Mexico: Methods for determining customs value and their practical application

The value of goods is one of the most important concepts in foreign trade, particularly in import operations and occasionally in export operations, as previously mentioned in previous articles.

This value is the basis for determining foreign trade taxes, as well as other taxes and contributions applicable to the importation and exportation of goods into Mexican territory.

This value is the amount upon which the corresponding rate or tariff is applied to determine the amount of taxes applicable to foreign trade operations, whether import or export, as the case may be.

The concept of customs value—and, in general, customs valuation—is regulated by the Customs Law (LA). At first glance, it may seem like a simple concept, but analyzing each of its elements can be a significant challenge, especially in transactions between related parties or companies part of a group.

Sometimes, the concepts and definitions associated with customs value have a subjective component, due to the degree of valuation of the products, their use, destination, individual characteristics, and brand, among other factors. These situations introduce complexity into determining the true value for customs purposes.

Since customs value is an essential element in determining various foreign trade taxes, it must be clearly defined and based on an objective legal basis in accordance with both the Mexican United States Constitution and the Federal Tax Code.

Like the tariff classification of goods, the general concepts of customs valuation have an international origin. The General Agreement on Tariffs and Trade (GATT) and the Customs Valuation Code (CVA) derived from it, along with their notes and additional provisions, establish important provisions that must be considered when determining what is meant by customs value, as well as the specific elements and circumstances that affect it.

In this regard, the Customs Law establishes various rules and regulations that govern this concept, which represents the basis for import taxes and other contributions applicable to the importation of goods into national territory and which, in general terms, reflect the regulations established by the GATT in the CVA.

The customs valuation rules are set out in articles 64 to 78-C of the Customs Law and their interpretation and application are established both in the regulations of said law and in the so-called General Administrative Guidelines in Foreign Trade Matters.

It is important to note that the Customs Law itself establishes the application of the foreign trade tax base to the quota corresponding to the goods established according to their tariff classification, emphasizing the relevance of this concept in foreign trade operations.

To determine the customs valuation or customs value of goods, it is important to consider that this value largely depends on subjective factors such as material, quality, or brand. Therefore, even among goods that are identical in terms of use and tariff classification, there may be significant differences in value depending on the various elements that comprise them.

In Mexico, the customs value of imported goods is generally considered to be the value indicated on the invoice or purchase document, representing the price paid for said goods by the importer. However, sometimes the amount paid does not accurately reflect the true value of the goods subject to valuation, nor the various provisions regarding the determination of this concept under the Mexican statute.

It is important to consider that this concept not only includes the quantity or amount paid for a given merchandise but must also include other concepts or elements that form part of the total cost or actual value paid by the importer prior to the merchandise being introduced into Mexican territory.

Failure to comply with the elements and regulations on which the customs value of a good must be calculated (such as time, place, quantity and commercial level) may result in a potential "undervaluation" of the same, which will ultimately translate into taxes and contributions omission  that may trigger  administrative or even criminal offenses, as such undervaluation is one of the causes for the existence  of smuggling.

To calculate the customs value, the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT) and the LA establish six alternatives for determining the customs value of goods, which must be applied by exclusion and in order of priority.

These alternatives are in essence:

• Transaction value or price paid or payable for the goods.
• Transaction value of identical goods.
• Transaction value of similar goods.
• Deductive or subtractive method or unit sales price value in the importing country.
• Reconstructed value or estimated value, based on the cost of materials, manufacturing, profit, overhead, transportation, handling, and insurance.
• Method of last resort if it is not possible to calculate the value in accordance with the above methods.

Under Mexican law, the transaction value is the method considered the basis for determining the customs value of goods; that is, the price paid or payable for certain merchandise.

However, this amount must also be added by other (incremental) concepts to the extent that these are in charge of the buyer and not included in the price paid or payable.

Among these concepts we can include:

• Sales commissions.
• Brokerage fees.
• Packaging.
• Transportation, insurance, handling, loading, and unloading costs.
• The value of goods and services that the importer supplies free of charge or at reduced prices for the production and sale of the imported goods.
• Royalties and license fees related to the goods that the importer must pay directly or indirectly as a condition of sale of the goods when these are not included in the price paid.
• Value of any part of the proceeds from the subsequent sale, transfer or use of the imported goods that revert to the seller.

There are certain items excluded from the customs value, such as certain expenses or costs, which will be deducted from the price paid or payable, provided these are distinguished from the value itself, and are expressly included in the commercial documents.

As a general rule, the customs value for the importation of goods into Mexico is the transaction value, this is, the price paid or payable upon the goods, plus the mentioned items.

However, this value is only applicable when certain conditions and requirements are met, including:

• There are no restrictions on the transfer or use of the goods by the importer, except if provided by law; these must not limit the territory for subsequent sales; or affect the value of the goods.
• That its sale for import into Mexico is subject to conditions or considerations or undetermined conditions or are directly related such goods.
• That the sales proceeds in Mexico do not revert to the seller (exporter).
• That there is no relationship between the importer and seller, unless it is duly evidenced this does not influence the price paid (transaction value).

This implies that the importer must be able to demonstrate to customs authorities that the import purchase transaction does not fall into any of the aforementioned circumstances.

In this regard, it is necessary to have this information or documentation before import operations in order to respond to the authorities should these request it.

While it may seem impossible to evidence  a "negative fact", in practice such information can be achieved through written agreements ,  correct use of INCOTERMS  applicable to the transaction and declared  in the import manifest, evidence of payments or transfers to the seller / exporter, as well as other service providers considered as  incremental, etc.

The above is confirmed by the requirement for determining such values based on “objective and quantifiable facts” as established by the LA itself.

If these requirements are not met, the following valuation methods must be applied, in order and by exclusion (identical goods, similar goods, unit sales price, etc.).

It is also possible to modify these values for payment of the applicable taxes and contributions further to the import operation if the prices, values, and amounts added to said value are modified due to situations following the import operation.

If through the information or documents for determining the applicable valuation method this cannot be duly established, the customs authorities may establish a different value, which may result in:

• Failure to pay import taxes (general import tax, customs processing fees, value-added tax, special tax on production and services, dumping duties, etc.).
• Such omissions will trigger payment of updates and surcharges on said concepts as of the import date and until the actual payment date of such differences.
• Declaration of incorrect information in import manifests that may result in fines upon formal omissions.
• Fines for failure to pay the aforementioned contributions.
• Limitations on the possibility of deducting the total amount of imported goods, as well as the accreditation or deduction of VAT.
• Potential commission of tax crimes such as smuggling, equivalent smuggling, or tax evasion.

Therefore, it is extremely important that, in import operations, all  the above elements are taken into consideration to avoid potential  import taxes assessments due to undervaluation.

This can represent a considerable administrative burden for both importers and exporters. However, conducting this analysis prior to import transactions will avoid potential tax issues in the event of a review by the competent authorities.

It is also extremely important to verify whether import transactions are actually carried out under a sales contract or whether these have another business purpose, such as the manufacturing or maquila services in Mexico.