Customs valuation under Method 1 remains the default approach for the majority of import transactions and sits within a broader compliance framework that requires disciplined documentation and consistent application across jurisdictions.

There are six sequential methods for identifying the transaction value for customs valuation. Effective monitoring must be prioritised, as there is a considerable risk of supplying inaccurate information.

The following items must be added to the price paid or payable unless (they are already included):

A.  Delivery costs. The costs of transport, insurance, loading or handling connected with delivering the goods to the border within the United Kingdom.

B. Commissions. Certain commission and brokerage payments, including selling commission, must be included. (The organisation may exclude buying commission if it is shown separately from the price paid or payable for the goods.)

C. Royalties and licence fees. These payments must be included when they relate to the imported goods and are paid as a condition of the sale.

D. Goods and services provided free of charge or at reduced cost by the buyer. If you provide, directly or indirectly, any of the following, you must include in the customs value any part of the cost or value not included in the price charged to you by the seller:

• Materials, components, parts and similar items incorporated in the imported goods, including items such as price tags, Kimble tags, or labels.
• Tools, dies, moulds, and similar items used in producing the imported goods, for example tooling charges. There are various ways of apportioning these charges.
• Materials consumed in producing the imported goods, such as abrasives, lubricants, catalysts, reagents, and similar items that are used in the manufacture of the goods but are not incorporated into them.
• Engineering, development, artwork, design work, and plans and sketches that are carried out outside the United Kingdom and are necessary for producing the imported goods. The cost of research and preliminary design sketches is not to be included.

If the traders are to make payments (periodically or as a one off) to the seller for any of the above goods and services, this amount must be included in the customs value.

Application of transaction method 1

The primary transaction methodology used in ninety percent of transactions is valuation Method 1, based upon the price paid or payable for the goods. There may be regional variations on which sale, in a chain of multi tiered sales, forms the commercial value. In the United Kingdom, the final sale occurring immediately before the goods were brought into that customs territory is appropriate.

In the United States, the Federal Circuit in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) accepted what is referred to as the first sale rule. Within the United States, the first sale, where a factory sells goods to an intermediary seller who subsequently sells the goods to an importer, may be used to determine the transaction value. The First Sale Rule is identified within 19 U.S.C. § 1401a(b)(1), which outlines that the transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States.

The criteria to meet this rule are that the goods must be destined for the United States, and the sale must be bona fide and conducted at arm’s length. The presumption will remain that the sale prior to import is the transaction value. Therefore, there is a burden of proof on the United States importer to demonstrate compliance with the first sale rule.

The supporting documentation to confirm the price paid or payable to apply this valuation method should include:

• Commercial invoice
• Evidence of sale for export, for example:
  a.  Evidence that the goods are manufactured according to the importing destination’s specifications, or are identified according to the marks they bear as having no other use or destination.
  b.  The goods in question were manufactured or produced specifically for a buyer in the destination.
  c.  Evidence that specific goods are ordered from an intermediary who sources the goods from a manufacturer and that the goods are shipped directly to the destination from that manufacturer.

Monitoring risk in the application of transaction valuation method 1

Certain criteria must be fulfilled to ensure that transaction valuation Method 1 is appropriate.  These include the following:

(a) There must be no restrictions as to the disposal or use of the goods by the importer except those which:

• Are imposed or required by law or by public authorities
• Limit the geographical area in which the goods may be resold,
• Do not substantially affect the value of the goods.

Examples of restrictions which can be ignored:

• An official licence is required to trade in the imported goods
• The goods cannot be sold before a certain date, for example cars that cannot be sold before the start of a model year.

(b) The sale or price must not be subject to any condition or consideration for which a value cannot be determined with respect to the goods being valued.

(c) Where the seller receives (directly or indirectly) part of the proceeds of any subsequent resale, disposal, or use of the imported goods, the importer must be able to make an appropriate addition to take account of this.

(d) If the importer is related to the seller, they must be able to demonstrate that the price is not reduced because of this relationship.

(e) Where a sale for export has occurred as part of a series of specific and relevant transactions relating to the goods in question, the transaction value must be determined at the time of acceptance of the customs declaration on the basis of the sale occurring immediately before the goods were brought into that customs territory (in the United Kingdom).

Intercompany pricing

Intercompany pricing in a situation where a sale is made

If the organisation is related to the seller, the price paid or payable can be accepted under Method 1 provided it can be demonstrated that the relationship has not affected the price.

The following ‘tests’ may be applied for comparison purposes.
(a) Information may be provided to demonstrate that either:

• The organisation and the seller trade with each other as though they are unrelated,
• The organisation pays the same price as unrelated buyers operating at the same commercial level and purchasing similar quantities of the goods, or
• The price the organisation pays is fully costed and reflects arm’s length conditions.

(b) Within the United Kingdom, recent feasibility or transfer pricing studies conducted by independent third parties may be used as evidence to verify that the transfer price is at arm’s length for customs valuation purposes.

Transfer pricing

Transfer pricing is a method of determining how multinational enterprises establish their pricing when selling goods or services between related (associated or connected) companies. UK taxation and customs valuation law requires pricing to occur as if the companies were unrelated. HMRC has identified that transfer pricing may be used to establish customs valuation based upon meeting certain criteria:

• The conditions for transaction value Method 1 are fulfilled
• All relevant costs are included in the transaction value, if any have been paid separately other than the price paid for the goods.

HMRC has also identified that companies cannot rely solely on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations to fulfil customs valuation methodology, the WTO valuation framework must be wholly integrated. As a result, it is unlikely that a margin based methodology would be acceptable, as this may require a retrospective year end pricing adjustment rather than relying on actual economic conditions at the time of export.

Intercompany pricing in a situation where company stock is moved across borders to the same or a subsidiary organisation

 

(a) Transfers to branches where goods are imported, either:

• Through a branch office that does not have separate legal status of its own,
• Directly by the supplier’s own employees, or
• By an agent acting in the supplier’s name  (for example, under Power of Attorney) to be stored for distribution in a warehouse (e.g. Amazon).

These circumstances cannot be regarded as a sale as the parties are regarded as being part of the same legal entity. 

If an earlier purchase has occurred, whereby the supplier has purchased rather than manufactured the goods to be valued, the price paid for the goods on the original invoice may be used.

In circumstances where Method 1 is not possible, the organisation must apply Methods 2 to 6. In circumstances where the organisation can demonstrate that the intra-company invoice value between the inter-related parties represents a fully costed (arm’s length) price, this would be acceptable under Method 6. The methods must be applied in consecutive order; however, Methods 4 and 5 are interchangeable.

For further practical insight into customs valuation, documentation discipline, and exporter risk management, explore the full Exporters Guide here.