In a previous article we discussed the transaction value method for determining the customs entered value. In another article we discussed how the use of transaction value may be used, even when the seller and importer are related.

There are times when there is simply no transaction or transaction value may not be used. The regulations are somewhat cryptic on this point and state that transaction value may be denied when:

• There are limitations on the disposition and use of the merchandise that effect value;
• The sale is subject to conditions or considerations for which a value may not be determined;
• Proceeds accrue to the seller in a manner that restricts appropriate adjustments to transaction value for such proceeds; or
• There are related party transactions where transaction value cannot be substantiated.

This last bullet was the focus of my Related Party Transactions article noted above.

For commercial importers it may be difficult to think of importations that you did not have to pay for or for which there was no transaction. Imagine, however, the following commercial situations when you might import:

• A trade show exhibit,
• A machine sent to you free of charge by a related company,
• Production materials or components provided by your overseas customer free of charge,  Consideration samples and prototypes, or
• Replacement or warranty goods.

Admittedly, some of the above might qualify for transaction value when appropriately documented. It is also possible, however, the product transfer occurred more informally and alternative valuation methods would be more appropriate.

What is an importer to do when there is no transaction or when Customs deems the transaction valuation method invalid?

The customs regulations give us the answers. The regulations regarding valuation may be found in 19 CFR §152. The reader is encouraged to explore this area of the regulations, as they are lengthy and offer more detail than can be provided within a brief article.

The regulations remind us that transaction value is the first in a hierarchy of valuation methods, which are applied, in the following order:

1. Transaction value of identical merchandise.
2. Transaction value of similar merchandise.
3. Deductive value.
4. Computed value.
5. Combination of the above.

Unless assists are involved, the importer may interchange deductive and computed value. If assists are involved, the importer would use computed value.

1. Value of Identical Merchandise (19 CFR §152.104)

When transaction value may not be used, the transaction value of identical merchandise is allowed. The value must have been previously accepted by Customs.

2. Value of Similar Merchandise (19 CFR §152.104)

Should identical merchandise not be available the next step is to use the value of similar merchandise. Again, this value must have been previously accepted by Customs.

3. Deductive Value (19 CFR §152.105)

Deductive value is a calculated roll-down approach to valuation. Starting with the resale price in the United States after importation the importer may deduct:

• Normal commissions, profit and general expenses connected with sales in the U.S. of imported merchandise of the same class or kind as the merchandise concerned.
• Transportation and insurance costs.
• Customs duties and federal taxes.
• Cost of further processing in the U.S. should the merchandise not be sold in its imported condition.

There are some restrictions on deductive value:

• If an assist was involved, the importer would need to rely on computed value.
• The “price” is calculated based upon the unit price the good is sold at in the greatest number of units after importation into the U.S. The regulations provide helpful detail defining this concept.
• Actual profit and expenses are not to be used in the calculation; rather the importer should estimate the “usual” profits and expenses.

4. Computed Value (19 CFR §152.106)

Computed value is the converse of deductive value. It is a calculated roll-up process. The importer may opt to use computed value to precede deductive value in the valuation hierarchy.

Computed value is calculated as the total of the following:

1. Materials and processing costs involved in the production of the imported product.
2. Profit and general expenses.
3. Assists if not already included in the first two items.
4. Packing costs.

5. What Is the Value If Other Values Cannot Be Determined? (19 CFR §152.107)

In the unlikely event the importer and Customs are unable to determine a value using the above methods, Customs is instructed to make appropriate adjustments and allowances to the methods but only using information available in the United States.

Should your company need to rely on any of the above valuation methodologies you will likely have an additional burden to document the value. Where transaction value is, by definition, supported by your transactional business systems (purchasing, accounting, receiving etc.), your alternative valuation methods will rely on periodic analysis and audits. If you are using these alternative valuation methods, be certain to retain records of analytical work you did to substantiate the value.