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).
Transaction
value
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.
Final point
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: 
