July, 2019

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The Customs Valuation Law Status of Price Discounts

Mark K. Neville, Jr.

The starting point for an examination of customs valuation on imports into the United States should be a look at the definition of transaction value, i.e., the price actually paid or payable for the [imported] merchandise when sold for exportation to the United States plus certain statutory additions if they are missing from that price.1 This is the price actually paid or payable (“PAPP”) standard set by Article 1 of the Customs Valuation Agreement2

GATT Article VII

This transaction value definition marks a radical departure from the “actual value” standard of Article VII of the General Agreement on Tariffs and Trade (GATT), in both the original 1947 and the later 1994 versions. To be clear, Art. VII of the GATT set forth “general principles of valuation” and its “actual value” standard was indeed generally defined as

… the price at which, at a time and place determined by the legislation of the country of importation, such or like merchandise is sold or offered for sale in the ordinary course of trade under fully competitive conditions.”

At the Annex 1 interpretative notes to GATT Article VII (Ad Article VII, para. 2.1), we find that actual value may include additions to the invoice price covering “non-included charges which are proper elements of actual value3 plus any abnormal discount or other reduction from the ordinary competitive price.” Emphasis added. Further, Ad Article VII, para. 2.3 established that the standard of “fully competitive conditions” permits a contracting party to exclude from consideration prices involving special discounts limited to exclusive agents.4 Taken altogether, we find hostility to discounts.

Discounts Not Directly Treated in the Customs Valuation Agreement

To be clear, the Customs Valuation Agreement itself is silent on the subject of discounts. Perhaps it was felt that there was no need to address the topic because the PAPP represents the “bottom line” price agreed by the parties, no matter how derived.

Status of Discounts in the Customs Valuation Agreement

While silent on the subject, we may infer that the Customs Valuation Agreement permits discounts. That conclusion would derive from the principle that if a discount is not expressly prohibited then we may safely conclude that it may be permitted as one of perhaps many elements that go into the fixing of the PAPP by the buyer and seller in the give-and-take of any given transaction.

The Customs Valuation Agreement and, as will be seen, the implementing legislation in the US5 appear at odds with GATT Art. VII to the extent that, under the latter authority, discounts may be disregarded altogether. The two agreements appear in conflict.

In the event of a conflict, the Customs Valuation Agreement will prevail, and no Member of the WTO may be permitted to retreat behind the cover of GATT Art. VII. This is explicitly laid out in the General Interpretative Note to Annex 1A to the [Marrakesh] Multilateral Agreement on Trade in Goods:

In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A to the Agreement Establishing the World Trade Organization (referred to in the agreements in Annex 1A as the “WTO Agreement”), the provision of the other agreement shall prevail to the extent of the conflict.

The Customs Valuation Agreement is such an “other” Agreement, and the result of the Customs Valuation Agreement trumping the GATT 1994 is that the disfavor accorded discounts has been largely superseded. At the international level, the Technical Committee on Customs Valuation (TCCV) of the World Customs Organization (WCO) issued three early Advisory Opinions (AOs) (5.1, 5.2, 5.3) on the legitimacy of cash discounts.6 Those three AOs on cash discounts remain in place, as does the later AO 15.1 on quantity discounts, which expressly allowed discounts to lower the customs value if they were agreed prior to importation.7 Collectively, these TCCV instruments establish an international consensus that discounts agreed prior to importation should be honored.

US Practice

In the United States, the customs valuation statutes prior to the adoption of the current law in 1979 were quite complicated and based on a market value concept. The normal hierarchy looked to “export value,” which was defined as the price at the time of exportation to the United States at which such or similar merchandise is freely sold in the usual wholesale quantities and in the ordinary course of trade. 8

It is no surprise that the status of discounts in this pre-1979 environment of “freely sold…usual wholesale quantities …and ordinary course of trade” was one of the perennial issues confronting the trade community. But with the US adoption of the Customs Valuation Agreement and its “positive” definition of transaction value the market value rubric was scrapped. The US customs regulations eliminate any doubt as to the validity of buyer discounts:

The [PAPP] will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula . . . The term “payable” means that the price has been agreed upon, but the actual payment may not have been made at the time of importation.”9

The regulations proceed to set out an example illustrating a cash discount, Example 5 in 19 CFR § 152.103 (a) (1): “A seller offers merchandise at $100, less a 2% discount for cash. A buyer remits $98 cash, taking advantage of the cash discount. The transaction value is $98, the price actually paid or payable.”

Discount Agreed Before Importation

To be sure, not all discounts are per se legitimate. In fact, the US has accepted discounts only where the importer can show that the discount was agreed prior to importation.10 The statute is clear: 19 USC §1401a(b)(4)(B) states that “any rebate, or other decrease in, the price actually paid or payable that is made or otherwise affected between the buyer and the seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value.” This difference in treatment of discounts established before vs. after importation is consistent with the TCCV position expressed in AO 15.1.

CBP Practice

As for CBP, they purport to apply a three-part test for testing the effect of discounts lowering customs value:
  1. the discount or price adjustment must be agreed on prior to the importation of the merchandise;
  2. the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry;11
  3. the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation.
Maybe it’s just me, but I see points one and two marking a distinction without any difference. In other words, how else other than through documentary evidence would the importer establish a pre-importation agreement? In any event, there are a number of CBP rulings which follow this three-criteria format.12

The CBP practice is to closely examine the proffered documentary evidence and the importer which is seeking a price adjustment is held to a high standard. A 2016 ruling offers a good illustration.

In ruling no. H274599 (9/27/16), the importer sought to attain the benefit of a “discount” represented by the price of distressed merchandise. Due to an inadvertent systemic error in their electronic invoicing in 2014, the importer had unintentionally declared the values of the distressed merchandise at a price higher than the price actually paid to its related party in Canada from whom the imported distressed merchandise was purchased. Upon learning of the error in 2015, the importer initiated corrective action, and the PAPP for the distressed merchandise was adjusted downward. The importer alleged overpayments to its related party in Canada were quantified and refunded for 2014 in the form of a lump sum transfer between the two companies. As a result the importer sought a refund from CBP for the overpayments in duties that resulted from higher values claimed for the distressed merchandise.

Closely scrutinizing the documentary evidence, CBP determined that the asset purchase agreement and the bill of sale related to a purchase of the assets of a bankrupt company in Canada by the entity that was later the seller in the export transaction. The importer/buyer was not a party to that earlier transaction. Beyond that, the asset purchase agreement and the bill of sale carry a lump sum purchase price paid for the purchased assets, with no mention of the distressed merchandise or any of the discounts granted for such merchandise. Similarly, the bill of sale provides for the transfer of purchased assets, but with the exception of the allocation of the purchase price between the categories of purchased assets, it shed no light on any type of discounts claimed for the distressed merchandise. CBP determined that the importer had not met its burden in establishing the first two criteria noted above and it was therefore not necessary to review the third criterion. The lesson: if an importer wants to obtain the benefit of a discount in lowering the dutiable value it would be well-advised to present strong documentary evidence (agreements, purchase orders, invoices and the like) establishing that the necessary agreement was reached before importation.

Canadian Approach

Canada applies a similar approach to discounts, although expressed in a less formulaic fashion. Moreover, the Canada Border Services Agency (CBSA) administrative practice is not built around administrative rulings, instead relying on its “D Memos” which provide useful administrative guidance. In its D Memo on price reductions (formerly entitled “discounts”), CBSA explains:
  1. If a price reduction is in effect at the time of importation, the amount of that price reduction must be considered when calculating the price paid or payable for the imported goods.
  2. As an example of a price reduction granted prior to importation, a firm in Canada purchases a machine from a foreign manufacturer. The list price of the machine is $100. However, the manufacturer grants a 10% discount because the purchaser operates at the retail level of trade, resulting in a price paid or payable of $90. Since the parties agreed on the discount prior to importation, the price paid or payable is $90 and is an acceptable basis for value for duty, subject to the other requirements of the transaction value method being met (section 48 of the [Customs Act]).
  3. The Canada Border Services Agency (CBSA) will only accept a reduction in the price paid or payable that occurs after importation if:
    • (a) the purchaser takes advantage of cash discount terms offered by the vendor prior to importation; or
    • (b) an agreement in writing to later reduce the price paid or payable was in effect at the time of importation, and the reduction results from the agreement.
  4. Prior to importation, a vendor may offer to a purchaser cash discount terms that provide for a reduced payment to be made within a specific time period that concludes after the date the goods are imported. When such a cash discount arrangement exists, the CBSA will allow consideration of the discount when ascertaining the price paid or payable, regardless of when the purchaser makes the reduced payment.
  5. For example, a firm in Canada purchases a machine from a foreign manufacturer, the price of which is $10,000. However, the manufacturer grants a discount of 5% if payment is made within 10 days after the date of sale. At the time of importation, the cash discount is still available but not yet taken. If the purchaser takes advantage of the manufacturer’s discount terms, the CBSA will accept the price reduced by the amount of the discount, resulting in a price of $9,500 upon which a calculation of value for duty under the transaction value method can be based.
  6. In accordance with paragraph 48(5)(c) of the [Customs Act], any rebate or decrease in the price paid or payable effected after importation of goods must be disregarded. Consequently, this applies when a purchaser and a vendor enter into an agreement to reduce the price paid or payable of goods after those goods have been imported to Canada.
  7. For example, a purchaser imports goods into Canada for resale. After importation, the purchaser requests from the vendor a reduction in the price of the goods to improve its price competitiveness in the Canadian market. If the vendor agrees to reduce the price, the purchaser cannot adjust the price paid or payable for the goods by the amount of the reduction as the decrease was effected after importation.
  8. Paragraph 48(5)(c) of the [Customs Act] does not apply to a reduction to the price paid or payable that results from an agreement that is in writing and is in effect at the time the goods are imported to Canada.13
All of this is quite consistent with the US approach.


Importers and their professional advisers are cautioned to approach the subject of discounts carefully. If it is a possibility that a discount might be offered later it is well that the issue be discussed and agreed prior to importation. A “we’ll deal with that later” plan will not work, because the customs authority will reject the discount as a post-importation price re-negotiation.


1. The US statutory definition is found at 19 USC § 1401a (b) (1). The definition is the same, mutatis mutandis, in other countries’ implementing legislation.


3. This prefigures the spirit of adjustments under Art. 8 of the Customs Valuation Agreement, 19 USC §§ 1401a (b) (1) (A)-(E).

4. Parenthetically, the mischief of the Brussels Definition of Value (BDV, formally the Convention on the Valuation of Goods for Customs Purposes (1950), and its notional approach to the subject was prefigured by the note in GATT Article VII (Ad Article VII, para. 2.4), “The wording of sub-paragraphs (a) and (b) [of Art. VII.2] permits a contracting party to determine the value for customs purposes uniformly either (1) on the basis of a particular exporter’s prices of the imported merchandise, or (2) on the basis of the general price level of like merchandise.” For the current status of GATT Art. VII and this note relative to the Customs Valuation Agreement, see text below.

5. Canadian practice is also explicit on the subject of discounts. Thus, paragraph 18 of one relevant “D Memo,” If a discount is granted prior to, or at time of importation, the amount of that discount should be considered when calculating the price paid or payable for the imported goods.” Customs Valuation: Price Paid or Payable, Memorandum D13-4-3 (Jan. 7, 2014). To the same effect is Price Reductions, Memorandum D13-4-10, discussed below.

6. TCCV, Advisory Opinions 5.1 (1982), 5.2 (1982) and 5.3 (1983).

7. TCCV, Advisory Opinion 15.1 (1986).

8. Former 19 USC § 1401a (b), repealed by Trade Agreements Act of 1979, Pub. L. 96-39. For more background on the pre-cursor US customs valuation statutes, see Neville (ed.), International Trade Laws of the United States: Statutes and Strategies, chapter 5, Thomson Reuters (2012).

9. 19 CFR § 152.103 (a) (1).

10. Allied International v. United States, 795 F. Supp. 449 (CIT 1992) (importer required to affirmatively show that there was a pre-importation agreement for the claimed discount).

11. In the absence of a written agreement establishing an unconditional discount, entry documentation and invoices reflecting the discount were sufficient documentary evidence. Ruling no. 545659 (10/25/95). Conversely, a discount was disallowed when importer failed to submit evidence that it took advantage of 2% discount for payment within 45 days of the invoice date. Ruling no. 546037 (1/31/96).

12. See, e.g., ruling nos. H032110 (2/19/19), H133044 (3/9/11) and W563462 (10/11/06).

13. Price Reductions, Memorandum D13-4-10 (Feb. 6, 2018).

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