Alveo Legame Business Solutions

Monday, October 17, 2016

Customs Value 101: What Importers Must Know

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How much should you pay in Import duties and taxes? That depends on the Customs valuation. If incorrectly declared, you’ll pay too little – or too much – in Import duties, VAT or other taxes.

In this article, we explain what every Importer must know about Customs valuation when buying from Asia.

Keep reading, and get the answers to the following questions:

1. How do I calculate the Customs value in my country or market?

2. How can I be sure that the correct Customs value is declared?

3. Why do many suppliers deliberately reduce the Customs value?

4. What kind of risks do I face if the Customs value is too low?

What is the Customs Value?

The Customs Value is the number used by the Customs authorities to calculate Import duties, fees and other taxes.

Normally, the Customs Value is declared on the Bill of Lading.

How can I calculate the Customs Value?

That depends on the market. For example, the Customs value is based on the FOB (Free on Board) price in the United States. The FOB is basically the unit cost.

In the European Union, however, the Customs value is based on the CIF cost – which includes the freight cost and insurance (in addition to the unit price).

Hence, the shipper must declare the value based on the destination, which of course also requires the shipper to know (or, more accurately, be informed) of the correct Customs valuation method.

Are costs for molds, prototypes and services part of the Customs value?

Yes. What many Importers don’t know is that the declared value also includes costs for molds, samples and related services.

Hence, buyers cannot reduce the declared value by declaring part of the payment as a cost for design services. However, this only applies if you pay for design (or other) services abroad.

Services purchased locally are not part of the declared value.

However, there are some services, performed abroad, that are generally exempt from inclusion in the Customs value. Sourcing and Quality Assurance services, for example.

Molds and product samples are also part of the customs value. The Importer is often allowed to divide the cost of the tooling and samples over multiple shipments – or pay everything up front.

What can happen if the Customs Value is not properly declared?

Undervaluing the declared value amounts to tax fraud and is a criminal offense.

This is also a common practice, on everything from small parcels to containers. A practice that is estimated to cost the European Union as a whole, as much as€80 million in lost import duties.

How can the authorities check if the declared Customs Value is correct?

The Customs authorities have access to tools that can flag suspicious shipments. If the total declared value is deemed artificially low, the cargo is flagged and the Importer may be asked to provide additional evidence of the transaction value.

However, an artificially reduced Customs valuation may be discovered months, or even years, after entry.

The tax authorities may compare your records (i.e., compare the Commercial Invoice value to the actual transaction amount) during a company audit.

The Customs authorities can also access records, which ensures that importers cannot deliberately declare a large number of shipments below the customs threshold, in order to avoid paying import duties.

Surprisingly, we keep getting requests from Importers looking for guidance on how to game the system. We can assure you that there are no easy tricks that the authorities haven’t seen already.

How can I be sure that my supplier or freight forwarder declares the right Customs Value?

By not assuming that they will declare the correct value to begin with.

The formula for success is simple:

1. Calculate the Customs value according to the valuation method in your market

2. Inform your supplier and/or freight forwarder of the Customs value

3. Request the supplier and/or the freight forwarder to provide you with copies of the Bill of Lading and Commercial Invoice (to verify that the correct value is declared)

Case Study: United States (FOB)

Unit price: $12.5
Quantity: 2200 pcs
Tooling Cost: $500
Transportation costs to Port of Loading: $200
Transportation costs to Port of Destination: $1200 (Not included)
Calculation: $12.5 x 2200 pcs + $500 + $200 = $28,200

Case Study: European Union (CIF)

Unit price: $12.5
Quantity: 2200 pcs
Tooling Cost: $500
Transportation costs to Port of Loading: $200
Transportation costs to Port of Destination: $1200
Calculation: $12.5 x 2200 pcs + $500 + $200 + $1200 = $29,400

Why do some Asian suppliers understate the Customs Value?

There are two reasons.

First, some manufacturers think they are doing their buyers a favor.

Second, most suppliers don’t employ international taxation lawyers. They simply don’t know the Customs valuation laws of every country in the world – even major markets such as the US and EU.

It is your job to calculate the Customs value and inform your supplier accordingly.

Customs Value by Country or Market

COUNTRY / MARKET	VALUATION METHOD	READ MORE
United States	FOB
European Union	CIF
United Kingdom	CIF
Australia	FOB
New Zealand	FOB
Canada	FOB
Singapore	CIF
Malaysia	CIF

CIF (Cost Freight Insurance) = Product Cost + Insurance + All Transportation costs to the Port of Destination

FOB (Free on Board) = Product Cost + Transportation costs / Export clearance costs in the supplier’s country

Bags and Luggage Manufacturers in China: A Complete Guide

Looking for bag and luggage factories in China? Look no further.

In this guide, we explain everything you need to know about finding the right manufacturer, ensuring product compliance, drafting product specification sheets and much more – when importing all sorts of bags.

How to select the right bags and luggage factory

Many established bag and luggage manufacturers are based in China’s southern Fujian province. However, there are far more important factors to consider, when selecting the right manufacturer.

This is a rather developed industry, with some manufacturers dating back to the late 1980s. But with so many factories, and trading companies, to choose from – you need to understand what really matters:

1. Product focus and price range

The bag and luggage industry is big, and manufacturers are always specialized in a certain category. Within different bag categories, you’ll find that the suppliers also specialize in different price ranges.

Some manufacture high end bags for luxury brands, while others are geared towards fast fashion brands such as Zara and H&M.

If you go even further down the ladder, there are manufacturers that specialize in promotional bags. ‘Giveaway quality’ might not be the right choice if you aim for something more high end.

Yet, a “Giveaway cosmetics bag” supplier might have big brand name buyers, like Nivea. They may also look really good on paper in all other aspects – but still not be the right for your business.

Thus, the most important thing to consider is the product focus and price range.

Let’s summarize it as follows:

Price ranges

High end
Medium / Fast fashion
Promotional / Giveaways

2. Company Data

Every company in China holds a business license. This document is maintained by all factories, but the data can also be obtained online (in Chinese only though).

When you source bag producers, this is what really matters:

a. Registered Capital: You cannot access reliable financial data from Chinese companies, but you can get a clue about their scale of operations, by looking at the amount of registered capital.

While this is not a very capital intensive industry, suppliers with RMB 1,000,000 or less, are less likely to be a manufacturer. The more, the better.

b. Business Scope: Look for words such as “bags” and “luggage” to determine if the supplier is truly focused on bag manufacturing.

In addition, “production” or “manufacturing” should be mentioned, as this indicates that the company is licensed as a manufacturer, and not a trader.

3. Documents

Finally, we look at the documentation.

a. Product Certificates

In the EU and US, chemical regulations apply to bags and luggage. For example, PU leather may not contain certain plasticizers, such as phthalates.

Many suppliers don’t have any control of such substances, meaning that they don’t know whether or not their materials are compliant.

Given that you are responsible to ensure compliance, it is critical that you select a bag supplier that can deliver on this. Ask for test reports of all kinds: REACH,California Proposition 65 and Heavy Metals Screenings.

b. Company Certificates

Another way to identify an organizer supplier is to look at their quality management certification, such as ISO 9001 – and their social compliance certification, which includes BSCI and Sedex.

Such suppliers tend to be geared towards developed markets.

Buyer References

The kind of customers that’s buying from the manufacturer can tell a lot about the supplier. However, big names don’t always mean the manufacturer is the right choice for your product.

Remember what I said about different quality segments?

Product Specifications

Regardless of whether you buy Private label products, or design your own bags, you need to define quality in terms of product specifications.

This is what a product specification for two types of bags might look like:

SPECIFICATIONS	PU LEATHER BAG	LAPTOP BAG
Design	OEM (Custom)	ODM (Private Label)
Material	PU Leather 420 gsm	Nylon, 210 gsm
Lining	100% Polyester	100% Polyester
Dimensions	32 x 23 x 13 cm	44 x 24 x 14 cm
Inner Compartments	2	2
Front Compartments	None	1
Zipper	YKK, 12 cm	YKK, 9 cm
Shoulder Strap	L: 800 mm W: 8 mm Material: PU Leather	L: 1500 mm W: 35 mm Material: Nylon
Net Weight	620 grams	590 grams
Max Weight	7 kgs	15 kgs
Standards	None	REACH

In addition to the spec sheet, you must also provide the supplier with design drawings for the product unit, and the inner compartments.

If you buy an ODM product, however, you can base the design on product samples provided by the supplier.

Product regulations

There are generally no regulations that apply specifically to bags in general. That said, there are multiple substance regulations and labeling requirements that apply to the materials that bag is made of.

CPSIA

Applicable to all children’s products sold in the United States. Bags and luggage marketed as suitable for children 12 years or younger, must be CPSIA compliant.

For example, ensuring compliance involve the following steps:

Identify applicable ASTM standards
Create a Children’s Product Certificate (COC) and additional documentation (i.e., Bill of Material)
Create a tracking label
Submit batch samples for compliance testing and obtain test reports

CA Prop 65

Restricts more than 800 substances in consumer goods, and is mandatory if you intend to sell to buyers in California. Many companies outside of California still use this standard to cover many substances at once.

REACH

Restricts substances in all consumer goods sold in the European Union. For example, PU leather may not contain certain plasticizers and heavy metals.

Labeling Requirements

While there are no labeling requirements that apply specifically to bags, there are two categories of labeling requirements that are relevant:

Material labeling requirements
Country of origin

First, country of origin (i.e., Made in China) labeling is mandatory in the United States, but not in the European Union.

Second, material labeling requirements depend on the main materials of the bag. If you buy canvas bags, you must ensure compliance with applicable textiles labeling requirements. This involves the fiber composition, care labeling and more.

However, if you import a bag made of leather, or even PU, a completely different set of labeling requirements applies.

Ensuring compliance when importing from China

As mentioned in this article, it is critical to work with suppliers that have experience with American and European product regulations.

However, even when you are sure of the supplier’s capability to manufacture compliant bags, you must communicate all your product compliance requirements in advance, and provide them with ready made labeling files.

Minimum Order Quantity (MOQ)

The MOQ for bags is normally set at around 500 to 1000 pcs per model. However, some manufacturers, which may not always be the smallest as many do assume, offer lower MOQs.

Sometimes, as low as 100 to 200 pieces per model. This does, however, come at a higher unit price.

When importing bags, there’s more than just one MOQ requirement to take into consideration. While the supplier sets an MOQ on a per model basis, there are also two separate MOQs on a per color and material basis.

These two MOQs are mostly reflections of the requirements set by the subcontractors, and can vary based on the material and the color. This is how the MOQ might be structured:

MOQ per design: 500 pcs
MOQ per material: 250 pcs
MOQ per color: 250 pcs

By researching the suppliers MOQ structure, you can create several different models, or at least variations of the same models, rather than buying that one blue bag in 500 pcs.

Compliance requirements also have an impact, as the MOQ for REACH and CA Prop 65 compliant materials tend to be higher.

Quality Inspection

What could possibly be worse than a laptop bag that can’t carry the weight of a laptop? Well, that actually happened.

The only way to ensure that your bag is made according to specification, is to hire a quality inspector to check up on the goods prior to shipment.

A quality inspection is never improvised, but follows a specific checklist. This is what a quality control checklist for laptop bags might look like:

Visual inspection: Dirt, damages, incorrect colors, other cosmetic defects
Dimensions
Maximum weight check
Water resistance check

However, this requires that you have communicated your specifications and quality requirements prior to production.

Sunday, October 16, 2016

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