There are three universal international trade values, and I find that when students come into the Export and Import trade classes, that they are often confused about this subject and don’t know that there are more than one value in their own profession. The three values are: Transaction Value, Customs Value and National Sales Tax Value (VAT).
This is the cost used between the trader’s and the commercial invoice value. The Incoterm used in the contract helps determine the breakdown of what is covered in the invoice. This may be below, equal to, or higher than the Customs Value. Had the seller sold EX Works, then that would be below the Customs Value as it does not include the export customs clearance and any service cost to move the cargo on to the carrier.
Customs Value (FOB)
Customs Value is the total amount of money spent inside the country of export. This will be the value from which all import taxes (excluding VAT) would be calculated. The Incoterm FOB would explain the Customs value, which may not have been the code used in the contract, but does help determine the breakdown of what is covered in that Customs Value.
The VAT value (CIF)
National Sales tax or VAT value on imports is the total amount of money spent for the product including the cost of bringing that product to the country of import. The Incoterms CIF/ CIP may not have been used in the contract, but does help determine the breakdown of what is covered in those costs and creates the VAT value.
Transaction Value and the Customs Value (FOB)
If the Transaction Value is lower than the Customs Value, then Customs officials know that the seller’s cost, which is on the invoice, and some of buyer the buyer’s cost, the cost from the Incoterms handover point, plus cost up to when the cargo is loaded (FOB) onto the carrier (LAW, Land Air or Water), needs to be added together to make up the Customs Value (FOB).
If the Transaction Value is the same as the Customs Value, when they have traded with the Incoterm FOB, then the seller is not spending any money outside the country of export and the buyer is not spending any money inside the country of export.
If the Transaction Value is higher than the Customs Value, for example, the trade Incoterm was DAT, the seller will have costs outside the country of export.
The Exchange Control Act then allows the seller to spend money (if required in a foreign currency), on services outside the country of export, but no more that the difference between the Customs Value (FOB) subtracted from the Transaction Value (commercial Invoice DAT).
The VAT value (CIF) and the Customs value (FOB)
For exports and imports trade, Customs only focus on what happened inside the country of export, but the National tax system (VAT) takes into account the cost to bring the cargo to the country of import. To simplify the system, the VAT people say that on average, the cost spent between the two countries is about 10% higher than the cost spent inside the country of export. Therefore the VAT formula takes the Customs Value and adds 10% (upliftment) to get the ATV (Added Tax Value) and calculates the VAT on the ATV.
It is not the commercial invoice that determines the tax values for import tax or VAT. The commercial invoice is a tool to help determine the three values that governments around the world want to know, of which two is used for tax purposes and one (invoice) for forex to come into or go out of a country.
Contributed by Jim Merrington from MBA Exit and originally appeared in: