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CUSTOMS VALUATION SYSTEM (TM3)

Handout No. 2

NAME: _______________________________ PREPARED BY:

YEAR & SECTION: _______________________ LESTER M. DE CHAVEZ, LCB
INTRODUCTION
This handout provides an introduction to Customs Valuation, a procedure applied to determine the customs
value of goods. This process is a critical aspect in the field of Customs Administration.
The World Customs Organization (WCO) and the World Trade Organization (WTO) play significant roles in
this area, providing guidelines and regulations that govern customs valuation worldwide. These methods of
valuation are set out in a sequential order of application, with the “transaction value method” being the
primary method of customs valuation. The study of these methods provides students with the knowledge
and understanding needed to effectively determine the customs value of goods.
OBJECTIVES:
At the end of this handout, students shall be able to:
• Identify Methods of Valuation
• Explain the concept of Primary Method of Valuation, Method 2 and Method 3
• Develop critical thinking skills in evaluating and analyzing customs valuation methods and
regulations.
TOPICS
SECTION 701 – Method One – Transaction Value System (Concept)
• Price Actually Paid or Payable (PAPP)
• Mandatory Additions (MA)
• Permissible Deductions (PD)
SECTION 702 – Method Two – Transaction Value of Identical Goods (Concept)
SECTION 703 – Method Three – Transaction Value of Similar Goods (Concept)

WTO VALUATION SYSTEM

A set of rules to determine dutiable value.
Applies only to articles subject to ad valorem duty.

PRINCIPLES IN THE DETERMINATION

In determining dutiable value:
a. There is a need for a fair, uniform and neutral system for the valuation of goods for customs
purposes that precludes the use of arbitrary or fictitious dutiable values;
b. The basis for valuation of goods for customs purposes should, to the greatest extent possible, be the
transaction value of the goods being valued;
c. The dutiable value should be based on simple and equitable criteria consistent with commercial
practices and that valuation procedures should be of general application without distinction between
sources of supply; and
d. Valuation procedures should not be used to combat dumping
METHOD ONE-TRANSACTION VALUE SYSTEM
The primary method in determining the dutiable value of imported goods shall be Method One: The
Transaction Value, whenever the conditions prescribed for its use are fulfilled.
Standard: sequential rule in valuation
However, if the dutiable value cannot be determined with the use of Method One, the following valuation
methods shall be applied in sequential order:
Method Two: The Transaction Value of Identical Goods
Method Three: The Transaction Value of Similar Goods
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 Method Four: Deductive Value
Method Five: Computed Value
Method Six: Fallback Value

Exception to the sequential rule

• Importer may request that the order of application of Methods Four and Five be reversed. But if the
Commissioner of Customs determines that the reversal will give rise to difficulties in determining
dutiable value using Method Five then the request shall be denied and Method Four shall be used.
• If the importer does not request that the order of Method Four and Method Five be reversed, the
normal order of the sequence shall be followed.
Standard: use of GAAP
"Generally accepted accounting principles (GAAP)" -refers to the recognized consensus or substantial
authoritative support within a country at a particular time as to which economic resources and obligations
should be recorded as assets and liabilities,

• which changes in assets and liabilities should be recorded, how the assets and liabilities and changes
in them should be measured,
• what information should be disclosed and how it should be disclosed, and which financial statements
should be prepared.
• these standards may be broad guidelines of general application as well as detailed practices and
procedures.
BOC shall utilize information prepared in a manner consistent with GAAP in the country which is
appropriate for the Valuation Method in question.
• For Method Four it shall be PH GAAP
• For Method Five it shall be GAAP of country of exportation
Methodology in the use of Method One: Transaction Value
1st Ascertain whether conditions are fulfilled. All the conditions must be fulfilled. Even if only 1 of
the conditions is not fulfilled go to next valuation method
2nd Determine the price actually paid or payable (PAPP) and costs that are to be included in the
PAPP
3rd Determine applicable adjustments (mandatory additions) that should be added to PAPP
4th Determine the post importation charges or permissible deductions
CONDITIONS THAT MUST BE FULFILLED BEFORE METHOD ONE MAY BE USED
Condition 1: There must be sale for export to the Philippines
Condition 2: No restriction as to disposition except acceptable restrictions
Condition 3: No consideration or condition for which value cannot be determined with respect to
goods being valued
Condition 4: There are no proceeds of subsequent sale that accrue to benefit of seller
Condition 5: Relationship must not have influenced price
CONDITION 1: THERE MUST BE SALE FOR EXPORT TO THE PHILIPPINES
Only transactions involving an actual international transfer of goods may be used in valuing merchandise
under the transaction value method.

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 • Transfer of goods from a from a foreign country to Philippines
• Sale from free zone to customs territory the TV of imported materials when admitted shall be
used
• Sale from CBW to domestic market the TV of imported materials when deposited to CBW shall
be used.
How sale may be described
1. A commercial operation which involves a buyer and a seller;
2. The buyer agrees to obtain certain goods while seller agrees to supply certain goods;
3. There is change of ownership on agreed delivery date and method of delivery for a given price

Instances when there is no sale in an international transaction

1. Free consignments, like, gifts, samples and promotional items;
2. Goods imported by intermediaries, who do not purchase the goods and who sell them after
importation;
3. Goods imported by branch office which are not separate legal entities
4. Goods imported under a hire or leasing contract;
5. Goods supplied on loan, which remain the property of the sender.
6. Goods imported on consignments
CONDITION 2: RESTRICTIONS AS TO DISPOSITION
• There must be no restrictions by the seller to the buyer as to the disposition or use of the goods
• Acceptable restrictions:
a. Imposed or required by law e.g. FDA, BPS etc.;
b. Limit the geographical area in which the goods may be resold; e.g. may be sold only in Luzon and
not nationwide
c. Do not substantially affect the value of the goods. - a seller requires a buyer of automobiles not to
sell or exhibit them prior to a fixed date which represents the beginning of a model year

• goods may only be sold during a promotion period

• Seller may require specific channel of distribution in the sale of goods
• Direct selling rather than sale through department stores
CONDITION 3: THE SALE OR PRICE MUST NOT BE SUBJECT TO SOME CONDITIONS OR CONSIDERATIONS FOR
WHICH A VALUE CANNOT BE DETERMINED WITH RESPECT TO THE GOODS BEING VALUED.
a. The seller establishes the price of the imported goods on condition that the buyer will also buy other
goods in specified quantities;

• Seller establishes price at US$ 5.00 for a pair of slippers if buyer will also buy 100 pairs of
shoes
b. The price of the imported goods is dependent upon the price or prices at which the buyer of the imported
goods sells other goods to the seller of the imported goods;
- The buyer is also a seller. While the seller is also a buyer
- Seller “A” will sell at US$5.00 per pair of slippers made in Holland if Buyer “B” will sell to Seller “A”
beautiful handcrafted shoes made in the Philippines at US$25.0
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Conditions or considerations relating to the production or marketing of the imported goods shall not result
in rejection of the transaction value
a. Buyer furnishes the seller with engineering and plans undertaken in the Philippines shall not result in
rejection of the use of Method One in valuing imported goods - Buyer “A” in the Philippine orders Bahay
Kubo from China but engineering design is done in PH.
b. Buyer undertakes on his own account, even though by agreement with the seller, activities relating to the
marketing of the imported goods, and the value of those activities is not part of the dutiable value nor shall
such activities result in rejection of the transaction value.
CONDITION 4: PROCEEDS OF SUBSEQUENT SALE
No part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue
directly or indirectly to the seller, unless an appropriate adjustment can be made at the time of importation.

• Importer sells imported goods in the domestic market and a portion of sales accrues to the benefit
of the foreign supplier. Even if proceeds of subsequent sale accrues to the benefit of the supplier
use of Method One is not precluded. Condition: if at the time of entry the amount to be remitted for
the benefit of the seller can be quantified. In which case it shall be considered as an adjustment
(Mandatory Addition) to PAPP.
• Seller requires the buyer to remit 20% of FOB purchase price after sale of the imported goods in the
domestic market.
CONDITION 5: THE BUYER AND THE SELLER ARE NOT RELATED, OR WHERE THEY ARE RELATED, SUCH
RELATIONSHIP DID NOT INFLUENCE THE PRICE OF THE GOODS
Situations where there is relationship between buyer and seller:
1. They are officers or directors of one another's businesses;
2. They are legally recognized partners in business;
3. They are employer and employee;
4. Any person directly or indirectly owns, controls or holds five (5) per cent or more of the
outstanding voting stock or shares of both of them.
5. One of them directly or indirectly controls the other;
6. Both of them are directly or indirectly controlled by a third person;
7. Together they directly or indirectly control a third person;
8. They are related by affinity or consanguinity up to the fourth civil degree

RELATIONSHIP
a. Relationship will not automatically result to rejection of the use of Method One.
• If there is relationship the use of Method One may only be rejected if such relationship influenced
price
b. Persons who are associated in business with one another, in that, one is the sole agent, sole distributor or
sole concessionaire are not related unless they fall within the category of the 8 types of relation.
Proving relationship did not influence price
1.The circumstances surrounding the transaction demonstrate that the relationship did not influence
PAPP:
Examples:

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 a. If the price had been settled in a manner consistent with the normal pricing practices of the
industry in question or with the way the seller settles prices for sales to buyers who are not
related to the seller,
b. Where it is shown that the price is adequate to ensure recovery of all costs plus a profit
which is representative of the firm's overall profit realized over a representative period of
time (e.g. on an annual basis) in sales of goods of the same class or kind.
2. The transaction value closely approximates to one of the following test values occurring at or about
the same time (45 + or – date of exportation: date of BL or AWB):
a. The transaction value in sales to unrelated buyers of identical or similar goods for export
to the Philippines; or
b. The deductive value of identical or similar goods determined in accordance with Method
Four; or
c. The computed value of identical or similar goods determined in accordance with Method
Five. The test values are to be used at the initiative of the importer, for comparison only and
not as substitute values
METHOD ONE - TRANSACTION VALUE: DESCRIPTIVELY
TV = PAPP + Adjustments
Where: PAPP = Price Actually Paid or Payable
TV = Transaction Value
Adjustments = Mandatory Additions
PRICE ACTUALLY PAID OR PAYABLE (PAPP)
• Price actually paid - supplier paid by the time import entry is filed - prepaid, at sight L/C but
negotiated before entry filing, D/P
• Price payable - supplier not yet paid at the time import entry is filed
• Deferred payment (D/A; O/A, USANCE L/C) to be settled after entry filing
• Customs may ask for proof of payment to evidence accuracy of entered value
1. The total payment made or to be made by the buyer to or for the benefit of the seller for the imported
goods. - value of the goods expressed in price
2. The payment need not necessarily take the form of a transfer of money. - Payment may be made by way
of letters of credit or other modes of payment like D/P, D/A, O/A, direct payment
3. Refers to the price for the imported goods. - Thus, the flow of dividends or other payments from the buyer
to the seller that do not relate to the imported goods are not part of the dutiable value.
4. Expressed in INCOTERMS 2020 – Except “D” terms

PAPP OF “SOLD FOR EXPORT IN A SERIES OF SALES

• In a series of sales situation, the price actually paid or payable for the imported goods when sold for export
to the Philippines is the price paid in the last sale occurring prior to the introduction of the goods into the
Philippines, instead of the first (or earlier/earliest) sale.

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TO BE INCLUDED IN PAPP
This is not in the context of mandatory additions and should be included and not added to PAPP.
1. Down payment &Transaction is $50,000 FOB with $10,000 down payment by T/T and balance of $40,000
by L/C. Invoice issued is only for US$40,000. PAPP is $50,000.
2. Indirect payment § an indirect payment would be the settlement by the buyer, whether in whole or in
part, of a debt owed by the seller.
Example: Exporter “A” delivers to Importer “B” last month but “B” partially rejected the shipment
and bills “A” US$500.00. Today “B” issued Purchase Order to “A” for US$2,500.00 representing new
order but has deducted the US$500.00. The agreed price covered by the PO is US$3,000.00.
3. Discounts which must be prospective and not retrospective
• Offer is 10% discount for the purchase of 1,000 pieces of Product “A”. Regular price is US$500,000
for 1,000 pieces.
• Buyer “A” ordered 500 pieces and paid $250,000.00. After 2 months again ordered 500 pieces and
was given the 10% discount. Seller “A” issued invoice for 500 pieces with price of $200,000
ADJUSTMENTS/MANDATORY ADDITIONS IF CONDITIONS MET CARP-PIT-LUH
1. C – Commissions and brokerage fees
2. A – Assists
3. R - Royalties and fees
4. P - Packing and Container Costs
5. P – Proceeds
6. I – Insurance
7. T - Transport Cost
8. LUH – Loading, unloading and handling associated with transport cost of goods

ADJUSTMENTS/MANDATORY ADDITIONS
Conditions before adjustments can be made:
1) to the extent that they are incurred by the buyer,
2) provided there is objective and quantifiable data to form the basis of the adjustment, and
3) if such value has not been included in the PAPP:

MANDATORY ADDITIONS

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1) Commissions and brokerage fees (except buying commissions);
▪ Commissions and brokerage fees include selling commissions which are paid by the seller to his agent
in the promotion and sale of his products.
▪ Selling commission may take the form of an indentor’s commission, selling agent's commission, or
manufacturer's representative commission.
▪ The term brokerage fees refer to a commission paid to a broker who arranges the transaction
between a seller and a buyer. Such may be paid by the seller or the buyer or by both the seller and
the buyer.
▪ Buying commissions are fees paid by an importer to the importer's agent for the service of
representing the importer abroad in the purchase of the goods being valued.
2) Cost of containers which are treated as being one for Customs purposes with the goods in question;
3) Cost of packing whether for labor or materials;
4) Assists
▪ The value, apportioned as appropriate, of certain goods and services supplied directly or indirectly
by the buyer free of charge or at a reduced cost for use in connection with the production and sale
for export of the imported goods, to the extent that such value has not been incorporated in the
price actually paid or payable.
a. Materials, components, parts and similar items incorporated in the imported goods;
b. Tools, dies, moulds and similar items used in the production of the imported goods;
c. Materials consumed in the production of the imported goods; and
▪ Engineering, development, artwork, design work, and plans and sketches undertaken elsewhere
than in the Philippines and necessary for the production of the imported goods
5) Royalties and license fees related to the goods being valued that the buyer must pay, either directly or
indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not
included in the price actually paid or payable;
▪ The royalties and license fees may include, among other things, payments in respect to patents,
trademarks and copyrights. However, the charges for the right to reproduce or resell the imported
goods in the Philippines shall not be added to the price actually paid or payable for the imported
goods in determining the dutiable value.
▪ If such payments are not a condition of the sale for export to the Philippines.
6) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods
that accrues directly or indirectly to the seller;
▪ Example: when the contract of sale between buyer and seller states that a certain percentage of the
sales proceeds of an imported article is remitted to the seller.
▪ But to be mandatory addition the amount must be known at the time of importation - If not known
the use of Method One is not allowed
7) The cost of transport of the imported goods from the port of exportation to the port of entry in the
Philippines;

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 ▪ The cost of transportation would include those costs for physically moving the goods to the port of
entry in the Philippines. This cost could include such charges as trucking (inland freight, rail freight,
ocean freight, air freight and barge or lighterage and postal costs).
▪ How shall freight be computed in case imported goods are transported by importer’s own vessel or
aircraft?
8) The cost of insurance
▪ from port of loading to port of discharge
▪ inland insurance at country of exportation
9) Loading, unloading and handling charges associated with the transport of the imported goods from the
country of exportation to the port of entry in the Philippines; These would include, in part, the movement
of goods onto or from any conveyance. Handling would include any number of activities surrounding the
physical movement of the goods such as preparation of manifests, B/L or AWB, obtaining any export license,
and any other shipping arrangement.
All these charges must be associated with the transportation of the goods before the vessel reaches the port
of importation.
POST IMPORTATION CHARGES/PERMISSIBLE DEDUCTIONS
PIC are not dutiable if they are distinguished from the price actually paid or payable for the goods: Applicable
to “D” Incoterms.
a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after
importation on imported goods such as industrial plant, machinery or equipment;
b) Cost of transport after importation; and
c) Duties, taxes and other charges paid for the imported goods.

SECTION 702 – Method Two – Transaction Value of Identical Goods

Where the dutiable value cannot be determined under method one, the dutiable value shall be the
transaction value of identical goods sold for export to the Philippines and exported at or about the same
time as the goods being valued.
Identical goods refer to goods which are the same in all respects, including physical characteristics, quality
and reputations.
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Minor differences in appearances shall not preclude goods otherwise conforming to the definition from
being regarded as identical.
If more than one transaction value of identical goods are found, the lowest value shall be used to determine
the customs value.
Identical goods refer to goods which are:
1. The SAME in ALL RESPECTS, including:
a. Physical Characteristics
b. Quality
c. Reputation
(CODE: PQR) {Sec.702}
2. Produced in the SAME COUNTRY as the goods being valued; and
3. Produced by the SAME PRODUCER of the goods being valued

SECTION 703 – Method Three – Transaction Value of Similar Goods

Where the dutiable value cannot ne determined under the preceding method, the dutiable value shall be the
transaction value of similar goods sold for export to the Philippines and exported at or about the same time as the
goods being valued.

“Similar goods” refer to goods which, although not alike in all respects, have like characters and similar component
materials which enable them to perform the same functions and to be commercially interchangeable. The quality of
the goods, its reputation and the existence of a trademark shall be among the factors to be considered in determining
whether goods are similar.

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 CUSTOMS VALUATION SYSTEM (TM3)
ACTIVITY
NAME: ______________________________ DATE: _________________
YEAR & SECTION: _____________________
IDENTIFICATION
DIRECTION. Identify what is being asked in the following statements.
_______________________1. It is the procedure applied in determining the customs value of imported
goods.
_______________________2. It refers to the price actually paid or payable for the goods when sold for
export to the Philippines adjusted in accordance
_______________________3. If the Customs Value cannot be determined under the provisions of
Transaction Value System, it is determined by proceeding ________ through the succeeding sections
hereof to the first such section under which the customs value can be determined.
_______________________4. When the customs value cannot be determined under Transaction Value
System through Transaction Value of Identical goods, the customs value can be determined by
___________________.
_______________________5. It is essential in determining the amount of customs duty to be paid on
imported goods when the rate of duty is ad valorem.
_______________________6. It represents the total payment made or to be made by the buyer
(importer).
_______________________7. Where the dutiable value cannot be determined under Method One, the
dutiable value shall be the _____________________ sold for export to the Philippines and exported at or
about the same time as the goods being valued.
_______________________8. In applying Method 2, more than one transaction value of identical goods
are found, what shall be used to determine the customs value?
_______________________9. Where the dutiable value cannot be determined under Transaction Value of
identical goods, the dutiable value shall be the ____________ sold for export to the Philippines and
exported at the same time as the goods being valued.
_______________________10. It refers to the primary method of determining dutiable value of imported
goods.

ENUMERATION
DIRECTION. List down or enumerate what are being asked on each of the following item.
1-5 Conditions that must be fulfilled before method one may be used.
6-9 Mandatory addition applicable to all Incoterms.
10-13 Permissible Deductions
14-16 Conditions before adjustments can be made.
17-20 Acceptable restrictions

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