Valuation of Imported Merchandise aka How Much is it Worth

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Valuation of Imported Merchandise(a/k/a How
Much is it Worth?)
Kathleen M. Murphy Partner Drinker Biddle
Reath 312-569-1155 Kathleen.murphy_at_dbr.com
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Reasonable Care

• Customs Modernization Act (enacted 12/93)
  established the requirement that parties exercise
  reasonable care when importing into the United
  States.
• Section 484 of the Tariff Act, as amended,
  requires an importer of record,
• 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
  toproperly assess dutiescollect accurate
  statisticsdetermine whether any other applicable
  requirement of lawis met. (See Reasonable
  Care, Customs Informed Compliance Publication,
  February 2004) (Emphasis Added).

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Entry Summary CF-7501
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Overview of Customs Valuation 5 Hierarchical
Valuation Methods

• Transaction Value
• 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 post-importation costs)
• Computed Value (foreign supplier cost information
  for materials, processing, profit, general
  expenses, etc.) and
• Fallback Method (methodology based on a modified
  version of one of the first four methods).

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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 (Fed.Cir.
  1990).
• 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 arms length,
• Customs reviews related party transaction to
  ensure an arms length sale.

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When are parties related in CBPs eyes?

• Family / Work Relations
• Officers and directors of each others
  businesses.
• Partners of same business.
• Employer / Employee.
• Members of same family.

• Control Relations
• One person owns 5 of voting stock of both
  parties.
• One party controls the other.
• Both parties under the common control of a third
  party.
• Both parties control a third party.

Sec. 402(g)(1), Tariff Act of 1930, as amended
(19 U.S.C. 1401a (g)(1)).
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Evaluating Related Party Transactions for CBP
Purposes
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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
  firms overall profit realized over a
  representative period of time in sales of
  merchandise of the same class or kind.

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Circumstances of Sale Test (contd)

• 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 firms transfer
  pricing practices for tax purposes.
• Transfer pricing study is prepared by outside
  experts for the purpose of setting inter-company
  prices.

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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 purposes.
• 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 business.
• 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
  CBP.
• See, CBP Informed Compliance Publication
  entitled Determining the Acceptability of
  Transaction Value for Related Party Transactions
  (April 2007).

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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 imported goods?
• 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.
• 3. Assists
• 4. Packing costs paid by buyer
• 5. Proceeds of any subsequent resale of the
  goods transmitted to the seller
• If so, the value of the item must be added to the
  invoice price and the total amount declared to
  Customs.

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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?
• Relationships?
• Written agreement?
• 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 U.S.
  importer).

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Additions to the Price Dutiable Royalties

• Customs Headquarters has failed to set clearly
  defined lines for when royalties are dutiable
  (i.e., reportable).
• Customs currently applies a 3-part test.
• Case-by-case.
• 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 merchandise and
• 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 intertwined.

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Dutiable Proceeds

• 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.

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Packing Costs

• 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.
• Examples
• 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.

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AssistsDefined

• 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 production
• Tools, dies, molds and similar items used to
  produce product
• Merchandise consumed in production of the
  imported merchandise or
• 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.

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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.

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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?
• Reduced cost?
• Sold at current book value? (no assist)
• Asset maintained on U.S. books? (assist)
• Asset transferred to foreign supplier? (no
  assist)

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Engineering/RD Assists

• Dutiable assists include engineering,
  development, design work, plans, drawings, or
  sketches that are
• undertaken outside the United States,
• and
• are necessary for the production of imported
  merchandise.

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Examples - Engineering, development, artwork,
plans and sketchesthat are undertaken elsewhere
than in the United States and arenecessary 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 switch.
• Design drawings and artwork created in Canada are
  sent to China for the manufacture of labels.

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Engineering, Development 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 United
  States,
• and
• Work is incidental to other engineering,
  development, artwork, design work, undertaken
  within the United States.

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Examples

• 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.

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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 costs.
• 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 needed.

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How to Value an Assist
Engineering, development, etc.
Materials, components, etc.
Merchandise consumed
Tools, dies, etc.
Cost of Acquisition X X X X (unrelated
seller) Cost of Production X X X X (importer/rela
ted seller) Cost of Lease or Rental X Value
Added X Outside U.S. Transportation costs
to X X X X place of production
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How to Apportion the Value of an Assist

• Apportionment will be made in a reasonable
  manner appropriate to the circumstances and in
  accordance with generally accepted accounting
  principles. 19 C.F.R. 152.103(e).
• 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
• 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).

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Apportionment of Assists (cont.)
100,000 addition to first shipment.
1.00 addition to the value of each of the
100,000 units to be produced.
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Top Five Valuation Risks Facing Importers
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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.

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Lack of Established Channels of Communications
Regarding Value Issues

• 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 Services
Law
Tax
Accounting
Customer Service
Sales Marketing
Import Department
Receiving
Purchasing
Sub-contracts
Contracts
Engineering
Manufacturing
Export
Other
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Failure to Identify Assists

• Remember if items provided free of charge or at
  a reduced cost are already includedno worries!
• Do you

• Routinely meet with personnel who approve
  purchase of potential assists (e.g., engineers,
  RD, 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 department?
• Monitor shipping records from engineering or RD
  personnel?
• Review supply agreements with foreign suppliers?
• Coordinate with finance personnel to ensure
  proper allocation of assists?
• Train relevant employees to identify potential
  assists?

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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.
• Examples
• 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
  apportioned.
• 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.

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The Kitchen SinkOther Areas of Concernand
Potential Valuation Problems

• Post-importation price adjustments.
• Retroactive transfer price adjustments.
• Capital equipment imports which incorporate
  multiple shipments and progress payment terms and
  conditions
• 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.

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How These Risks Translate to aValuation Audit
Monitoring Company monitors trade activities to
assess the quality of performance over time, and
to ensure that issues and deficiencies are
promptly resolved and procedures are corrected to
prevent recurrence. Monitoring will include some
testing of compliance on a periodic basis.
Risk Assessment The Company identifies risks to
the goal of trade compliance, analyzes them for
possible effects, and designs control activities
to manage those risks.
Information Communication The Company
establishes and maintains processes to ensure
that relevant and reliable information is
recorded and communicated to those in the
organization who need it, and that information
provided to the government is complete and
accurate.
Control Environment The Company maintains an
environment that supports trade compliance,
provides a clear corporate mandate for
compliance, assigns competent personnel, uses
proper organizational structure, and possesses
adequate resources.
Control Activities The Company documents and
implements policies and procedures and other
control activities to ensure complete and
accurate reporting, as well as compliance with
other regulatory requirements.
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How These Risks Translate to aValuation Audit

• Does management approve written policies and
  procedures?
• Corporate Compliance Statement issued by
  management?
• Does one individual have authority to ensure that
  internal controls
• are established and followed by all company
  departments?
• Do personnel responsible for ensuring the
  accuracy of declared
• value have adequate knowledge and training in
  valuation?
• Does the Company encourage assistance from either
  internal or
• external experts for value issues, when needed,
  and are
• formal rulings requested?

Control Environment The Company maintains an
environment that supports trade compliance,
provides a clear corporate mandate for
compliance, assigns competent personnel, uses
proper organizational structure, and possesses
adequate resources.
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How These Risks Translate to aValuation Audit

• Does the Company identify, analyze, and manage
  risks related to value?
• Does the Company have procedures to ensure that
  additions to price actually paid or payable are
  included for
• - Commissions? - Proceeds?
• - Royalties? - Packaging?
• - Assists?
• Does the Company have procedures to ensure that
  the price actually paid or payable includes
• - Indirect payments? - NRE payments?
• - Price adjustments? - Currency exchange
  adjustments?
• Does the Company confirm that related party
  transactions are negotiated at arms length?

Control Environment The Company maintains an
environment that supports trade compliance,
provides a clear corporate mandate for
compliance, assigns competent personnel, uses
proper organizational structure, and possesses
adequate resources.
Risk Assessment The Company identifies risks to
the goal of trade compliance, analyzes them for
possible effects, and designs control activities
to manage those risks.
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How These Risks Translate to aValuation Audit

• Does the Company have formally documented
  internal controls
• to ensure that the value of imports is properly
  declared?
• Has the Company identified any risks related to
  value and
• implemented control mechanisms?
• Do written internal control procedures assign
  duties for ensuring
• the accuracy of declared value to a position
  rather than a person?
• 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?

Control Activities The Company documents and
implements policies and procedures and other
control activities to ensure complete and
accurate reporting, as well as compliance with
other regulatory requirements.
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How These Risks Translate to aValuation Audit

• Does the Company have adequate interdepartmental
  communication
• about Customs value?
• Do the Purchasing Department, Engineering Group,
  Accounting
• Department, Law Department and others provide
  adequate
• and timely information to the Import Department
  to ensure value
• is declared correctly?
• Does the Company use its ERP or other business
  system(s) to
• facilitate communications with the Import
  Department?

Information Communication The Company
establishes and maintains processes to ensure
that relevant and reliable information is
recorded and communicated to those in the
organization who need it, and that information
provided to the government is complete and
accurate.
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How These Risks Translate to aValuation Audit

• Does the Company review and update written
  policies and
• procedures?
• Are internal controls for valuation periodically
  tested and
• results documented? (This should include
  post-entry reviews
• to verify value was properly declared.)
• If the Company found weaknesses during internal
  control testing
• of declared value, did the Company correct
  and/or enhance the
• internal control?
• Does the Company have procedures to link specific
  purchase
• orders, invoices, and payment records to Customs
  entry
• numbers?
• Does the Company provide adequate customs broker
• oversight and audit the customs brokers work?

Monitoring Company monitors trade activities to
assess the quality of performance over time, and
to ensure that issues and deficiencies are
promptly resolved and procedures are corrected to
prevent recurrence. Monitoring will include some
testing of compliance on a periodic basis.
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QUESTIONS ????