M5
M5
METHODS OF VALUATION
(METHOD 1-6)
MODULE INTRODUCTION
This module contains discussion on Customs Valuation particularly on methods used in
computing for the dutiable value of imported goods. Detailed discussion on the primary
method (transaction value) and alternative methods (TV of Identical Goods, TV of
Similar Goods, Deductive Value, Computed Value & Fallback Value) is also in this
module.
CUSTOMS VALUATION
(METHODS OF VALUATION)
*6 Valuation Methods
*General Principles
1. The methods of valuation are set out in a sequential order of application. The
primary method for customs valuation is the Transaction Value and imported goods
are to be valued in accordance with the provisions of this method whenever the
conditions prescribed for its use are fulfilled.
2. Where the dutiable value cannot be determined under the Transaction Value
method, it is to be determined by proceeding sequentially through the succeeding
methods to the first method such as Methods 2 to 6, it is only when the dutiable value
can be determined under the provisions of a particular method that the provisions of
the next method in the sequence can be used.
3. However, the order of application of Methods 4 and 5 may be reversed. But it can
only be allowed upon the request of the importer subject to the approval of the
Commissioner of Customs taking into consideration that the reversal of the
sequential order will not give rise to real difficulties for the Bureau of Customs in
determining the dutiable value under Method 5.
- Permissible Deduction
*PAPP
PAPP is the acronym for Price Actually Paid or Payable for the goods when
sold for export to the Philippines. It is the total payment made or to be made by
the buyer to or for the benefit of the seller for the imported goods. In short, PAPP
is the amount incurred in the INCOTERMS used in the transaction.
Payment may be made in cash, letters of credit or negotiable instrument. The
buyer can also pay directly or indirectly to the seller. An example of indirect
payment is the settlement by the buyer of the debt owed by the seller.
*Sale
Remember the PAPP is for the goods when sold for export to the Philippines. It
means there should be a sale for export to our country in order to use the
Method 1 in determining the dutiable value of the goods
A sale exists if any of these following descriptions are met:
1. There is a commercial operation which involves a buyer and a seller
2. The buyer agrees to obtain certain commodities
3. There is an exchange of ownership of the goods at a time and for a price
or other consideration
4. A compensation was given in exchange for the transfer of ownership and
acquisition of goods
5. Both parties acknowledge that the transaction constitutes a commercial
operation.
*No Sale
How to determine if there is no sale?
There is no sale if no commercial operations exist. Goods that might be
considered not subject to a sale include among others the following:
Goods not subject to a sale Reason/s
1. Free consignment like gifts, Since there is no payment made,
samples and promotional items. there’s no commercial operation as
well.
2. Goods imported on consignment These are imported goods to be
paid only if such goods are sold in
the Philippines. Here, there’s no
assurance of payment, hence
commercial operation is not
guaranteed.
3. Goods imported by Because they are just the
intermediaries, who do not purchase intermediaries or middlemen, they
the goods and who sell them after are not the actual buyer, which
importation. means there is no commercial
operation between the buyer and
the seller.
4. Goods imported by branch offices Since the transaction happened
which are not separate legal entities. between companies of the same
ownership which means there’s no
payment happened, hence, no
commercial operations exist
5. Goods imported under a hire or For the reason that there’s no actual
leasing contract. transfer of ownership, then there’s
no commercial operation
6. Goods supplied on loan, which Since there is no transfer of
remains the property of the seller. ownership, commercial operation
does not exist.
*Sale for Export
Remember the PAPP is for the goods when sold for export to the Philippines. It
means there should be a sale for export to our country in order to use the
Method 1 in determining the dutiable value of the goods
*Adjustment
The adjustment in the PAPP pertains to mandatory addition and/ or
permissible deduction.
Mandatory Addition
In mandatory addition, add fees or expenses incurred in the imported goods
which are not included in the price actually paid or payable shall be added to the
PAPP, to the extent that they are incurred by the buyer, provided there is
objective and quantifiable data to form the basis of the adjustment.
Such fees and expenses to be added can be easily remembered through the
acronym – CARPPIT
o C –Commissions and Brokerage Fees
o A – Assists
o R – Royalties and License Fees
o P – Packing and cost of container
o P – Proceeds
o I – Insurance
o T –Transport Cost
A – Assists
o Assist is defined as the value, apportioned as appropriate of certain goods
and service supplied directly or indirectly by the buyer to the seller free of
charge or at a reduced cost for use in connection with the production and
sale for export of the imported goods.
o The goods and services are:
1. Materials, components, part and similar items incorporated in the
imported goods
2. Tools, dies, moulds, and similar items used in the production of the
imported goods
3. Materials consumed in the production of imported goods
4. Engineering, development, artwork, design work, and plans and
sketches undertaken elsewhere in the Philippines and necessary
for the production of the imported goods.
P – Proceeds
o The value of any part of the proceeds of any subsequent resale, disposal
or use of the imported goods that accrues directly or indirectly to the seller
shall be added to the PAPP.
o For example, in a contract of sale between the seller and buyer, a certain
percentage of the sales-proceed of an imported article shall be remitted to
the seller. And such amount shall be included in the mandatory addition.
I – Insurance
o The cost of insurance refers to those charges for insurance of goods
during the transportation, prior to the shipment unloading to the port of
destination.
o Cost of insurance shall be only added if it’s not included in the PAPP just
like the other components.
T – Transport Cost
o Transport cost is the charges for transporting imported goods before it
was unloaded to its port of destination in the Philippines.
o This cost includes such charges as trucking, inland freight, rail freight,
ocean freight air freight and barge or lighterage and postal costs.
Permissible Deduction
Permissible deductions are the costs and charges that should be deducted from
the PAAP because they are undertaken after importation.
In short, this is called the “Post Importation Charges”.
These costs are typically deducted when the Incoterms used is in Group D.
Permissible Deduction can be easily remembered by the help of the acronym. C
TD
o C - Charges for construction, erection assembly maintenance or technical
assistance, undertaken after importation on imported goods such as
industrial plant, machinery, or equipment.
o T - Transport Cost incurred after importation
o D - Duties, taxes and other charges paid for the imported goods.
The word “After Importation” means after the goods have arrived in its port of
destination in the Philippines ready for unloading.
Identical Goods
Identical goods are goods which are the same in all respects including, physical
characteristics, quality and reputation of the goods being valued.
Same Quality
o We can perceive that these shoes of Brand A and this shoe of Brand B
has the same quality because they are both Original
o However, if we compare the shoes of Brand A to Brand C, they cannot be
identical for the reason that they don’t have the same quality as Brand C
shoes is Class C, which quality is lower than the original.
Same Reputation
o It means that such goods have the same trademark as the goods being
valued.
o We can say that Adidas and Nike shoes have the same trademark
because they are the prominent rivals in shoes industry.
Identical goods shall be same in all respects of the goods being valued but there
are certain exemptions. These are the minor differences which do not influence
the price of the goods such as
o Color
o Sizes
o Label or pattern
Identical Goods shall also be produced by the producer of the goods being
valued.
o For example, if the manufacturer of the television being valued is Brand A,
then Brand A shall also be the manufacturer of the identical television.
However, this condition is no longer a necessity. When there are no identical
goods produced by the same person in the country of production of the goods
being valued, a different person or manufacturer can be accepted, provided that
the identical goods are produced in the same country of production of the
goods being valued.
o For Example, these SUV cars from England have different manufacturers
but it can be classified as identical since they are both produced from the
same country of production which is England.
The definition of identical goods excludes imported goods which engineering,
development, artwork, design work, and plans and sketches is undertaken in the
Philippines and is provided by the buyer to the producer of goods free of charge
or at a reduced cost.
o Meaning that such engineering, development artwork and the like shall be
undertaken in a country other than the Philippines in order to apply the
Method 2 in finding the dutiable value of the goods.
2. Identical goods shall be exported at or about the same time of the goods being
valued
It is generally interpreted as exportation of the identical goods to the Philippines
45 days before or after the date of bill of lading or AWB of the goods being
valued.
Prices vary as time goes by, so in order to ensure that the price of the identical
goods and the goods being valued are adjacent, “exportation within 45 days
before or after the date of bill of lading or AWB of the goods being valued” is set
by the Customs as a condition.
3. Identical goods shall be in a sale at the same commercial level and same
commercial quantity
Commercial levels pertain to whether the goods are sold for retail or wholesale
whereas commercial quantity is the quantity of goods imported.
o For example, if the goods being valued are sold for retail, then the
identical goods shall also be sold in retail. If the goods being valued are
sold in 1000 pieces, then the identical goods shall also be sold in 1000
pieces.
Nevertheless, Transaction Value of Identical Goods can still be accepted even if
such goods are sold at different commercial level and/or different quantities as
the goods being valued, provided that certain adjustment shall be made, taking
into account differences attributable to commercial level and/or quantity. Such
adjustment can only be made on the basis of demonstrated evidence that clearly
establishes the reasonableness and accuracy of the changes.
Similar Goods
1. Similar goods, although not alike in all respects, have like characteristics and
component materials of the goods being valued.
For example, red rose and white rose are similar goods because even though
they are different in color, they have like characteristics and component materials
since both are roses.
2. Similar goods are capable of performing the same functions of goods being
valued.
For example, ordinary umbrella and foldable umbrellas are similar goods. They
may vary in the type of umbrella, but their functions are the same which is to
protect people from heat of sunlight and the rain.
3. Similar goods are commercially interchangeable as the goods being valued.
For instance, table fan is commercially interchangeable to stand fan.
4. Similar goods shall also be produced by the producer of the goods being valued.
However, just like the definition of identical goods, similar goods and the goods being
valued can be of different producer as long as they are produced in the same country
of production.
2. Similar goods shall be exported at or about the same time of the goods being
valued
It is generally interpreted as exportation of the similar goods to the Philippines 45
days before or after the date of bill of lading or AWB of the goods being valued.
Prices vary as time goes by, so in order to ensure that the price of the similar
goods and the goods being valued are adjacent, “exportation within 45 days
before or after the date of bill of lading or AWB of the goods being valued” are set
by the Customs as a condition.
3. Similar goods shall be in a sale at the same commercial level and same
commercial quantity
Commercial levels pertain to whether the goods are sold for retail or wholesale
whereas commercial quantity is the quantity of goods imported.
o For example, if the goods being valued are sold for retail, then the
identical goods shall also be sold in retail. If the goods being valued are
sold in 1000 pieces, then the similar goods shall also be sold in 1000
pieces.
o Here, since there is a valid price list, the importer can make an appropriate
adjustment to determine the correct price of the goods.
2. The sale of the imported goods or identical or similar imported goods shall
also have taken place at or about the same time of importation of the goods being
valued.
The sale happened in a period extending to 45 days prior to and 45 days
following the importation of the goods being valued.
Yet, it is permitted to use the sale of goods sold in the Philippines in the same
condition as imported, at the earliest date after importation of goods being valued
but before 90 days after such importation.
3. The purchaser must not be related to the importer from whom he buys such
goods.
The relationship of the importer and the purchaser may influence the price of sale
in the Philippines.
4. The purchaser in the Philippines must not have supplied assists either directly
or indirectly.
It implies that no equipment, ties, moulds and the like are supplied by the
purchaser in the imported goods sold in the Philippines.
Aggregate of Elements
Remember that the sale in the Philippines is just the basis of Deductive Value
because deduction shall be made from the established price per unit of the
aggregate of certain elements.
These certain elements are the expenses and cost incurred in the Philippines
which can be represented by the acronym CAUC:
o C - Commission generally earned on a unit basis in connection with sales
in the Philippines for goods on the same class or kind.
o A - Additions which is usually made for in connection will sales profit and
general expenses in the Philippines for goods of the same class or kind.
o U - usual transport, insurance and associated costs incurred within the
Philippines
o C - Customs duties and other national taxes payable in the Philippines by
reason of the importation or sale of the goods
The aggregate amount of the elements, CAUC, shall have established price per
unit. “Unit price” means the price at which the greatest number of units is sold
in sales to persons who are not related to the persons from whom they buy such
goods at the first commercial level after importation at which such sales take
place.
o Let’s take a look at this table of price list where we can get the unit price
by determining the greatest number of units sold.
o From the 4th column, we can perceive that 80 is the highest number of
units sold, therefore the unit price in the greatest aggregate quantity is 90.
o A simple example would be the case of two sales where the first sale of
500 units are sold at 95 currency units each. In the second sale, 400 units
are sold at a price of 90 currency units each. In this example, the greatest
number of units sold at a particular price is 500, therefore, the unit price in
the greatest aggregate quantity is 95.
Formula
Aggregate of the relevant costs, charges and expenses + other costs + amount of profit
and general expenses = Dutiable Value
2. Other costs
Costs that shall be added only if it is not included in the Aggregate of the relevant
costs, charges and expenses. These costs can be remembered easily through
the acronym CAPET
o C - Container costs which are treated as being one for customs purposes
with the goods in question
o A - Assists, apportioned in a reasonable manner in accordance with
generally accepted accounting principles
o P - Packing costs whether for labor or materials
o E - Engineering, development, artwork, design, work and plans and
sketches undertaken in the Philippines and charged to the producer.
o T - Transport cost, loading, unloading costs, handling charges and
insurance and related charges until the goods have reached the port of
destination in the Philippines ready for unloading.
2. In Fallback Value, the condition in Method 2 and 3 that the identical and similar goods
shall be produced from the same country of production of the goods being valued is no
longer required.
o For example, the goods being valued is a leather bag produced from Australia
and the identical leather bag found is manufactured from Switzerland. Here,
under the Method 6, Method 2 can now be applied in determining the dutiable
value of the leather bag from Australia as long as the other conditions in Method
2 is met.
3. In Method 4, the goods shall have been sold in the same condition as imported but
under the Fallback Value, the goods can be in advanced or processed form when sold
to the purchaser.
3. State the importance of PAPP in determining the dutiable value using transaction
value methods.
4. State the similarities and differences between the primary method and the
alternative methods in computing for the dutiable value.
6. Aside from examples given in this module, cite some scenarios where reasonable
flexibility can be used.