In this article, the third in our blog series on U.S. tariffs (check out the other two pieces on origination and classification), we continue to spotlight high-risk tariff practices and potential enforcement consequences.
Recent increases to U.S. tariffs have caused supply chain disruptions and other uncertainties in international trade. As most customs duties are “ad valorem” and therefore determined as a percentage of the value of imported goods, the declared customs value is the base for calculating duty liability for most imports. Thus, understanding the rules and best practices for customs valuation is essential for businesses engaged in international trade.
Determining Dutiable Value
Since the late 1970s when the current international rules on customs valuation were first adopted, the primary method for determining customs value under U.S. customs law is the “transaction value.” The transaction value is the price actually paid or payable for the goods when sold for export to the United States, plus certain statutory additions. If this price cannot be used – such as when the importer has not purchased the imported goods, or the buyer and seller are related and the relationship influences the price – the U.S. Customs and Border Protection (CBP) applies sequentially a series of alternative methods.
Just as income taxpayers may reduce their taxable income through legitimate deductions, the customs value of goods might not include every element of the cost that an importer incurs. It is legitimate for importers and exporters to examine their transactions to ensure they are not unnecessarily paying tariffs on elements of the price that are not dutiable.1
At the same time, customs law requires certain costs to be added to invoiced prices, if such costs are deemed to be part of the customs value. Examples include (1) packing costs, (2) selling commissions, (3) assists (such as materials, components, or tools provided by the buyer at no or reduced cost), (4) royalties and license fees that the buyer must pay as a condition of sale, and (5) proceeds of any subsequent resale that accrue to the seller.
Determining whether a particular charge or cost is part of the proper customs value can be complex and often requires careful analysis. It is usually done with the help of expert advice.
Undervaluation Schemes
Given the complexity of customs valuation and the commercial context of higher tariffs, importers and their suppliers may be tempted to engage in illicit undervaluation schemes to reduce exposure to tariffs. Schemes that involve misrepresenting the value of imported goods on customs documents are illegal. There are several common methods by which undervaluation is carried out. One prevalent form of undervaluation involves the falsification of invoices. In this scheme, the importer and the foreign supplier collude to produce a commercial invoice that lists a value significantly lower than the actual transaction price. Customs officials rely heavily on these invoices to assess duties, so a lower declared value directly translates to lower tariffs. Another common scheme is the use of multiple invoices (known as “double invoicing”). In this scenario, the exporter issues two sets of invoices: one with the true value of the goods for the importer’s internal records and another with a reduced value for customs declaration. The lower-valued invoice is presented to customs authorities, while the higher-valued invoice is used for payment and accounting purposes. Other undervaluation schemes include understating the weights or quantities of imported goods, and omitting required statutory additions.
Legal and Financial Risks
Undervaluation poses significant risks to importers and other parties involved in the process. Beyond the obligation to repay back duties, improper valuation can result in the loss of trusted trader status and the imposition of substantial civil and administrative penalties. In more serious cases involving negligence or fraud, CBP frequently refers matters to the Department of Justice (DOJ) for civil and criminal enforcement, which can lead to large fines and, in some instances, imprisonment for individuals involved. For example, on April 18, the DOJ intervened in a customs fraud case, U.S. ex rel. Lee v. Barco Uniforms Inc., where the defendants were accused of violating the False Claims Act by defrauding the government through undervaluation, misdeclaration, and underpayment of customs duties on commercial apparel imported from China. The government’s complaint alleges that the defendants employed a double-invoicing scheme, submitting false entry summaries to CBP that undervalued imported goods, and continued to underpay customs duties even after being warned by a third-party auditor. In a recent memorandum, the DOJ has identified customs fraud and tariff evasion as top enforcement priorities, signaling increased enforcement activities in this area.
Importantly, a party is not shielded from liability even if it is not listed as the official importer of record, or if the transactions are Delivered Duty Paid (DDP). U.S. law is clear that customs fraud can expose anyone involved in the scheme – whether they are buyers or sellers, corporations or individuals – to liability.
In sum, undervaluation schemes are illegal and can result in severe consequences for those involved. Accurate valuation of imported merchandise is not only required by law, but may also help importers reduce tariffs by excluding non-dutiable charges. U.S. businesses should ensure that their valuation practices are transparent and comply with U.S. customs law. When necessary, they should seek expert guidance to navigate these complex requirements.
1Multinational organizations where the buyer and seller of the goods are related will strive to record arms-length commercial terms so that the relationship does not influence the price of imported goods and the transaction value method of valuation will be used. This is often an element in wider planning around transfer pricing and taxation issues. Such matters are beyond the scope of this short analysis.
