CUSTOMS VALUATION RISKS, INCLUDING TRANSFER PRICING
The Australian Border Force (ABF) regularly highlights customs valuation as one of its compliance priorities. Even with duty free goods, valuation compliance is important. The incorrect valuation can affect not only customs duty but also GST and dumping duty. Further, penalties can be payable even where there is no revenue impact.
Customs valuation principles
In most cases, the customs value of goods will be based on the free on board (FOB) invoice price plus certain other additions. These include:
Commissions (other than buying commissions)
Freight prior to the goods arriving at the place of export
Contributions you make to the manufacture of the goods that are not included in the price (assists).
Assists can include materials or services used in manufacturing the goods, tools or dies used in the manufacturing process and design and artwork (not undertaken in Australia). Importers need to consider whether they have provided their customs broker with all the information the broker needs to determine the customs value of the goods. It is necessary to ask yourself, ‘What costs am I paying to have the goods produced and/or purchased and brought to Australia? If the answer is that there are amounts in addition to the invoice price, it is important that you notify your customs broker. This is crucial as the customs broker will rely heavily on the commercial invoice to determine the customs value.
Materials and labour used in getting the goods into the state in which they are exported to Australia need to be included in the customs value. An area where we often see mistakes are costs incurred at an offshore distribution centre (DC) or warehouse. If goods are repacked at the DC or warehouse, it is likely that the ABF will consider that the costs of repacking should be included in the customs value. This may only be a few cents per item but it will add up over years of imports.
Buying commissions do not need to be included in the customs value of goods but there is a catch. The term ‘buying commission’ is defined narrowly in the Customs Act. The commission is unlikely to be a duty-free buying commission if any of the following occur:
The agent receives any additional benefit from the transaction (does the agent procure insurance or transport for a fee?)
The agent represents any other party in the transaction (such a related party in the supply chain)
The agent trades in goods similar to the imported goods (even if it does not trade in the imported goods)
The agent supplies any additional services in respect of the imported goods.
The reality is there would be many genuine buying commissions that are not treated as duty-free buying commissions under the Customs Act.
There is a lot of case law concerning which royalties should, and should not, be included in the customs value. Often, a royalty which is merely for the right to use a trademark in Australia will not be subject to customs duty. However, care should be taken in respect of any royalty that gives you the right to use a trademark in the manufacture of goods.
Purchasing goods on an ex-works basis can mean that you have the responsibility of transporting the goods from the place of manufacture to the port of export. Depending on when the goods are packed in the container, these costs may be foreign inland freight costs which need to be included in the customs value.
Do you provide any support to the manufacturer of the goods? For instance, are you supplying free of charge labels or price tags to be added to clothing, instruction manuals or warranty cards to be included with goods or moulds to manufacture goods? Alternatively, do you pay for someone to attend and help with the manufacture of the goods? All of these forms of assistance add value to the goods but will not be included in the invoice price. The ABF is likely to require them to be included in the customs value.
Is the invoice that is issued on the shipment of goods the same as the commercial invoice which you have paid? Often with complex supply chains, the shipper will not be the commercial supplier or the shipment may be comprised of goods covered by multiple commercial invoices. The critical issue is to be able to reconcile the commercial invoice (on which the customs value is based) with the customs invoice (which may be all the customs broker receives).
Transfer pricing adjustments
The customs value is based on the price payable for the goods. If, as a result of a transfer pricing adjustment, the price payable for the goods is altered, the customs value will also be altered. This can result in additional duty or a duty refund depending on the direction of the alteration.
Why is customs valuation compliance important?
Customs valuation is an area that has not recently received a lot of attention from importers or the ABF. This is understandable given Australia’s low duty rates and the proliferation of free trade agreements increasing the volume of goods entered duty-free.
However, on top of ensuring that the right amount of duty is paid, there are good reasons to ensure customs compliance. One compelling reason is the desire to avoid penalties, such as infringement notices.
Further, good levels of compliance are important for those importers seeking to be involved in the Australian Trusted Trader Program. This program, and its related trade facilitation benefits, is only available to importers who can demonstrate high levels of customs compliance.
It’s not all doom and gloom
It is not all negative. Through careful review of the customs valuation rules, you may find that you have been overvaluing goods and are entitled to a refund. Common refund opportunities arise from not accounting for vendor rebates, decreasing transfer pricing adjustments, and having used a cost insurance freight (CIF) value as the customs value when the customs value should be based on the lower FOB value.
Firstly, ensure your customs broker is aware of all amounts you pay in relation to the manufacture or import of goods. On top of this, we can assist with reviewing your supply chain for key products and identifying areas of risk and opportunity. In assessing the merits of taking this step, it is important to remember that penalties can apply even where goods are entered duty-free.