First Sale Valuation The Ultimate FAQ Guide 1

First Sale Valuation The Ultimate FAQ Guide

If you have any question about first sale valuation, you will find the answer right here.

Whether you want to know what it is, role it plays or how to go about all aspects about first sale valuation – you will find them right here.

Keep reading to learn more.

What Is First Sale Meaning?

First sale valuation refers to a program that is aimed at reducing duty for specified products from a particular country. The duty reduction is what has been agreed between the two countries.

The main purpose of first sale valuation is basically to save costs associated with dutiable value of products.

First Sale Valuation

First Sale Valuation

Dutiable value refers to value incurred and capped from the first transaction between broker and manufacturer of a particular product.

It eliminates costs associated with utilization of middlemen.

What Is First Sale Valuation In Shipping?

An item that is being imported may be subject to several transactions, with each transaction adding to the final price paid. Because duties and tariffs depend on the value of goods being imported, the duties and tariffs due by the importer may increase.

First sale valuation is used in the determination of the real value of the goods being imported.

It enables importers under given conditions to base the valuation of a product entering the country on the first sale in several transactions.

A valuation can also be made on the last transaction. The purchase price between a buyer and the factory determines the dutiable value of a first transaction.

This is considered rather than using the price between the importer and vendor. Due to this, duties are not imposed on the vendors’ markup or any additional charges from consequent sales.

To take advantage of this, the following procedure must be met:

  • To take advantage of first sale valuation, ensure that the export goods are destined to the given country. This should occur at the time the first sale is completed.
  • Ensure that the bona fide sales are at a minimum of two before the importer’s purchase.
  • The parties which are involved must be unrelated or rather the transactions conducted apart.

Is First Sale Legal?

Yes, first sale is legal although many importers are hesitant to do so despite it bringing forth a cost-saving advantage.

Some importers suffer by having a false perception that first sale means cooking books as it requires making two invoices.

One of the invoices has the total costs the importer has paid to the middleman. The other with the first sale cost for customs valuation at the border.

Despite this seeming shady, the first sale was established in Trade Agreements Acts in 1979. It has been observed by several legal decisions and guidance customs for a very long time.

Historically, importers used to seek approval to use first sale bypassing the Customs Service Office of Regulations and Rulings (OR & R).

This process was very long and could take about one to two years to complete.

Nowadays, customs permit importers to use reasonable care to self-certify. Alternatively, they may also pass through the port of entry or via the Customs Centers of Excellent and Expertise (CEEs).

Despite it not being mandatory for customs to approve the first sale, it may assist in making audits smoother.

How Does First Sale Valuation In A 3-Tiered Transaction Work?

Value of the goods purchased normally determines the duty to be paid. This is a phenomenon seen when goods are imported into any given country.

In a 3-tiered transaction, the manufacturer sells to a middleman. The middleman includes his/her charges then forwards or sells the shipments to the importer.

The importer is disadvantaged because they will pay duty based on price forwarded by the middleman on the second sale. The higher price margins constitute the profit margin of the middleman.

First Sale in a 3-Tier Transaction

First Sale in a 3-Tier Transaction

What Are The Benefits Of First Sale Valuation To Importers?

Some of the benefits of the first sale to importers include:

  • Reduction of customs duties on all transactions from a vendor who has implemented the first sale.
  • This leads to increased profits and the goods are offered at more competitive rates.
  • Ensures there are no paying duties on certain incidental costs and indirect costs.

Who Is Eligible For The First Sale?

Importers using a multi-tiered transactions are the ones eligible for the first sale. The goods eligible for first sale valuations should be the first to be brought in the country.

Is The First Sale Rule Applicable To All Commodities?

Initially, first sale rule was used primarily in industries like uniforms and sportswear with particularly extensive FOB volumes and elevated duty rates.

With the recent trade agreements between different countries, companies are being impacted when it comes to duty free status.

This is because many of the countries have reintroduced duties on merchandise.

How Do I Implement The First Sale Within My Business?

For your business to be eligible, it must meet the first requirements as put in place by customs.

It is important to establish internal procedures and controls to ensure that the entire process stands up to scrutiny from customs.

First sale program which is well documented will make audits easy and provide clear manual backup expressing that products meet the requirements.

Where there is transparency and close supply chain relationships, importer will be able to trust factories are establishing first sale value.

It is important to carry out regular assessments to make sure that the requirements for the first sale are continuously met.

What Are The Requirements For First Sale Valuation?

The requirements for first sale valuation include:

  • Should be Bona fide; intermediary’s transaction between them and manufacturer should be a bona fide sale and be complete with transfer of title.
  • Should be enroute for export in the relevant country at the first sale period. For example, products are specially labeled or designed based on the standards of the relevant country.
  • The transaction should be at “arm’s length” or be free of non-market influences. The manufacturer and the intermediary should not be related or if related, the transactions should be conducted at “arm’s length”.
  • All the dutiable cost should be declared.

Which Factors Indicate Whether A Bona Fide Sale Has Occurred In A First Sale Valuation?

The reason why transaction constituting goods do not make up bona fide sales is that the goods are subjected to a sale.

These goods are usually shipped on consignment making it hard or impossible for them to be appraised based on their transaction value.

For goods’ transactional value to be appraised, it is important to ensure that they are not shipped into a country as consignment.

Goods that are imported are also not categorized as bona fide sales in the following cases:

  • If the goods are promotional items and are to be issued for free.
  • Gifts
  • Samples
  • Items indicated to be leased while in real sense were loaned out.

Some of the factors which determine whether a bona fide sale has occurred in the first sale valuation include documentary evidence like:

  • Distributions
  • Company brochures or reports
  • Purchase orders
  • Invoices
  • Bills of lading
  • Correspondence between the parties
  • Proof of payment

Are Incoterms Of Significance In First Sale Valuation?

In scenarios where there is no other pertinent evidence, customs may determine whether a bona fide sale observed the terms of sale. This will show whether there was a transfer of the title and loss of risk.

In the absence of this, the sales term may be looked as part of the perspective of the whole situation. This is established together with the evidence gathered in totality.

The customs will primarily consider taking control of the sale terms given on the written contracts, invoices, and merchandise sales.

This means that all incoterms will follow the “Uniform Commercial Code” and “Incoterms 2020”.

However, this may only be exempted if the parties involved show via contracts, agreements, or course of dealing.

An important factor to be considered is showing that meanings to the terms have been utilized differently.

During A Multi-Tiered Transaction, At What Point Is It Clear That Goods Are Destined For Import Into The Respective Country?

Determining the point at which it is clear goods are destined for import in multi-tiered transaction may be made on an itemized basis.

Customs will put in mind that the goods are destined to be an import of a given country once evidence is available.

The evidence tends to prove that from the time the middlemen purchased the imported goods, the only possible destination was the respective country.

These goods should from the beginning possess the following specifications of the respective country:

  • Conform to the relenant country’s design specifications for example material, models, and colors.
  • Possess the relevant country’s labels, stock numbers, logos, and barcodes.
  • Should be destined strictly to a particular country with no room for diversion.

Which Documents Are Required To Support A First Sale Claim?

First Sale Transaction

First Sale Transaction

Some of the documents required to support the first sale claim include:

  • Purchase order from importer to vendor
  • Purchase order from a vendor to factory
  • Invoice from the factory to the vendor
  • Payment from the importer to the vendor
  • Payment from the vendor to the factory
  • Contracts between the parties involved
  • Any other additional documents that could support a first sale claim

When Is A Sale Considered To Have Been Conducted At “Arm’s Length” In First Sale Valuation?

While there may be approval of the first sale for related parties, customs may demand evidence that cost is a Bonafede arms-length transaction.

This tends to be a bit challenging more so if the parties are related to one another.

In this case, a sale would be viewed reachable.

The interaction between seller and the buyer should not have influenced the payable price or the price paid.

What Is Tariff And HS Classification And Why Does It Matter In A First Sale Valuation?

Tariff and HS classification are international systems used to classify imported or exported goods. They exist for all products which are involved in global trade

The classification is based on an international classification system.

It makes it possible for communication between customs departments and different countries.

Having the appropriate tariff classification codes on goods ensures your trade practices are compliant and saves a lot of money.

Very many countries around the world use 10-digit HS codes for classification and reporting imported goods.

Tariff and HS classification help to determine the number of duties required on every imported item. This helps ensure that you are not paying a lot of duty than you need to or eliminating heavy fines for non-compliance.

Is There A Difference Between First Sale Valuation And Duty Drawback?

First sale valuation is a legal route to cut down duty liability.

This is because goods value is declared by importer based on the first sale of a multi-tier transaction, thus lowering their duty exposure.

The importer is allowed to elect value declaration in the relevant country’s customs using the lowest of the many bona fide sales.

The chosen value may then serve as the basis of duty appraisal.

This applies so long as each of the sales is properly documented and ascertained as bona fide.

In first sale valuation, a lower declared transaction value translates into lower duties and fees imposed by the government.

Conversely, duty drawback refers to a refund of paid duties that amount to about 90 percent on imported goods into a country.

The owner of the drawback may either be a manufacturer, importer, or exporter.

What matters is that the claimant of the drawback has filed the relevant documentations for the drawback. The refund may be a reduction or waiver in part or whole of the customs duty which is assessed.

Assessment and collection of these duties occurs after the importation of the relevant materials. The main purpose of duty drawback is to encourage the relevant country’s manufacturing as well as export sales from foreigners.

The main types of duty drawback include:

  • Manufacturing substitution drawback.
  • Unused merchandise direct identification drawback.
  • Unused merchandise substitution drawback.
  • Manufacturing direct identification drawback.

What Are The Risks Of Incorrectly Implementing First Sale Programs?

Because of the large potential savings and related compliance risk, the implementation of first sale programs needs careful and experienced planning.

This is to make sure all legal requirements are met fully.

A first sale program that is implemented incorrectly may lead to several risks.

These may include massive duty exposures which are escalated by civil penalties, potential interests, and legal defense costs.

Implementation of a successful first sale program is determined by conducting rigorous auditing procedures.

What Are The Best Practice Tips For First Sale Program Management?

Some of the best practices for first program management include:

  • It is important for importers to develop long term relationships with vendors. This is especially if they are planning to do with them long term business engagements.
  • Custom compliance requires high levels of confidentially making it ideal for long term relationships between vendors and importers.
  • Partner with your customs broker in implementing a first sales process in your company.
  • You should consult with a specialist concerning the first sale such as a trusted Customs Attorney.
  • Automate workflows to reduce the amount of manual effort to maintain compliance with the first sale.
  • Make sure there is an internal escalation process should there be changes in business arrangements with your vendor or factory. This will ensure that you meet the requirements of the first sale program.
  • It is critical to ensure that the first sale transaction is developed carefully. This may be done through careful planning and coordination with suppliers.

What Is Global Trade Management Software?

It is software that assists companies in the management of their trade operations throughout the world.

GTM is mostly used by exporters and importers to enhance collaboration with trade partners and in the management of trade operations.

Global Trade Management Software

Global Trade Management Software

How Does GTM Software Help With First Sale Program Management?

The right organizational structure in place assists to assess, implement, manage, and maintain a first sale program.

This can therefore be achieved by the digitization of records using cutting-edge global trade management software (GTM).

GTM software helps in the automation of first sale invoices using customization functions that enable companies to create and send invoices.

This is done automatically by turning it on and off for different vendors as not all factories qualify for the first sale.

Flexible GTM eliminates the need for keeping a second separate set of invoices displaying the value of the first sale.

This is because the vendor still requires to be paid the full amount.

GTM software also simplifies the following processes:

  • Implementation of the first sale rule needs collaboration with your supply chain.
  • Enables importers, middlemen, and manufacturers in communicating about specifically required information and to meet the first sale rule.
  • Helps in mitigation of compliance risk.
  • Reduction of costs of imported merchandise, increasing profits, and improvement of vendor relationships as they work more closely.
  • Simplifies serious self-assessment and continual follow-up.

What Are The Common Barriers To First Sale?

Some of the common barriers for the first sale include:

  • The first sale entails a lot of costs in setting it up including establishing the required documentation and certifying suppliers.
  • In case your savings are small first sale may be cost-prohibitive. This is because it requires a manual component to maintain a first sale compliance program.
  • There is a reluctance to reveal sensitive sourcing information.

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