Method 5: what information will be needed from the foreign manufacturer

The buyer knows how much it pays for the equipment. But how much did the factory spend to make it? Materials, labour and production expenses are not usually disclosed in a commercial invoice. Those are the figures that will be needed if customs value has to be determined under method 5.

This method starts with the manufacturer's costs. Profit together with general expenses is then added, as well as the transport and related costs provided for by the Code. The resulting amount is called the computed value. The rules are set out in Article 44 of the Customs Code of the Eurasian Economic Union (EAEU Customs Code).

When goods are purchased through a trading company, the importer may have an invoice showing that the factory sold the equipment to the intermediary for 70,000 and the intermediary resold it for 85,000. Such a document explains two sale prices. It does not show the costs of manufacturing the goods, so it is not enough for method 5.

Production data usually has to be obtained from the factory itself. The sales department may help transmit the documents, while the composition of costs and their allocation among products are explained by the staff who maintain the accounts or calculate production cost. Whether the basis for the calculation can be assembled depends on the manufacturer's willingness to disclose that information.

Earlier methods of determining customs value are considered before method 5. First comes the transaction value of the imported goods themselves, followed by transactions involving identical and similar goods. Methods 4 and 5 are then considered. The declarant may request that the order of those two methods be reversed and move to method 5 before the deductive value method.

The main requirement for the source data is stated directly in Article 44: information about production must be supplied by or on behalf of the manufacturer and supported by the manufacturer's commercial records. A purchase invoice issued by a trading intermediary shows the resale price between companies but does not disclose the factory's production costs.

A request to the manufacturer should identify the contract or order, model, item number, quantity and production period of the shipment. If the goods are made in different versions, the specific version should be identified. Otherwise, the costing received may relate to similar products but to a different shipment or a different version of the equipment.

A per-unit and per-batch costing makes it possible to compare the total with the number of units produced. It may show materials, production expenses and indirect expenses separately. Indirect expenses relate to several types of products at once and are allocated among them. If one workshop makes five models, the calculation should explain what part of the workshop's expenses was allocated to the required model.

The set of supporting documents depends on the production process itself and the accounting rules in the country where the factory is located. These may include invoices for raw materials, production reports, accounting registers and internal calculations allocating expenses. The key point is that the final figure in the costing can be traced back to the source data and relates to the required goods and period.

The Rules approved by Decision No. 273 of the Board of the Eurasian Economic Commission (EEC) dated 12.12.2012 link the calculation to the manufacturer's commercial records and the generally accepted accounting principles applied in the country of production. In international practice, the abbreviation GAAP is often used for this concept. For method 5, what matters is which accounting rules applied in the country of production during the relevant period.

Once the costing has been obtained, its components should be checked. Production costs include, among other things, packing materials and packing work, as well as containers that are treated together with the goods for customs purposes. If the factory has already included them in the production amount, they must not be added to the calculation again.

The buyer may have supplied the factory, free of charge or at a reduced cost, with raw materials, components, consumables, tools, moulds or technical developments. The factory did not buy them at its own expense, so its production costing may not include those costs. Article 44 provides for the inclusion of an apportioned value of certain goods and services supplied by the buyer for the production of the imported goods.

If one tool or mould is used for several shipments, there must be a clear method for allocating its value. For example, the full value of a mould should not automatically be included in one small shipment if in fact it is used to make goods for several shipments. The calculation should show what part of the value was allocated to the current import and why.

There is a special rule for design, development, engineering, engineering-design work, artistic design, sketches and drawings performed in the territory of the EAEU. Their value is included under method 5 only to the extent paid by the manufacturer. For development work carried out in Russia, it is therefore necessary to establish who paid for it and whether the relevant amount was included in production costs. The same expense must not be counted twice.

Article 44 requires profit and general expenses to be considered together. General expenses include direct and indirect commercial and administrative costs of producing and selling the imported goods for export to the EAEU, to the extent those amounts have not already been included in the production part of the calculation.

For comparison, sales of goods of the same class or kind are used, produced in the same country as the goods being valued and sold for export to the territory of the EAEU. Where possible, a narrower group of goods for which suitable information is available is selected.

A low manufacturer profit therefore does not by itself show that the combined figure is too low. The manufacturer may have higher general expenses. Rules No. 273 provide for these amounts to be assessed together. If the manufacturer's information does not correspond to information available to customs about the usual profit and general expenses, customs may use its own data. When making such a calculation, it must inform the declarant of the sources of information and the calculations made.

Delivery is checked separately. The calculation includes the costs provided for by the Code up to the place of arrival in the customs territory of the EAEU or another place designated by the EEC for the relevant transport. These are transport, related loading, unloading and transshipment, and insurance. If the contract carries the goods farther to a Russian warehouse, the entire route cost cannot automatically be included. It is useful to obtain a route breakdown from the carrier and at the same time check whether the factory has already included the same transport in its costing.

Consider a hypothetical example. Assume that the grounds for method 5 are established, all amounts are documented and expressed in one notional currency.

Production costs for the shipment were 60,000. Containers and packing are already included in that amount. The Russian buyer supplied a mould free of charge, and 4,000 of its value is properly attributable to this shipment. That amount is not included in the factory's 60,000. The manufacturer also paid 1,000 for drawings prepared in Russia, and that payment is not yet included in the costing.

The documented amount of profit and general expenses is 12,000. Delivery to be included is 3,000.

The result is:

Under the assumptions of the example, the computed customs value is 80,000. Article 44 does not establish a universal percentage of profit or general expenses for all manufacturers.

Method 5 can also apply between unrelated companies. The ability to obtain the calculation depends on the manufacturer that holds the production data. Without the manufacturer's participation, an intermediary's invoice will not make it possible to reconstruct the materials, costs and other required components.

At the same time, paragraph 6 of Article 44 generally prohibits customs authorities from requiring a foreign person to provide documents and information for determining the computed value, except in cases provided for by international treaties and acts. Verification of information supplied by the manufacturer in the country of production is possible with the manufacturer's consent, after prior notification of the competent authority of that country and provided that authority raises no objection. Such verification is carried out subject to the international treaties of the relevant Member State.

If the manufacturer refuses to disclose its costing, there may not be enough data for method 5. But that refusal concerns access to production information specifically. In a dispute over a previously declared transaction value, it is necessary to check separately which customs questions about the transaction itself remained unanswered.

Andrey Bernev, customs lawyer