In international trade, the “price” of goods is the cornerstone of customs tax collection. Deliberately underreporting prices to evade taxes is an illegal act that customs authorities around the world strictly combat. However, many businesses, due to a lack of understanding of the complex customs valuation rules or operating in gray areas, accidentally or intentionally fall into the “underreporting” trap, ultimately paying a heavy price.
Part 1: Why Does Customs Focus on “Price”? — The Principles and Purposes of Valuation
Core Purpose: To ensure national tariff revenue and maintain a fair trade competition environment.
Basic Principles: The World Trade Organization’s Agreement on Customs Valuation establishes universally applicable valuation principles, centered on the “transaction value” principle. This means that customs valuation should be based primarily on the price actually paid or to be paid by the buyer when the goods are actually exported to the importing country.
This means that customs authorities are not looking for a “market price” or “reference price,” but rather the true and complete price relevant to your specific transaction. Any incompleteness in this price may trigger an investigation.
Part II: Six Methods of Customs Valuation: Legal Valuation Path
Customs does not set prices arbitrarily; instead, it follows legally mandated, sequential valuation methods. Understanding these methods will help you understand how customs will challenge your declared value.
Method 1: Transaction Value Method
The primary and primary method. This method is based on the sales invoice amount.
Adjustments: Customs may add certain items to the invoice price (such as commissions, brokerage fees, royalties, packaging fees, tooling fees, etc.) and deduct certain items (such as post-import infrastructure, installation, and repair costs).
Eligible Conditions: The two parties to the transaction do not have a special relationship, or a special relationship exists that does not affect the price.
Method 2: Identical Goods Transaction Value Method
If Method 1 cannot be used for your goods, customs will use the transaction value of identical goods exported to the same country at or approximately the same time.
Method 3: Similar Goods Transaction Value Method
Similar to Method 2, but uses the transaction value of similar goods.
Method 4: Deduction of Price Method
Based on the domestic sales price of the imported goods (or identical/similar goods) in the importing country, deduct any relevant profit, taxes, and domestic fees to calculate the dutiable price at the time of import.
Method 5: Calculated Price Method
Calculate the total cost of materials, processing fees, profit, and general expenses required to produce the goods. This method is very complex and is typically used in specific circumstances such as processing trade.
Method 6: Reasonable Method
When all the above methods are inapplicable, Customs may use flexible but reasonable basis for valuation. However, prohibited prices (such as domestic market price, export price to a third country, arbitrary or fictitious prices) must not be used.
Part III: Common Forms and Legal Risks of “Low Price Declarations”
(I) Active and Malicious Low Price Declarations
Form: Directly issuing a “yin-yang contract” or false invoice that is far lower than the actual transaction amount.
Risk: This constitutes smuggling. Once verified, the consequences include:
Payment of back taxes + hefty fines (which can be several times the amount of tax evaded).
Confiscation of goods.
Criminal prosecution: Company leaders may face imprisonment.
Corporate bankruptcy: Companies are blacklisted by customs, and all future imports and exports will face the strictest inspections.
(II) Passive and unconscious valuation traps
Many companies fall into this trap, believing they are declaring the “true price.” Common traps include:
“Free molds” or “R&D fee” traps
Scenario: A foreign buyer pays for the mold development costs of your product in exchange for a lower unit price.
Issue: According to valuation rules, mold fees are considered “assistance” items, and their value should be included in the dutiable value of each imported shipment. The unit price you declared is incomplete.
Risk: Customs will retroactively revaluate and demand back taxes and interest on all related batches of goods.
“Special relationship” pricing trap
Scenario: You and the overseas buyer are parent-subsidiary companies, affiliated companies, or have a controlling stake.
Issue: Customs has the right to examine whether your transaction price is influenced by this special relationship, rather than the market price under arm’s length principles.
Response: You need to provide evidence (such as comparing prices sold to unrelated third parties and demonstrating that your profit margin is in line with industry standards) to prove that the price has not been affected.
“Royalty” Trap
Scenario: You need to pay patent fees or brand licensing fees to the buyer for imported goods.
Problem: If such fees are related to the imported goods and are a condition of sale, they must be included in the dutiable value.
Unreasonable “Commissions” and “Discounts”
Scenario: Incomplete declaration of commissions paid to the buyer, or unreasonable “year-end rebates” or “trade discounts” given.
Problem: Customs will examine the commercial substance of these arrangements to determine whether they constitute disguised price concessions and require them to be included in the dutiable value.
Part IV: Risk Prevention and Compliance Strategies
Principle 1: Report truthfully and maintain transparency
Commercial invoices must reflect the actual transaction serial number, transaction terms, and payment amount. Integrity is the most powerful weapon against inspections.
Thoroughly understand the complete composition of the “transaction price.”
When signing a contract, consult with a professional customs broker or consultant to identify all “adjustments” that may need to be included in the dutiable value, ensuring a clear understanding.
Properly handle “special relationships.”
For related-party transactions, be sure to prepare transfer pricing documentation to demonstrate that your pricing complies with the arm’s length principle. This documentation is a lifeline in the event of customs inquiries.
Preserve complete supporting documents.
Preserve all relevant contracts, agreements, payment receipts, and emails to demonstrate the reasonableness and authenticity of your declared prices.
Leverage the “advance ruling” system.
Apply for an advance ruling from customs for complex valuation issues (such as royalties and assistance items) before the goods are actually imported. Obtaining an official written ruling provides legal protection for your pricing strategy and mitigates subsequent risks.
Establish an internal review mechanism.
A dedicated person (or process) should be responsible for reviewing export customs declaration documents to ensure the compliance of price declarations.
Summary:
Customs valuation isn’t a financial game you can game yourself, but a rigorous legal system. Trying to reduce costs by “low-declaring” a price is like drinking poison to quench thirst. The legal risks, financial losses, and reputational damage far outweigh the tax savings.
Core Compliance Philosophy:
“It’s not what you think the price should be, but what it must be according to customs regulations.”
View customs compliance as a strategic investment, not an operational cost. By establishing a transparent pricing system and internal controls, you can not only mitigate risks but also build a solid foundation for a trustworthy business in the international market.