Ad valorem customs duties are calculated as a percentage of the imported product’s value. To prevent arbitrary pricing, customs authorities must use five sequential valuation methods established by the WTO.
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| 1. Transaction Value Method |
| Default: Price actually paid or payable + adjustments |
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| (If rejected, move down)
v
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| 2. Transaction Value of Identical Goods |
| Compares same goods sold to the same country |
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| (If unavailable, move down)
v
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| 3. Transaction Value of Similar Goods |
| Compares closely resembling goods with same function |
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| (If unavailable, move down)
v
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| 4. Deductive / Computed Value Methods |
| Deductive (Resale price minus costs) or Computed |
| (Production cost + industry standard profit) |
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| (If unavailable, final resort)
v
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| 5. Fallback Method |
| Flexible use of methods 1-4 based on available data |
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Method 1: The Transaction Value (The Primary Standard)
The default customs value is the Transaction Value—the price actually paid or payable for the goods when sold for export to the country of importation.
- Mandatory Adjustments: To find the full taxable value, the buyer must add specific costs to the invoice price if they were not already included. These include international freight, marine insurance, packaging, and royalties. This final value is known as the CIF (Cost, Insurance, and Freight) value.
- Grounds for Rejection: Customs can reject Method 1 if the buyer and seller are related parties and that relationship artificially lowered the transaction price, or if the sale is subject to restrictions that make it impossible to value.
Alternative Valuation Methods (Methods 2 to 5)
If Method 1 is rejected, the customs officer must test alternative methods in strict order:
- Method 2 (Identical Goods): Based on the transaction value of identical goods exported to the same country at or about the same time.
- Method 3 (Similar Goods): Based on the value of goods that closely resemble the imports in characteristics and component materials, performing the same functions.
- Method 4 (Deductive Value): Calculated by taking the final unit resale price in the local market and subtracting local profits, duties, and transport costs.
- Method 5 (Computed Value): Calculated by summing the production costs of the materials, manufacturer’s profit, and international freight.
- Method 6 (Fallback Method): If all else fails, value is determined using flexible adjustments of methods 1 to 5 based on local data. The use of arbitrary or fake minimum values is strictly prohibited.
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