Deductive Reasoning – Deducting Expenses or Asking for Trouble?

By Bruce Leeds, Senior Counsel, Braumiller Law Group

Acme Corporation receives a shipment by ocean freight from Japan. The terms of shipment on the purchase order are CIF Long Beach, California, meaning the price includes the cost of the goods plus prepaid ocean freight and insurance from Japan to Long Beach. The commercial invoice accompanying the shipment shows a total CIF price of $105,000 for the shipment.

Listed on the commercial invoice are the following:

Ocean freight: $4,000
Marine insurance: $1,000

Under Part 152.102(f) of the Customs Regulations, it states that the price paid, or payable, for imported merchandise is “exclusive of any charges, costs, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States.” This means that international freight and insurance is not included in the Transaction Value of the shipment. Accordingly, you can subtract the ocean freight and insurance shown on the invoice ($5,000) from the total CIF price to arrive at an entered value of $100,000 – right? Wrong!

Customs Informed Compliance Publication (ICP) entitled “Proper Deductions of Freight and Other Costs From Customs Value” provides an excellent summary of this subject. It states in very certain terms that only the actual costs of international freight and insurance can be deducted. This means that the importer, or its broker, would need to provide a copy of the bill of lading showing the actual freight charge or an invoice from the forwarder or carrier showing the actual freight charge. The actual cost of marine insurance could be shown by an invoice from the insurance company or insurance broker.

The problem here is that prepaid freight is normally treated as confidential by the shipper. Only the party that prepaid it would know what the actual freight charge is. They may not want to share that information with the U.S. importer. The bill of lading accompanying the shipment may only state “as agreed” or similar language. Similarly, the cost of prepaid insurance is also confidential.
What is the importer to do? Can it estimate the freight and insurance? No – the ICP states that only the actual charges can be deducted. This means that Acme Corporation in this particular instance would need to persuade the Japanese seller to divulge the exact amount of freight and insurance and provide documentation to support the claimed amounts.
What if the Japanese seller turns down Acme Corporation’s request? In that event, the Customs Prime Directive applies: If you can’t prove it, don’t claim it. Acme Corporation would need to enter and pay duty on the full CIF price of $105,000. Acme Corporation may not think this is fair, but the Customs Regulations aren’t always fair.

If Acme Corporation were to obtain evidence of the actual freight and insurance charges at a later date, it could file a post summary correction, or protest to obtain a duty refund.

What if Acme Corporation, or its customs broker, were to simply deduct the $5,000 and hope for the best? We will point to the CBP Focused Assessment Kit, giving instructions to Regulatory Auditors. Under the title of “Red Flags for Price Actually Paid or Payable” the kit lists “Unsubstantiated/estimated nondutiable charge deductions are used for entry.” This means that the auditor will be looking for such charges and, if found, list them as a violation and loss of revenue.

Another part of the Focused Assessment Kit describes “Situation in which team would proceed to ACT (Compliance).” This means that the focused assessment will go to the next stage of looking into the violations and requiring a compliance improvement plan. One of the factors that would cause this is listed as “unsupported freight deduction.”

Regulatory Audit also visits customs brokers to examine them for compliance. We understand that freight charge deductions are one of the things on the Regulatory Audit broker hit list: Is the broker deducting freight and insurance and, if so, can the broker support the deduction with evidence of the actual charges?

This may seem like a simple thing, but in this age of special duties on many products it could be significant. Some advice would be to not purchase from foreign suppliers under Incoterms that include international freight and/or insurance, or require the seller to support such charges with evidence of the actual amounts, or – better yet – change the Incoterms to FCA or similar to eliminate this issue.

Thinking about deducting international freight and insurance to arrive at the entered value? Remember the Prime Directive!