Customs entries on imported merchandise involve calculating duties and taxes based on commodity classification (HTS), country of origin, and invoice value. In a previous post we discussed the importance of making sure that correct HTS codes are used. In most cases the commercial invoice or CI value is used for duty calculation. In situations where the transaction is not so clear Customs has established an “appraisement hierarchy” to determine entry value. The details can be found in US Customs and Border Protection regulations 19 CFR part 152.  Here is a summary:

Appraisement Hierarchy

1) Transaction Value- actual invoice value

2) Transaction Value of identical merchandise- same country, same class and kind

3) Transaction Value of similar merchandise- same country, commercially interchangeable

4) Deductive Value – start with US retail selling price and deduct commissions, transportation, insurance, duty/tax, and value of further processing

5) Computed Value- sum of the following. Importer can request computed instead of deductive.

• Cost of Materials
• Cost of Packaging
• Assists
• Profit
• Overhead
• G&A

6) Value if other values cannot be determined- if the value of imported merchandise cannot be determined it will be appraised on the basis of a value derived from the methods set forth in parts 152.103 thru 152.106.

Transaction Value cannot be used and the hierarchy comes into play when:

• There is a restriction on sale (except geographic)
• Merchandise is sold on consignment
• There is a barter transaction
• There is “goodwill” value involved
• Parties are related, unless relationship did not influence price

Unacceptable bases of appraisement:

• The selling price in the US of merchandise produced in the US
• A system that provides for the appraisement of imported merchandise at the higher of two alternative values
• The price of merchandise in the domestic market of the country of exportation
• A cost of production other than a value determined under 152.06
• The price of merchandise for export to a country other than the US
• Minimum values for appraisement
• Arbitrary or fictitious values

Incoterms are rules used to facilitate global trade. Incoterms were created and are administered by the International Chamber of Commerce and are updated every 10 years. Incoterms 2010 published by ICC Services Publications, Paris FR is a very good reference. Some of the important points covered in the book are:

• Incoterms must be in the contract of sale to apply
• > 120 countries have endorsed Incoterms 2010
• Now 11 rules in 2 groups
• 2 new rules deal with geographic place
• Incoterms is not a law…older versions can be used as long as all parties agree
• Incoterms replaces Uniform Commercial Code (UCC) in domestic commerce
• for reference  www.iccbooksusa.com
• Incoterms cover;
  • Who does what
  • Who pays for what
  • When risk of goods passes from seller to buyer
  • Who is responsible for insurance, export clearance, import clearance, and other costs pertaining to delivery of goods
• Incoterms do not cover;
  • Ownership or title to goods
  • Payment terms
  • Detailed requirements
  • Complete contract of sale

Incoterms 2010 includes several rules changes:

• Now referred to as rules not terms
• Remove DAF DES DDU DEQ
• New Rules  DAT DAP
• 2 Groups…Any Mode and Ocean/Inland Waterway Only
• Any Mode…EXW FCA CPT CIP DAT DAP DDP
• Ocean or Inland Waterway Only…FAS FOB CFR CIF

Attached chart is a quick guide to Incoterms 2010

Incoterms 2010 Quick Reference Chart 120610

Our previous post suggested an annual review of Harmonized Tariff descriptions as a good business practice. Another good practice is to make sure you are taking advantage of regulations that allow importing on a duty free or preferential basis. Here are a few items for your annual customs review. Contact Ad Hoc Logistics if you need help.

• Classification– review annual updates to Harmonized Tariff to make sure your codes and descriptions are accurate. Proper classification and valuation of imported goods are the first step in compliance. If you do nothing else, do this.
• Duty Drawback– this is a refund of duties paid on imports that are later exported. Record keeping is key here.
• Chapter 98 of the Harmonized Tariff allows duty free entry of certain categories of goods. Examples are: American Goods Returned, American Goods Repaired or Altered Abroad, and American Components Assembled Abroad.
• Trade agreements– programs which allow duty free or reduced duty rate entries. There are many agreements (such as NAFTA) in place.
• Customs rulings– consider requesting formal customs rulings prior to large transactions. This ensures compliance and eliminates uncertainty about imports. Rulings can be requested thru the CBP website.
• Correcting errors– when an entry mistake is discovered it can be corrected by a prior disclosure to CBP. The formal process is a Post-Entry Amendment/Post Summary Correction. A prior disclosure can help mitigate penalties.

The International Trade Commission publishes updates to the Harmonized Tariff System of the United States (HTSUS) twice per year in January and July.  Accurate classification and valuation of imported goods are essential. The Harmonized codes and descriptions filed upon entry determine duty rates or duty free status. Harmonized tariff descriptions also give Customs and Border Protection (CBP) information about what commodities are entering the country and determine if any other agencies such as the FCC or FDA also have jurisdiction. An annual review of your HTSUS codes and database update is a good business practice. Contact your broker or Ad Hoc Logistics if you need help.