How Customs Determines Value of Imported Goods

Trying to mitigate or avoid import duties and taxes, some importers misrepresent or underprice the correct value of their import shipments. Others risk criminal smuggling charges by not declaring the imported items at all.

Novice importers often assume that the price paid on their commercial invoice will be the value that customs officials will use to calculate the amount of duty and tax payable. That is not necessarily so. This article explains valuation methods for properly calculating the transaction value of an import shipment from customs’ perspective.

Transaction Value Method

The most popular valuation method, transaction value uses the amount paid or payable as adjusted for export.

The transaction value represents the aggregate of all payments that the purchaser makes or will make to the benefit of the foreign vendor, whether that benefit is direct or indirect.

Transaction Value of Identical Goods Method

Sometimes the transaction value method will not work. This can be the case when a new product is imported into Canada, and customs officials do not know the tariff treatment to apply to the new item.

When the 16-bit Nintendo game console was first imported into Canada from Japan during the 1980s, Canadian Customs did not know how to classify the new Nintendo product and was going to charge 12% duty.

A senior customs broker brought in a similar Atari system to compare with the Nintendo. While the color and design of the Nintendo differed from the Atari, the Nintendo product was shown to be functionally identical to the Atari system. Customs officers agreed that, as an identical good, the Nintendo imports should be charged the same tariff duty rate of 3.9% that had been assessed on prior Atari shipments.

Transaction Value of Similar Goods Method

If no identical good exists, the next valuation method to be applied is for similar goods. Apple’s new iPad may have unique features; yet the iPad is similar to a computer netbook. Therefore, customs can assess the iPad’s value based on a comparable netbook product.

Deductive Value of Imported Goods Method

If no similar good exists, the deductive value method is applied. A host of expenses may be subtracted from the imported item’s purchase price.

Potential deductions are:

International freight and insurance

Volume and quantity discounts taken at the time of purchase

Cash and early payment discounts

Buying commissions from an agent working for the importer

Similarly, any credits from a prior shipment have to be accounted for separately. Like the advertising and promotion charges, if credits had been lumped in with charges on the importer’s commercial invoice they must be subtracted from the calculated value for duty.

Clearance Procedures

When the importers arrive, they have to contact the Customs office at the port of entry to clear the household effects from the Customs custody. They will need to prepare all documents as required by Customs to claim tax and duty free importation of the household effects and follow the processes listed below:

The importer/agent submits an Application for Tax and Duty Free Allowance, Import Declaration Form, and all supporting documents to the Customs office at the port of entry;

Customs verifies the documents and Application for Tax and Duty Free Allowance and charges taxes and duties on any household effects not eligible for tax and duty free allowance;

The importer/agent pays taxes and duties (if any) at the Cashier Division, and then contact the Goods Clearance Division; and

Customs inspects the imported household effects against the Declaration. If there is no discrepancy between the Declaration made and the goods inspected, all goods will be released.