Customs Value | What Is It & How Do You Calculate It?

What is Customs Value?

Customs value refers to the total value of the merchandise that is being imported into a country. On the basis of customs value, import duty for customs clearance of goods is determined. For instance, if your shipment has 10 items and the value of each item is US$ 20, then the customs value of your goods would be US$ 200.

What is the Purpose of Customs Valuation?

For many reasons, it is important to have a standard set of rules for establishing the total customs value of goods. For starters, it helps determine how much import duty the package recipient must pay against the shipment. Since customs duties and the value-added tax (VAT) are calculated on a percentage of the value of goods, the customs authorities need to have a clear understanding of how to perform certain tasks.

Creating an accurate measuring standard that is commonly agreed upon is vital for the following purposes:-

Application of commercial policy measures
Economic and commercial policy analysis
Import and export statistics
Proper collection of import duties and taxes

How to Determine Customs Value?

To calculate customs value the customs authorities generally use the transaction value method to determine invoice value for customs. However, when in certain cases, the transaction value method is not sufficient, customs valuation is determined using different methods. Let us take a look at the various methods.

1. Transaction value of imported goods method

The transaction value method is the first and the most important method of customs valuation as listed in the Customs Valuation Agreement. Here, the transaction value refers to the actual price paid or payable for the goods when sold for export. Under this method, the customs valuation is generally based on the actual price of the imported goods which is also reflected on the invoice.

The customs value equals the transaction value if all the following conditions are fulfilled:-

There must be evidence of a sale for export to the country of importation in the form of commercial invoices, contracts, or purchase orders.
There must be no restrictions on the disposition or use of the goods by the buyer other than:- a) Those required by law in the country of importation. b) Those limited to the geographical area in which the resale of goods may happen. c) Those that do not affect the value of the goods substantially.

When transaction value is used as the valuation method, the price cannot be subject to conditions for which the value for imported goods cannot be determined. These conditions include:-

The seller establishes the price of the goods on the condition that the importer will also buy a specific quantity of some other goods.
The price of the goods depends on the price of the goods that the importer sells to the seller.
Both parties established the price in a form of payment unrelated to the goods imported.

However, specific adjustments can be made to the transaction value if there is sufficient information available about the following aspects:-

Commissions and brokerage, excluding buying commissions
Packing and container costs and charges
Assists
Royalties and license fees
Subsequent proceeds
Cost of transport and insurance

In some cases, the customs authorities may have reasons to doubt the truth or accuracy of the declared value. In such situations, they may ask the importer to provide more information/ explanation for the declared value.

The customs authorities may decide that the correct value cannot be determined using the transaction value method especially if they still have doubts even after receiving more information from the importer. If customs authorities use another method for valuation, they must provide the reasons for doing so in writing to the importer.

2. Transaction value of identical goods method

The same approach is used for calculating the transaction value of identical goods if:-

The goods have the same physical characteristics, quality, and reputation.
The goods are produced in the same country as the country where the goods are being valued.
The goods are produced by the same producer that produced the goods that are being valued.

This method is used only if identical goods are imported into the same country where the goods are being valued. The goods must also be exported at or around the same time as those goods that are being valued.

The following exceptions to the above conditions are accepted:-

No identical goods are produced by the same person in the country producing the goods that are being valued.
Minor differences in the appearance of goods being valued do not prohibit valuation using otherwise identical goods.

3. Transaction value of similar goods method

The transaction value of similar goods can be calculated if:-

The goods resemble those being valued in terms of materials and characteristics.
The goods have the same functions and are interchangeable with those being valued.
The goods are produced by the same producer of the goods being valued and are sold to the same country of importation as the goods being valued. The goods must also be exported around the same time as the goods that are being valued.

4. Deductive value method

The deductive method is used when the customs value cannot be determined using the transaction value of the imported goods or identical or similar goods. This involves determining the unit price at which the goods are sold to an unrelated buyer in the greatest aggregate quantity in the same country of importation.

Here, the greatest aggregate quantity is equal to the price that the greatest number of units are sold, first at the commercial level after importation and then to unrelated buyers.

To determine the greatest aggregate quantity, all sales at a specific price and the sum of the units of goods sold at that price are compared to the sum of the units of identical or similar goods sold at any other price.

The greatest number of units sold at one price will represent the greatest aggregate quantity. This value is used for establishing the customs value. However, the following conditions must be satisfied:-

The buyer and the seller in the importing country must not be related.
The sale must take place around the time of importation of the goods being valued.
If no sale took place at or around the time of importation, sales up to 90 days after importation of the goods being valued are acceptable.

There may be some deductions from the price at the greatest aggregate quantity. These are:-

Commissions, the sum of profits, and general expenses added in connection with sales.
Transport costs and insurance costs incurred within the country of importation.
Customs duties and other taxes payable in the country of importation.
Value added by assembly or further processing as applicable.

5. Computed value method

This is a challenging and rarely used method. Here, the customs value is calculated based on the cost of production of the goods being valued. This includes the profit and general expenses reflected in sales of similarly classified goods.

The computed value is the sum of the following:-

Production cost: The value of materials, fabrication, and other processing involved in the production of the imported goods.
Materials: Raw materials, costs of transportation to the place of production, sub-assemblies, and pre-fabricated components to be assembled later.
Fabrication: The cost of labor, assembly costs if there is an assembly operation instead of the manufacturing process, and indirect costs like factory supervision, plant maintenance, or overtime.
Packing costs, assists, engineering work, or artwork undertaken in the country of importation.
Profit and general expenses reflected in the export sales of similarly classified goods provided by producers in the country of importation.

The profit amount and general expenses like rent, water, electricity, legal fees, etc. must be taken as a whole. Cost of insurance, transport, loading, unloading, and handling charges associated with transporting the goods to the place of importation fall under ‘other expenses.’

6. Residual value method

The residual method does not identify specific requirements for determining customs value. Instead, the value is based on one of the other methods and involves very little adjustment. The value must be fair market and incorporate commercial reality.

In this method, the final value can also be influenced by the following elements:-

The relation between the parties involved, for instance, a related buyer and seller,
A condition where the goods were provided to the consignee at no charge.
Allowable additions or deductions to the value of the goods.
Goods that are not sold in the country, as well as, used goods.

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Customs Value Vs Declared Value

The shipment's declared value serves as a basis for the customs department to impose any duties and taxes. Therefore this means that the declared value and the customs value are the same. But there can be a difference between the declared or customs value and the value given for insurance purposes, including the replacement cost if the item gets damaged during shipping.

The Customs Value is the actual financial value of your shipment. This value is used for customs clearance and may affect the transit time of your shipment. In contrast, The Declared Value is the selling price or replacement cost of your shipment's contents as stated by its shipper, which is the maximum liability in connection used for limiting the carrier’s liability for delay, loss, or damages.

Customs Value FAQs

Can the customs value be zero?

Yes, but only on shipments such as documents or samples that possess no commercial value. The samples supplied free of cost must be specified on the invoice.

Does the customs value include the shipping cost?

The customs value is the total value of all the items in the shipment and includes the shipping cost as well depending on the commercial terms or incoterms used or agreed upon in the transaction.

Can an importer disagree with the values determined by the customs authorities?

Yes, importers can disagree with the values determined by the customs authorities if they believe the right methods were not used to calculate the customs value. In such a case, they can appeal for a review.

Should an importer declare the value for those goods that are exempted from customs duty?

Yes, it is mandatory to declare the value for even those goods that are exempted from customs duty. This is done for the proper compilation of trade statistics.

What happens if I under-declare customs?

If you declare a lower value for the customs without providing adequate proof of the same, the customs authorities can estimate the value of the products and charge a higher fee based on their valuation. In that case, you may have to pay a lot more for the undervalued goods declared to customs and may also have to pay a fine for tax evasion.

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