Mexico has signed several commercial agreements allowing imports and exports with preferential tariff terms. These advantages are driven by the Ministry of Foreign Trade, and they allow Mexican companies (including small and mid-sized businesses) to break into foreign markets. However, in an effort to gain access to new business, companies sometimes overlook proper valuation of their goods for customs purposes, so it is vital to have accurate justification for the declared value of the goods.
An additional issue that customs authorities have paid close attention to is transactions between controlled (or related) legal entities within an enterprise. In these cases, the transaction value can be used as the tax base as long as the business relationship or connection does not affect the price. That is, the goods must be documented with a market value. For tax purposes, many companies conduct a transfer pricing study, which is an economic study to determine a “standard” value.
Per international practice and standards, transaction value is the first transfer that can be accompanied by a receipt, contract, or invoice. All incremental costs must be included, such as insurance, freight, storage, royalties, etc. inasmuch as they are payable by, or on behalf of the importer, and are not part of the price paid.
The World Trade Organization (WTO) was established in 1995 and has 153 member countries. It administers approximately 60 international agreements regarding the trade of goods, services, and intellectual property. The agreements are negotiated at what are called “Rounds”, such as the Doha Round, the Uruguay Round, and the Cancun Round. These agreements establish, among other things, principles for trade liberalization, agreements established between countries to reduce customs tariffs, and procedures for resolving grievances. The WTO’s main documents are: the General Agreement on Tariffs and Trade (GATT, in reference to goods) and the General Agreement on Trade in Services (GATS).
The importance of a good calculation method
If there is no documented value or it is impossible to determine the value of the goods, there are a series of alternative methods established by regulation. One of these is the transaction value of identical or similar goods. In the absence of accurate data, the importer can use the known value of another container with the same type of goods from a different origin, or can use a container with similar goods that came from a country that is the same distance away or that has similar terms. There are other methods that offer flexibility in calculations; however, importers should be aware that the value must be documented and may be refuted by authorities.
The reference values are negotiated in the companies’ sales departments, so it is important that they also be involved. This would especially apply to transactions with outstanding balances, off-line or discontinued goods, discounts, consignments, and other commercial transactions that are relevant for determining value. This applies to all organizations carrying out foreign trade operations, especially those that sell trademark protected goods, for which they must pay royalties.
Incorrect valuations may give rise to problems when calculating the tax base for importation, which have significant financial and tax consequences.
If the value of the goods is higher than the value declared to customs, the discrepancy automatically triggers a settlement by difference on the contributions paid. Additionally, if the customs entry permit [pedimento], allowing goods to enter another country, reflects a value higher than that of the commercial invoice, the authorities may authorize a subtraction of the difference up to the amount that was declared in excess.
In general, faulty customs valuations can cause a company to pay more import taxes or to deduct less than their income tax liability. Furthermore, the customs and tax authorities may impose fines, surcharges, or sanctions, which could be a burden on the company’s finances.