February, 2016
Computed Value, Where Accountants have a Seat at the Table
Mark K. Neville, Jr.
As faithful readers of this column will know, we cannot stay away from issues arising in customs valuation for long. We always come back to this fertile ground, whether it is to focus on the internal elements of the customs valuation law itself or to review its junction with the transfer pricing laws and other disciplines.
Last month we revisited First Sale for Export, a winning customs valuation strategy that remains with us in the United States and, because it can deliver such savings for the importer, should not be overlooked. And in this space we turn our attention to an alternative method of appraisement, computed value,1 that is in danger of also being overlooked. Unlike First Sale, computed value is sometimes out of mind for no other reason than it is hard to apply.
But first, a bit of background.
In the case of computed value, similar on a macro level to a “cost plus” approach, the importer must build up to an FOB sale price by adding together
But even a first glance at the criteria should reveal the weakness of computed value. Unlike deductive value, which derives from the importer’s own books and records and its own experience in its sales activities in the customs territory, computed value looks away to the foreign producer’s books and records. In the CVA itself, in the very promulgation of computed value, the signatories noted that
In the US, there is an explicit recognition that computed value cannot be determined if the required information is not available.8 But if we assume that the requisite information is forthcoming, as is the case of imports from Mexican maquilas which form the basis for most of the CBP rulings on computed value, what are some of the features that are worthy of our attention?
Another solution to an absence of actual cost information would be to rely in averaged costs, but this would require a retreat from computed value, which requires actual costs, and to appraise the imported merchandise instead under a “modified computed value” under the authority of the fallback method.11
The reliance on the producer’s own accounting for its production costs and expenses can be a good thing and a bad thing. There is authority for the proposition that CBP cannot second-guess a producer’s accounting treatment of its costs and expenses if that is both consistent with local generally accepted accounting principles (GAAP) and there is no showing the profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States.12
The advantage to using the available data is obvious but the disadvantage may be less apparent unless one considers that the producer may have unwisely included cost elements that may not, or would not otherwise, be dutiable. Then the importer is stuck with an inflated production cost. That is what happened in the entry that led to a 1997 Federal Circuit decision in Campbell Soup Co/ v. United States.13 In that case, the producer in Mexico used included postproduction costs (insurance and transportation) within its fabrication costs. Such an accounting treatment was consistent with Mexican GAAP. CBP would not allow the importer to disavow the accounting and revise the costs, and the courts supported CBP.14 The importer was stuck with an elevated cost element.
But CBP was more accommodating when another importer showed that it had overstated its production costs when it had failed to account for having ceased production in early August.15 As a result, the importer sought to lower its costs in the course of correcting the accounting irregularities. Perhaps the difference with Campbell Soup is that the importer was able to show that its accounting was not in accordance with GAAP. CBP provided another example of the primacy of accounting principles in applying computed value in a 2002 ruling also involving Mexican production for a US food company, Pillsbury.16 In this case, the importer sought to exclude the growing costs associated with two classes of vegetables, those falling under a “pass and destroy” status, i.e., which had been inspected and rejected and those which had been lost due to “field disaster”, i.e., a freeze. CBP disallowed the costs associated with the rejects as usual and recurring expenses, but allowed the losses due to the freeze as extraordinary expenses and similar to a loss due to a fire, which had been the subject of an earlier ruling.
In yet another example, Honeywell sought to exclude costs associated with global accounts payables from being counted toward a computed value appraisement on imports from its Mexican maquila operation. Honeywell pointed out that global accounts payable services are not costs usually reflected in sales of merchandise of the same class or kind as the imported product and are tracked and maintained separately on the foreign assembler’s books in accordance with Mexican GAAP as described in a letter prepared by the outside Mexican auditor. Because these costs were not treated as fabrication costs, nor could they be treated as dutiable assists, the costs were excluded.17 While we are on the subject of the producer’s expenses, note that any credits will be recognized and lower the production costs only if they relate to actual expenses and not to “business opportunity loss” such as might be the subject of a business interruption insurance recovery.18
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Last month we revisited First Sale for Export, a winning customs valuation strategy that remains with us in the United States and, because it can deliver such savings for the importer, should not be overlooked. And in this space we turn our attention to an alternative method of appraisement, computed value,1 that is in danger of also being overlooked. Unlike First Sale, computed value is sometimes out of mind for no other reason than it is hard to apply.
But first, a bit of background.
Customs Valuation Principles
The customs valuation laws, set forth in The Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994(the “GATT’s Customs Valuation Agreement (CVA)”), are organized on the basis of objectively derived information and the methods used by customs authorities to appraise imported goods are arranged in a strict hierarchy. First and foremost, the preferred method is transaction value (TV), which is based upon the price paid or payable that are set between buyer and seller in a qualifying sale for export.2 In the US and other developed jurisdictions, TV applies to well over 90% of import transactions. In those instances where there is no TV, however, the imported goods must be appraised using the next available from amongst the alternative methods of appraisement. These include the TV of identical merchandise, the TV of similar merchandise, deductive value, computed value, and the so-called “fallback” method when the standards of any of the preceding methods are not met.3Deductive vs. Computed Value
This is not the opportunity to engage in a lengthy catechesis of the CVA methods, so we can jump directly to a short-hand focus on two of the alternatives, deductive and computed values. Both are intended to get the importer back to something approaching an FOB price for the imported goods, which you should recognize as the basis for TV. In the quest to end up at the same place as TV, deductive value takes a route similar to a “resale minus” analysis, backing out of the sale price in the country of importation amounts for profit, general expenses, and related costs.In the case of computed value, similar on a macro level to a “cost plus” approach, the importer must build up to an FOB sale price by adding together
- Cost or value of materials and standard cost of fabrication
- Profit and general expenses
- Any dutiable assists
- Packing costs.4
But even a first glance at the criteria should reveal the weakness of computed value. Unlike deductive value, which derives from the importer’s own books and records and its own experience in its sales activities in the customs territory, computed value looks away to the foreign producer’s books and records. In the CVA itself, in the very promulgation of computed value, the signatories noted that
The use of the computed value method will generally be limited to those cases where the buyer and seller are related, and the producer will be prepared to supply to the authorities of the country of importation the necessary costings and to provide facilities for any subsequent verification which may be necessary.7
Of course it could be worse than requiring access to a foreign producer’s relevant information. Imagine if the importer had to resort to an examination of the usual profit and expenses of foreign country-based producers of the same class or kind of merchandise.In the US, there is an explicit recognition that computed value cannot be determined if the required information is not available.8 But if we assume that the requisite information is forthcoming, as is the case of imports from Mexican maquilas which form the basis for most of the CBP rulings on computed value, what are some of the features that are worthy of our attention?
Computed Value
First off, the customs regulations specify text that may be required for inclusion in a commercial invoice where there will be a computed value appraisement. Section 141.88, 19 CFR §141.88, provides the following with regard to computed value:When the port director determines that information as to computed value is necessary in the appraisement of any class or kind of merchandise, he shall so notify the importer, and thereafter, invoices of such merchandise shall contain a verified statement by the manufacturer or producer of computed value as defined in section 402(e).
There is no further explanation of what is meant by a “verified statement” and a review of the statute reveals that there is no reference to a verified statement. A CBP headquarters ruling does clarifies the point, as the relevant subsection was cited and an importer was instructedYou, accordingly, must be prepared to provide to Customs, if requested, the documentation which you claim to possess which supports the figures you have provided regarding the cost of manufacturing the merchandise.9
It is the nature of most large scale productions that the producer’s actual costs and expenses may not be finally captured until after the close of an accounting period (month, quarter, etc.) What is the importer to do when the relevant costs have not been fixed with any finality at the time of entry? One solution is to rely upon Reconciliation, the customs administrative process whereby an importer is able to make entry with a placeholder customs valuation and later complete the entry process once the actual cost data has become available.10Another solution to an absence of actual cost information would be to rely in averaged costs, but this would require a retreat from computed value, which requires actual costs, and to appraise the imported merchandise instead under a “modified computed value” under the authority of the fallback method.11
The reliance on the producer’s own accounting for its production costs and expenses can be a good thing and a bad thing. There is authority for the proposition that CBP cannot second-guess a producer’s accounting treatment of its costs and expenses if that is both consistent with local generally accepted accounting principles (GAAP) and there is no showing the profits and expenses are inconsistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States.12
The advantage to using the available data is obvious but the disadvantage may be less apparent unless one considers that the producer may have unwisely included cost elements that may not, or would not otherwise, be dutiable. Then the importer is stuck with an inflated production cost. That is what happened in the entry that led to a 1997 Federal Circuit decision in Campbell Soup Co/ v. United States.13 In that case, the producer in Mexico used included postproduction costs (insurance and transportation) within its fabrication costs. Such an accounting treatment was consistent with Mexican GAAP. CBP would not allow the importer to disavow the accounting and revise the costs, and the courts supported CBP.14 The importer was stuck with an elevated cost element.
But CBP was more accommodating when another importer showed that it had overstated its production costs when it had failed to account for having ceased production in early August.15 As a result, the importer sought to lower its costs in the course of correcting the accounting irregularities. Perhaps the difference with Campbell Soup is that the importer was able to show that its accounting was not in accordance with GAAP. CBP provided another example of the primacy of accounting principles in applying computed value in a 2002 ruling also involving Mexican production for a US food company, Pillsbury.16 In this case, the importer sought to exclude the growing costs associated with two classes of vegetables, those falling under a “pass and destroy” status, i.e., which had been inspected and rejected and those which had been lost due to “field disaster”, i.e., a freeze. CBP disallowed the costs associated with the rejects as usual and recurring expenses, but allowed the losses due to the freeze as extraordinary expenses and similar to a loss due to a fire, which had been the subject of an earlier ruling.
In yet another example, Honeywell sought to exclude costs associated with global accounts payables from being counted toward a computed value appraisement on imports from its Mexican maquila operation. Honeywell pointed out that global accounts payable services are not costs usually reflected in sales of merchandise of the same class or kind as the imported product and are tracked and maintained separately on the foreign assembler’s books in accordance with Mexican GAAP as described in a letter prepared by the outside Mexican auditor. Because these costs were not treated as fabrication costs, nor could they be treated as dutiable assists, the costs were excluded.17 While we are on the subject of the producer’s expenses, note that any credits will be recognized and lower the production costs only if they relate to actual expenses and not to “business opportunity loss” such as might be the subject of a business interruption insurance recovery.18
Summary
Transaction value is to be favored due to its ease of use. Where TV does not lie, computed value may not be accessible for many importers but, in those instances where it can play a role, it is essential that the importer and his service provider enlist the help of their accounting brethren. It is especially important that accountants in the country of production are engaged........................................................................................................................................
1. Article 6 of The Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994(the “GATT’s Customs Valuation Agreement (CVA)”) and, in the US, at 19 USC § 1401a (e).
2. Art. 1 of the CVA, 19 USC § 1401a (b).
3. These are Arts. 2, 3, 5, 6 and 7 of the CVA and 19 USC §§ 1401a (c), (d), (e)and (f).
4. You should recognize that both dutiable assists and packing costs are elements which must be added to the invoice price to make customs value in a TV appraisement. They are accounted for at Arts. 1 and 8 of the CVA and at 19 USC §§ 1401a (b) and (h) (1) (A) and (3).
5. The importer’s own data should be used unless it is inconsistent with those relating to sales of the same class or kind of imported merchandise. Interpretative Note to Art. 5, CVA, 19 USC § 1401a (d) (3) (B) (i).
6. Interpretative Note to Art. 6, para. 1, CVA; 19 USC 1401a (e) (2) (B).
7. Interpretative Note to Art.6, para. 1, CVA.
8. Customs regulations, 19 CFR § 152.106 (f).
9. Ruling no. 546735 (6/19/97).
10. See ruling no. H170395 (6/15/11).
11. Priv. Ltr. Rul. 94006026 (11/15/93).
12. Ruling no. 545088 (12/14/95) (CBP has no authority to add to producer’s calculation of profit and expenses certain amounts recorded on the importer's books for purposes of determining the computed value of imported merchandise).
13. Campbell Soup Co. v. United States, 107 F.3d 1556 (Fed. Cir. 1997).
14. See also ruling no. H102516 (9/16/10).
15. Ruling no. 242984 (2/19/14).
16. Ruling no. 548149 (8/21/02).
17. Ruling no. H010951 (9/21/07).
18. See ruling no. 545611 (1/2/01).
2. Art. 1 of the CVA, 19 USC § 1401a (b).
3. These are Arts. 2, 3, 5, 6 and 7 of the CVA and 19 USC §§ 1401a (c), (d), (e)and (f).
4. You should recognize that both dutiable assists and packing costs are elements which must be added to the invoice price to make customs value in a TV appraisement. They are accounted for at Arts. 1 and 8 of the CVA and at 19 USC §§ 1401a (b) and (h) (1) (A) and (3).
5. The importer’s own data should be used unless it is inconsistent with those relating to sales of the same class or kind of imported merchandise. Interpretative Note to Art. 5, CVA, 19 USC § 1401a (d) (3) (B) (i).
6. Interpretative Note to Art. 6, para. 1, CVA; 19 USC 1401a (e) (2) (B).
7. Interpretative Note to Art.6, para. 1, CVA.
8. Customs regulations, 19 CFR § 152.106 (f).
9. Ruling no. 546735 (6/19/97).
10. See ruling no. H170395 (6/15/11).
11. Priv. Ltr. Rul. 94006026 (11/15/93).
12. Ruling no. 545088 (12/14/95) (CBP has no authority to add to producer’s calculation of profit and expenses certain amounts recorded on the importer's books for purposes of determining the computed value of imported merchandise).
13. Campbell Soup Co. v. United States, 107 F.3d 1556 (Fed. Cir. 1997).
14. See also ruling no. H102516 (9/16/10).
15. Ruling no. 242984 (2/19/14).
16. Ruling no. 548149 (8/21/02).
17. Ruling no. H010951 (9/21/07).
18. See ruling no. 545611 (1/2/01).
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.