of the most misunderstood areas of customs law but also are one of the most commercially sensitive. This article will briefly highlight the issues and obligations that an importer may face with regards to customs valuation.

Why is it important to correctly value my goods?

Incorrectly calculating customs value can have numerous negative effects on your business:

You should also note the personal liability provisions for Senior Accounting Officer under the new Finance Act 2009 as well as potential preclusion from achieving Authorised Economic Operator status in the future.

How do I correctly value my goods?

The customs regulations set out various methods for determining an acceptable customs value, which must be applied in a prescribed order. However, approximately 90% of all imports are valued under Method One, using the export sale price.

There are a number of instances where it is not possible to use this method, including:

• Transfers to branch companies or agents,
• Sub-contract work where the materials are provided free of charge
• Related party sales that are not arms-length

In these circumstances you will need to determine an alternative method of valuation in accordance with the methods two to six (see below).

What is the Transaction Value method? (Method One)

Article 29 of the Customs Code defines this as:

"...The price actually paid or payable for the goods when sold for export to the Customs Territory of the Community, subject to specific adjustments where necessary..."

This will include all payments made or to be made as a condition of sale of the imported goods by the buyer to the seller. In order for the transaction value to be the basis of customs valuation, certain requirements must be satisfied:

• There must be no restriction on the disposal or use of the goods by the buyer (other than those imposed by law or the authorities). Restrictions that limit the geographical area in which the goods may be sold and those which do not substantially affect the value of the goods are also permitted.
• The sale and price must not be subject to some condition or consideration for which a value cannot be determined with respect to the goods in question. For example, where the seller establishes the price of the imported goods on condition that the buyer will also buy other goods in specific quantities.
• No part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer must accrue to the seller unless permitted by Article 32.
• The buyer and seller must not be related or where they are related, further conditions must be satisfied (see below).

The Prior Sale

One of the more complicated and contentious issue in customs law and practice is the issue of prior sale. If goods are only sold once prior to importation, it is quite clear that they have been sold for importation into the EU. However, the meaning of the term "sold for export" is ambiguous when there are a number of sales in the supply chain. In these circumstances it is usually the last sale that is regarded as the necessary sale. However, there may be exceptions to this rule. An earlier sale may be used if it can be proved that it was that sale that intended the goods to be imported into the EU, such examples of this could be:

• The goods were manufactured/processed to EU specifications or have identifying marks that they are intended for no other market/destination.
• The goods were manufactured or produced specifically for a buyer in the EU.
• Specific goods are ordered from an intermediary who sources the goods from a manufacturer and the goods are shipped directly to the EU from the manufacturer.

So for example:

Company A (a non-EU company) produces a product to EC specifications and sells the product to Company B (also a non-EU company) for $100. Company B then sells to Company C (an EU company) for $200 and the goods are imported and Company C pays the duty on the $200 value.

However, under the prior sale rules as the goods were manufactured to EC standards by Company A, Company C is permitted to declare the $100 first sale as the value on which the import duty can be paid.

However, It must be noted that for reasons of commercial sensitivity it may be difficult to persuade Company B to reveal its margins (i.e. how much it paid for the products initially and then how much it sold them on for) The use of First Sale effectively strips out any intermediaries charges to customs duty. It can also be a useful tool in simplifying the customs valuation of transactions which include royalty payments and other potentially dutiable charges (see below). Also, please note that the prior sales arrangements are under threat at EC level. (See ITS article: "A Threat to Prior Sale Planning").

What should be included in the customs value?

There are a number of items that must be included in the customs value of an imported product, they are:

• Delivery Costs (Transport, Loading/Handling and Insurance of goods to the point of entry into the EU. (See below)
• Commissions (not including buying commissions)
• Royalties and Licence fees
• Goods and services provided free of charge or at a reduced cost by the buyer. If any of the following are provided directly or indirectly they must be included in the customs value:

- Materials, components, parts and similar items incorporated in the imported goods including price tags, Kimball tags, labels
- Tools, dies, moulds and similar items used in producing the imported goods, e.g. tooling charges
- Materials consumed in producing the imported goods e.g. abrasives, lubricants, catalysts, reagents etc which are used up in the manufacture of the goods but are not incorporated into them or
- Engineering, development, art work, design work and plans and sketches carried out outside the EU and necessary for producing the imported goods. The cost of research and preliminary design sketches is not to be included.
• Containers and Packing: The cost of containers that are treated as being one with the goods being valued and the cost of packing (whether for labour and/or materials).
• Proceeds of resale(s)
• Export duty and taxes paid in the country of origin/export

The above charges must be added to the customs value then certain qualifying conditions are met and so it is necessary to look at the facts and any documentation imposing these charges to determine whether they are dutiable of not.

What can I leave out of the customs value?

Similarly, there are a number of items that do not have to be included in the customs value of imported goods, they are:

• Delivery costs within the EU. If the sellers or carrier's charge covers delivery beyond the EU border the additional charge may be deducted from the customs value as long as the additional charges are shown separately from the price actually paid or payable.
• EC Duties and Taxes can also be deducted from the Customs Value
• Discounts- These can be left out when they relate to the imported goods being valued and there is a valid contractual entitlement to the discount:
- Quantity or Trade Discounts
- Cash and early-settlement discounts
• Dividends made to the seller
• Marketing activities related to the imported goods
• Buying Commissions
• Export Quota and Licence Payments
• Interest Charges
• Rights of reproduction
• Post-importation work
• Management Fees

Again, a close examination of the facts supporting such deductions should take place before you seek to strip any of these elements out of the customs value.

What does "related to the seller" mean?

As stated above, Method One can be used for related party transactions provided they are based on arms-length terms. There are additional provisions in customs law in place to govern these transactions. A buyer and seller are "related", when for example when the parties are:

• Officers or directors of one another's companies
• Legally recognised partners in business
• Employer and employee
• Members of the same family

What if I am "related" to the seller?

As long as it can be proved that the price payable has not been affected by the relationship then Method One can be used. Businesses can be reactive as wait to see if customs queries the arms-length relationship of related party transactions, in which case you can request their grounds be set out in writing and then you are given reasonable grounds to respond. Being reactive has the advantage of focussing on a specific area of contention.

However, customs duty control is audit based with declarations remaining open for three years. A successful challenge to related party transactions could have retrospective effect. Some businesses would rather take a proactive approach by seeking to justify related party customs values in advance.

They are two potential ways of doing this. Firstly, you can do this by satisfying a number of "tests" by:

• Proving that the transaction value of identical or similar products exported to the EC is the same or similar to the goods that you are importing.
• Proving the price paid for your goods is close to the customs value of identical or similar goods under Method Four (see below).
• Proving that the price paid for your goods is close to the customs value of identical or similar goods under Method Five (see below).

Alternatively, you can provide information to HMRC that proves that you trade with the "related seller" as if you were not related in that you pay the same price as unrelated buyers in the EC and that the price paid is fully-costed or "at arms' length". This often calls upon work carried out by businesses in relation to transfer pricing under the OECD guidelines. A note of caution, the customs rules are set out under GATT Article VII, a different system to OECD and there are material differences between the two systems. Businesses need to take steps to reconcile the two systems or run two parallel prices.

What are the other Methods of Valuation?

If it is not possible to use Method One for purposes of valuation then there are other methods that can be used:

Method Two: Valuation of Identical Goods

Essentially, the customs value of identical goods imported at or about the same time of the importation of the goods in question can be used. These goods must be produced in the same country as those being valued. The goods must be the same in all respects (though minor differences in appearance do not matter).

Basically, the customs value is the value achieved by identical products that have already been imported into the EC using Method One valuation. Please note though that it is important that you take into account the differences between the costs of transporting the identical goods into the EC.

Method Three: Customs Value of Similar Goods

If there are no identical goods (and only if there are no identical goods) then you must use Method Three. These goods must be produced in the same country, can carry out the same tasks and must be commercially interchangeable with the goods in question. If the producer of the goods does not make similar goods then you can use similar goods made by a different producer.

It is worthwhile noting that Methods Two & Three are rarely used unless a business dual-sources its products as otherwise it is difficult to legally attest to identical or similar transactions.

Please note that Methods One to Three must be followed numerically whereas Methods Four and Five can be chosen (so therefore Method Five can be applied before Method Four).

Method Four: The Selling Price of the Goods in the EC.

Method Four is often described for the sake of convenience as "resale-minus".

The Customs Value is based on the price of each item (unit price) at which the imported goods/identical goods/similar goods are sold in the EC in the condition as imported to customers unrelated to the seller.

The unit price must relate to sales in the greatest aggregate quantity at or about the time of importation. (In the UK this is known as Method 4a).

Alternatively, you can base the customs value on the unit price of the actual sales of the imported goods that take place up to 90 days post-importation. However, as you cannot establish a value until the goods have been sold, you must request release against a deposit.

Method Five: Cost of the production of goods.

Usually this method is only used where the importer and supplier are related. This is a built-up customs value.

It involves the cost or value of materials and fabrication or other processing used in producing the imported goods plus an amount for the producer's profit and general expenses plus the cost of transport, insurance and loading or handling connected with delivering the goods to the EC border.

For obvious reasons this method is commonly known as cost plus.

Method Six: The Fallback Rule

This method is used to determine the customs value on the basis of data available in the EC. In essence it is the flexible application of any of the above five methods (transaction value + the other four applied with relative flexibility).

How can International Trade Solutions help you?

The article above is a brief guide to the main valuation issues faced by importers (although there are many more). International Trade Solutions has worked with numerous businesses over a fifteen-year period on valuation issues and has developed in-depth expertise and experience of clients' needs and requirements as well as considerable industry-specific knowledge. International Trade Solutions has not only saved these clients hundreds of thousands of pounds through duty-reclaims but has helped clients fulfil their customs obligations thereby protecting them from duty-back payments and penalties.

We also team up with specialists in transfer pricing to address related party transactions in a way that will meet the needs of direct tax and customs.

For a free first consultation meeting call us on 01905 619229 or email us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .