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 to Canada.
Per Section 48 of Canada’s Customs Act, the transaction value represents the aggregate of all payments that the purchaser in Canada 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.
Section 49 of Canada’s Customs Act details the identical goods method.
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.
Section 50 of Canada’s Customs Act applies to the similar goods method.
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
Also per Section 51 of Canada’s Customs Act , any advertising or promotion incurred in the export country must be deducted.
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.
Computed Value Method
There can also be additions required to calculate the transaction value of an imported good. These are applied according to the computed value method described in Section 52 of Canada’s Customs Act.
Examples of items to be added are charges incurred in the country of export, such as:
- Counselor fees
- Customs brokerage fees
- Deferred quantity discount from the foreign vendor
- Domestic warehouse charges and rent
- Inland insurance premiums
- Inspection charges
- Port charges
- Price escalations if price of product goes up before goods are shipped from the export countries
- Royalties, licensing fees, trademarks and patents that the vendor charges
- Special export duties or taxes
- Storage expenses incurred outside Canada
- Vendor selling commissions
- Weighing of goods charges.
Other items to be added to the import’s computed value are:
- Fitted cases
- Non-returnable bottles, cans and drums
- Pallets, which may be included for safety purposes
- Special export cases and packing like waterproof paper.
Also to be added are the following 3 items that involve legal and intellectual property rights:
- “Canadian assist” charges for any design assistance that a Canadian company provides to the exporter such as materials, tools, plans and sketches
- Subsequent proceeds that the importer pays the exporter for re-selling the imported goods
- Warranty payments to vendor.
Residual Method of Valuation
The last way for assessing the dutiable value of an import is called the residual method. The residual method is based on an item’s market value, as defined in Section 53 of Canada’s Customs Act.
Simplifying Complex Valuation Methods
Smaller importers should be aware that the value of a commercial import shipment is often not the same as what they paid to the exporter.
Consulting a customs broker or working with the Canada Border Services Agency can help ensure that the correct transaction value is used to calculate import duties and taxes.
For entrepreneurs who like to do their own research, Sections 44 to 55 of Canada’s Customs Act deal with valuation. Memo D13-3-1 delves into the formulas for calculating the value imported goods.
Daniel Workman - A senior business and finance writer who also does French translations, notably international trade and insurance materials.
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