Applying the "First Sale" Valuation Method to Multi-way Trade

Written By: Howard Kuo

In international trade, transactions of goods are often triangular (or quadrangular, etc.) in nature. For example, an American firm may place an order for goods with a firm in Taiwan, which then commissions a Mainland Chinese firm (manufacturer) to produce the goods, and finally delivers the goods to the US buyer.

In traditional valuation work, when goods are imported into the US, the basis for calculating their dutiable value on import is the price the importer pays the intermediary. But if the “first sale” valuation method is adopted, the dutiable value of the goods can be determined using the price in the transaction between the manufacturer and the intermediary. In other words, the dutiable value of imported goods will not include the intermediaries’ gross margin, thereby lowering the goods’ dutiable value, and thus cutting the customs duties and other indirect taxes that have to be paid on them.

The legal basis for the abovementioned “first sale” valuation method originates in the WTO’s Valuation Agreement - in particular, its definition of “transaction values”. According to Article 1 of that Agreement, the customs value of imported goods should be their transaction value, and what is termed transaction value is “the price actually paid or payable for the goods when sold for export to the country of importation”. In indirect trade situations, “selling for export” can be interpreted as being the transaction between the manufacturer and an intermediary; that is, the “first sale” in the entire supply chain.

The “first sale” valuation method has already been accepted by customs authorities in the US and EU countries. As for Asia, since many countries have scant experience implementing the WTO Valuation Agreement, a comparatively reticent attitude has been shown towards adopting the “first sale” valuation method. If a firm wants to adopt the “first sale” method to declare the dutiable value of goods, it must meet all of the following conditions:

1. Both sides of the transaction must carry out real sales.

The WTO Valuation Agreement does not, in fact, clearly define what a “sale” is. Generally speaking, a sale is a transfer of the property rights and risks pertaining to a commodity. On this basis, if title to goods is directly transferred from the manufacturer to the importer, and the intermediary does not take possession of the products, or does not need to bear any risks in connection with them, then no actual sale of goods has taken place between the manufacturer and the intermediary, and thus a “first sale” may not be established.
2. When the manufacturer sells goods to an intermediary, it must be certain that the goods are to be imported into a country in order to ship them to particular targets.
In other words, if the intermediary has yet to establish the final sale conditions, but proceeds to procure goods from a manufacturer, warehouse them, and subsequently come up with a buyer in the importing country, then the “first sale” valuation method cannot be applied.
3. If the buyer and seller are affiliated enterprises, then the transaction price must not be affected by the special relationship between the two parties.
Besides the specific conditions on “first sale” described above, one must also make sure whether the calculation of dutiable value needs to include other expenses. Following the WTO customs valuation agreement, certain expenses borne by the buyer, although not included in the price actually paid or payable, must nonetheless be added in the dutiable value calculation. In the traditional approach to valuation, “buyer” refers to the importer. Expenses borne by intermediaries are not explicitly related to dutiable value. But under the “first price” method, the intermediary becomes the buyer, so the portion of expenses paid by the intermediary may have to be added when computing dutiable value.

For customs agencies, applying “first sale” valuation means assigning lower dutiable values to commodities, and that affects customs revenue. For this reason, the Customs will adopt a rather strict posture in its examinations of price declaration forms based on “first sale”. So if a corporation intends to adopt this valuation method, in addition to making sure that its transaction model meets the above requirements, it must also be especially careful to obtain, record and preserve the relevant documents (orders, invoices, bills of lading, cargo tags, etc.).

In addition, although the US and EU countries have not ruled that companies need to obtain formal permission from their customs authorities before adopting the “first sale” method, they should still come to an understanding with the customs authorities beforehand in order to reduce the risk of being pursued for back taxes later on.

Because triangular trade is a familiar model for many of Taiwan’s corporations exporting their products to Europe and the US, the “first sale” method provides a certain leeway for tax savings. Customs duties in those countries are borne by the buyer, so it follows that if the exporter can help the buyer to lower the cost of customs duties, this may increase the price competitiveness of goods.

On another note, Taiwan would like for its regulations to be aligned with international norms. To be thoroughly in sync internationally, however, the authorities are advised to apply the “first sale” valuation method to assess customs duties on goods imported into Taiwan.