When shipping internationally, one field on the commercial invoice causes more confusion—and penalties—than any other: The Declared Value.
This figure, combined with your HS Classification, is the mathematical basis for your import duty. Over-declare, and you burn cash on unnecessary taxes. Under-declare, and you risk audit, seizure, and legal action.
What You Will Learn in This Guide
Methodology
- Transaction value vs. fallback methods
- Logistics: How Incoterms affect duty
Strategy
- Wholesale vs. Retail valuation
- Compliance: Avoiding "First Sale" traps
The Three Pillars of Duty Assessment
Customs agencies (like the CBSA in Canada or CBP in the USA) calculate duty based on a specific formula involving three data points:
- Declared Value: The monetary worth assigned to the goods.
- Country of Origin: Where the goods were actually made (not just shipped from).
- HS Code: The tariff classification number. Learn about HS Codes here.
Method 1: Transaction Value
The Transaction Value is the primary method used by the World Trade Organization (WTO). It is defined as the price actually paid or payable for the goods when sold for export to the country of importation.
However, "Price Paid" is not always the final number. You must adjust for:
- Additions: Packing costs, selling commissions, assists (tools or molds provided by the buyer), and royalties.
- Deductions: Construction or maintenance costs after importation, and duties or taxes already included in the price.
If you are shipping a warranty replacement or a free sample, the transaction value is not zero. You must declare the fair market value—what the item would cost if you sold it. Always mark the invoice: "Value for Customs Purposes Only - No Commercial Charge."
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The Difference Between CIF and FOB
Crucially, different countries determine the "Value for Duty" differently regarding shipping costs. This distinction can significantly alter your landed cost.
| Valuation Method | What is Included? | Primary Regions |
|---|---|---|
| FOB (Free on Board) | Cost of Goods + Export Packing | USA, Australia |
| CIF (Cost, Insurance, Freight) | Cost of Goods + Export Packing + Shipping and Insurance | Canada, Europe, UK |
Example: If you ship a $1,000 laptop to Canada (CIF) with a $100 shipping cost, the GST and Duty are calculated on $1,100. If that same laptop goes to the USA (FOB), duty is calculated on $1,000.
The Great Divide: Transaction Value vs. The "No Sale" Valuation
In the world of business valuation, there is often a massive disconnect between what a business owner thinks their company is worth and what a valuation report says it is worth. This confusion usually stems from mixing up two distinct concepts: Transaction Value and "No Sale" Valuation.
To make smart decisions, you must understand whether you are looking at a real-world deal or a hypothetical model.
1. Transaction Value: The "Real World" Price
Transaction value is the specific price paid in an actual deal between a specific buyer and a specific seller. It is messy, human, and influenced by unique circumstances.
This value is not just about the math; it is about the story between two parties.
- Strategic Synergies: A buyer might pay a premium because your company owns a patent that fits perfectly into their existing product line.
- Emotional Factors: A buyer might be in a rush, or a seller might be distressed and desperate for cash, drastically altering the price.
- Investment Value: This represents the value of the asset to a specific investor, not the general public.
The Takeaway: Transaction Value is "Price." It is what a specific person is willing to write a check for right now.
2. The "No Sale" Valuation: The Hypothetical Standard
This is often referred to legally and financially as Fair Market Value (FMV). This type of valuation occurs when there is no actual transaction taking place. Instead, a valuator calculates what the business would be worth in a hypothetical open market.
These valuations are used for tax purposes, divorce settlements, estate planning, or 409A stock option pricing.
- Hypothetical Parties: It assumes a "hypothetical willing buyer" and a "hypothetical willing seller," neither of whom is under any compulsion to buy or sell.
- No Synergies: Crucially, this usually ignores strategic synergies. It assumes the business is being sold as a standalone entity, not as a strategic puzzle piece for a giant corporation.
- Regulatory Frameworks: It is bound by strict legal standards (like IRS Revenue Ruling 59-60) rather than negotiation tactics.
The Takeaway: "No Sale" Valuation is "Value." It is a theoretical baseline of worth, stripped of the specific motivations of a real-world deal.
Comparison: Why the Numbers Differ
The gap between these two figures can be significant. A "No Sale" valuation might value a company at $10 million (based on cash flow), while a Transaction Value could be $15 million (because a competitor wants to buy them to shut them down).
| Feature | Transaction Value (Price) | "No Sale" Valuation (FMV) |
|---|---|---|
| Context | An actual deal (M&A, Sale). | Compliance (Tax, Litigation, Reporting). |
| The Buyer | A specific person or company. | A hypothetical, generic buyer. |
| Synergies | Included (often drives price up). | Excluded (valued as standalone). |
| Emotion | High (negotiation, ego, timing). | None (objective analysis). |
| Outcome | Cash or stock changes hands. | A report is filed; no ownership changes. |
Summary
If you are selling your business, you are chasing Transaction Value—you want the highest price a strategic buyer will pay.
If you are gifting stock to your children or granting options to employees, you are using a "No Sale" Valuation—you want a defensible, objective number that satisfies the IRS or the courts.
The "First Sale Rule" (US Imports)
For high-volume importers to the USA, the First Sale Rule is a powerful financial tool. It allows the importer to declare the price the factory charged the middleman, rather than the price the middleman charged the importer, provided specific strict conditions are met.
Conditions for First Sale:
- The goods must be destined for export to the United States at the time of the first sale.
- There must be two bona fide sales (Factory to Middleman, Middleman to Importer).
- Paperwork must be flawless (purchase orders, invoices, proofs of payment).
Read our Deep Dive on First Sale Validation.
Wholesale vs. Retail Valuation
For e-commerce brands, the "Declared Value" depends on your logistics model. This choice can dramatically change your Landed Cost.
- Direct-to-Consumer (Cross Border): If you sell a shirt for $50 online and ship it to the customer, the declared value is $50 (Retail Price).
- Import for Warehouse (B2B): If you import 1,000 shirts to a warehouse to sell later, the declared value is the Manufacturing or Wholesale Price (e.g., $10).
This valuation gap is why many brands utilize a Non-Resident Importer (NRI) strategy to import in bulk at lower values before selling to the end consumer.
