Recent Trade & Tariff Perspectives

February 16, 2022  |  Jessica Woltering  U.S. Import Compliance Manager

aerial view of the front end of a container ship at sea 

The Risk of Taking Deductions—Is It Worth the Cost Savings?

Revenue continues to be a Priority Trade Issue (PTI) with U.S. Customs and Border Protection (CBP). In fiscal year 2021, CBP collected $93.73 billion dollars in duties, taxes, and fees. However, they continue to target potential areas of duty evasion.

A large aspect of that is valuation. More specifically, CBP aims at finding undervaluation, the failure to include all associated charges or undervaluing the goods when declaring the value of the goods in a customs entry.

If your company receives commercial invoices with additional charges, discounts, or other deductions—your customs broker should reach out to validate these charges before processing the entry. It is an easy question to rush through and move on. However, there are serious implications if questions regarding additions and deductions to the value are not vetted out.

CBP can issue a Customs Form (CF) 28, Request for Information, or decide to perform a Focused Assessment Audit on the Importer of Record (IOR), to validate that the valuation of the goods is accurate.

Valuation can be challenging and complex, especially when there are so many potential variables. For this blog, we are going to just focus on what CBP considers legitimate deductions from the entered value.

Understanding valuation terminology

One of the first steps to protecting your company is understanding what CBP considers a dutiable charge versus a non-dutiable charge. There is a complex language of acronyms and industry-specific terms that can be confusing when discussing valuation.

Additions to the transaction value: Charges added to the amount of the goods being imported. Examples are assists, packing costs, royalty or license fees, and selling commissions incurred by the buyer.

Deductions from transaction value: Charges able to be taken out of the dutiable value of a commercial invoice. Examples are ocean freight, insurance, technical assistance, charges with respect to the goods after importation, and transportation costs after importation.

Incoterms®: International Commercial Terms that facilitate commerce around the world and clarify the rules and terms between buyers and sellers in trade contracts.

Price actually paid or payable: Total payment, excluding international freight, insurance, and other C.I.F. (Cost, Insurance, and Freight) charges that the buyer makes to the seller.

Transaction Value: The preferred method of appraisement of merchandise imported into the United States. This is the price actually paid or payable for the merchandise, plus any additions not included in the invoice price.

What deductions are allowable?

Customs regulations state there are allowable deductions from transaction value if substantiating documents back up the “actual cost,” not the “estimated cost” of the deductions. Estimated costs cannot be deducted from the value of the goods. These allowable deductions include:

  • The cost, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of goods from exportation to the United States.
  • If identified separately, any reasonable cost or charge incurred for
    • Constructing, erecting, assembling, maintaining, or providing technical assistance after importation
    • Transporting the goods after importation
  • Certain discounts, if the discount is agreed to prior to importation
  • Customs duties and other federal taxes, including federal excise tax

This list is not exhaustive and other fees may be deductible, but specifics should be provided and discussed with a customs broker prior to deductions being taken. Standardized commercial invoice wording does not exist, so determining if fees are an allowed deduction is not always easy.

For example, there may be a fee that states “inland freight charge,” but that could be the inland freight in the country of export, or the inland freight from transportation in the United States after arrival. If you are unaware of exactly what these fees cover, then you may be taking deductions that are not allowable and opening your company up to additional scrutiny from CBP.

What documents can be used to support these deductions?

Title 19 Code of Federal Regulations, Part 152.102(f) asserts that “expenses incurred for transportation” may be deducted. It has been a long-standing policy of CBP that these deductions must be based on “actual costs” and not “estimated costs.” CBP reiterated this policy through the issuance of Treasury Decision 00-20 (T.D. 00-20) in March 2000.

At any time, CBP can request proof of “actual costs” deducted from an invoice if the IOR is not able to provide these details. This opens the door to Customs to review all entries in the past five years as well as any future entries. When deductions are taken, CBP could—at a minimum—require the IOR to present the following:

  1. A commercial invoice that states the term of sale (Incoterms). The Incoterm must reasonably indicate that the charges were inclusive of the cost of goods sold. For example, an invoice that states “CIF” would indicate that the seller incurred the cost of the international transportation of the freight to a named port or place, plus obtained a maritime cargo insurance policy for the cargo and paid the applicable premium.
  2. A rated bill of lading, freight contract, or freight invoice from the carrier that clearly states the freight cost for the shipment.
  3. An invoice from the insurer that clearly states the insurance premium for the shipment. CBP may be willing to accept a copy of the insurance policy if it includes the formula for calculating the premium on a per-shipment basis.
  4. Any other appropriate record(s) to substantiate other deductions, such as duty.

Be aware of what is included in the invoice value

The Incoterm agreed upon between the seller and buyer plays a large role in the fees included in the commercial invoice. There could be fees built into item values that may not be subject to duties and taxes, or these fees could be listed separately and added to the transaction value of the invoice.

In the 2020 Incoterms, there are seven Incoterms that can be used for any mode of transportation and four Incoterms specific to sea and inland waterways transportation. The Incoterm specifies the responsible party for each point in the transportation process—who arranges each segment of the trip, where risk transfers between the two parties, and for what each party is monetarily responsible.

E and F Incoterms (EXW, FOB, FCA): The buyer makes most of the decisions, including choosing their own customs broker and the responsibility of being the importer of record on the customs entry. The buyer is also able to decide on the routing and delivery options to their door.

C Incoterms (CPT, CIP, CFR, CIF): The risk is more evenly spread between the buyer and seller. The seller can transfer risk at the time the goods are delivered to the dock for export or after the vessel docks in the United States. Charges for ocean freight and insurance premiums are often built into the cost of goods or commercial invoice value.

D Incoterms (DAP, DDP, DPU): The least risky term for buyers. However, it also comes with the least amount of visibility and no control at any point in the process. The seller controls all transportation choices, customs clearance, and final delivery. Charges for freight, inland trucking, and even duties and taxes can be built into the commercial invoice value.

CBP published U.S. Customs Informed Compliance Publication – Customs Value. However, many of the examples used in this document are best-case scenarios. The 580-page Customs Valuation Encyclopedia explores the less garden-variety commercial invoice examples that CBP has compiled from valuation Binding Rulings provided from industry inquiries from the years 1980-2005.

How can C.H. Robinson help?

Once you understand the role Incoterms play and the fees CBP allows deducted from the transaction value—you have the tools to dive deeper into the sellers your company does business with to determine if there are any allowable deductions that can be split out of the dutiable value, and if so, obtaining the substantiating document for the “actual costs.”

As a customs broker, C.H. Robinson works to educate IORs on the regulations and practice due diligence to protect IORs from unnecessary requests from CBP, such as CBP Form 28s, Request for Information. If proof of “actual costs” is not available, then it would be in the IOR’s best interest to not take any deductions.

The risks undervaluing commercial invoices could result in past and future entries being requested and reviewed by CBP, contracts with sellers investigated in-depth, and even audits where CBP will interview employees and review internal processes. Connect with one of our trade policy experts to learn more.


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