How to make large savings by reducing dutiable values on imported goods.

Most of the duty rates applied to goods being imported into the United States are ad valorem duty rates. This means that duties are calculated as a percentage of dutiable value. Duty rates on goods imported to the U.S. can be high on goods from China, or on steel, apparel, and footwear, with rates as high as 37.5% of value. However, import transactions can be structured to reduce customs duties, sometimes saving hundreds of thousands of dollars for a medium size importer. No one wants to pay more customs duty than necessary, and any duty savings that are achieved can have a major impact on the gross profit of your importing clients.

Most countries have signed on to the International Valuation Code so we all use the same basic formulas to arrive at dutiable value. However, each importing country applies their own interpretation of the code, so different valuations can be achieved in different jurisdictions. The most often used formula to determine value is Transaction Value which is equal to “the price paid to the seller when the goods are sold for exportation [in our case] to the United States”. In the United States, dutiable value does not include payments for international freight and insurance or other sums paid for U.S. installations or post-entry services if properly documented. In addition, amounts paid for trademark royalties should not be dutiable whenthey are paid to a party other than the seller, and they are not paid as a condition of the sale for exportation to the United States. Finally, payments for buying commissions should also be non-dutiable if they are paid to a bona fide agent.

But the first sale rule of appraisement is the most notable of our opportunities to reduce dutiable value. This rule can apply when there are at least two back-to-back sales to the U.S. The first sale is usually from a factory to a trading company, and the second sale will be from the trading company to a U.S. customer. Under the U.S. interpretation of the law, the sale from a factory to a trading company, which is the “first sale” for exportation, can be used as the Transaction Value. This duty savings program works where the non-resident company is the importer of record and sells to their customers on a delivered duty paid basis, or where the U.S. customer is the importer of record. Here is a simple example of the duty savings: F sells to TC at 100 and TC sells to the USC at 120. If this is not set up correctly, duty at 10% would apply to 120; under the first sale rule duty would be applied at 100. Add some zeros and the saving really add up.

Implementing the first sale rule is not terribly burdensome, but it does require the cooperation of the trading company. That is, the trading company has to be willing to share the name of the factory (which mostly, buyers already know) and has to be willing to share the price that they pay to the factory. Some companies are vertically integrated so this is not an issue. Where the trading company is not related to the factory there are two selling points to reluctant trading companies: one, If the importer can lower its dutiable value they can buy more goods from the trading company; two, we only need the markup by the trading company, not the profit of the trading company, so the U.S. importer recognises that the trading company profit is lower than its mark-up and agrees that they will not use this information as leverage in future price negotiations.

If the trading company will participate, we have to make sure that it is clear that the sale from the factory to the trading company is a sale for exportation to the U.S. As a general rule, the factory knows where the goods are to be shipped when the trading company places its order. Often there are U.S. trademarks, sizing, or labelling. But if none of those factors exist, then we can make it clear on the orders and invoices exchanged between the trading company and the factory that the goods that are ordered are being sold for exportation to the U.S. Once we know that we have back-to-back sales for exportation to the U.S. we make sure that other requirements have been met and that the prices from the factory to the trading company are arms’ length prices.

The first sale program in the U.S. does not have the limitations that are imposed on this structure in other jurisdictions. It doesn’t matter if the U.S. customer places their order before the goods are imported, or pays for the goods before they arrive. It doesn’t matter that value will be determined based on a sale between two foreign entities. What we need are two back-to-back sales for exportation to the U.S. and we can put the program in place. The first sale program has been approved by the U.S. Customs Courts and has been used by US importers for decades. It is a program that can provide significant benefits and should be considered by international traders who import into the U.S.