China’s Customs Valuation Methods and Principles for Importing Used Equipment

Valuation Methods of China’s Customs for Imported Used Equipment

 

China’s Customs mainly uses the depreciation method to evaluate imported used equipment. The depreciation method calculates the value of the used equipment based on its usage and a certain depreciation standard. The depreciation method is an easy-to-use method that originated from the resetting cost and straight-line depreciation methods. It can flexibly use different depreciation standards based on the characteristics of the evaluated object and the possibility of actual operation.

 

The depreciation method used by China’s Customs can be divided into two categories based on the reference price for depreciation:

 

1.Calculate the depreciation based on the price of new equipment of the same or similar model and function available on the current evaluation date. Since the price considers the economic and functional depreciation of the equipment, the resulting evaluation price is closer to the market transaction price. Therefore, depreciation based on the new equipment price is more common in practice.

 

2.Calculate the depreciation rate based on the original purchase value of the equipment and the depreciation rate. This method is mainly used for some enterprises that transfer factory equipment and relocate to China for use, where ownership has not been transferred or both importers and sellers have unique economic relationships, and the enterprise is willing to provide the purchase price. However, this method is generally used less frequently.

 

There are four main types of depreciation standards

 

1.Depreciation based on the equipment’s newness rate (proportional depreciation method) Since China’s Customs has the advantage of on-site inspection and can use the power of commercial inspection, it can easily obtain the newness of the equipment. Therefore, China’s Customs can give partial functional and economic depreciation allowances based on the equipment’s newness rate to calculate the depreciation rate coefficient (see Table 2).

 

Table 2: Depreciation Rate Coefficients for Used Equipment

 

Customs Valuation

 

China’s Customs can consider the reset cost and newness of the used equipment to obtain relevant depreciation coefficients and calculate the valuation when evaluating the used equipment. When using this method to evaluate used equipment, the equipment’s newness rate usually should not be less than 30%, and the evaluation value should not be lower than 15% of the new equipment value.

 

Formula: Valuation of used equipment = new equipment price × depreciation rate
For example, a company imports a used 3516 model Caterpillar diesel generator set from the United States, which was produced in 1992 and is about 70% new. The power of the goods is 1000KW. It is known that the current FOB HKD price for a new 3516 model 1000KW Caterpillar is around HKD 950,000/unit. Therefore, according to this method, the value of the 70% new used generator set can be evaluated at around 55%-60% of the new price, which is about HKD 520,000-570,000/unit.

 

Due to the comprehensive evaluation of multiple factors such as appearance, service life, and usage time of second-hand machinery and equipment, the newness rate of the machinery and equipment can more closely reflect its actual value through ratio depreciation. Therefore, this method is one of the preferred methods for depreciating second-hand machinery and equipment. However, it should be noted that many factors affect the evaluation of the newness rate of second-hand machinery and equipment, so even professionals are inevitably subject to certain errors. According to relevant personnel in the commercial inspection department, an evaluation error of within 10% for the newness rate is considered normal.

 

2.Depreciation based on the service life of machinery and equipment (life depreciation method) The life depreciation method estimates the depreciation of equipment from the perspective of its service life. It assumes that machinery and equipment have a certain service life, and the value of the equipment is proportional to its service life. Based on the value of new machinery and equipment, the depreciation caused by the service life is deducted to obtain the evaluation value of second-hand machinery and equipment. The evaluation value of second-hand machinery and equipment = Value of new machinery and equipment – (Value of new machinery and equipment – Expected residual value) × (Years of use / Expected service life) The life depreciation method is generally applicable to machinery and equipment that are always in working condition, such as main power generators, cars, and engineering machinery. For the service life of various general-purpose machines, reference can be made to the “Reference Table for the Economic Service Life of General Production Equipment” and the “Reference Table for the Economic Service Life of Special Equipment” issued by the state.

 

In daily calculations, the expected residual value is generally around 10% of the reset cost. Example: A second-hand imported CNC machine tool with a nameplate indicating that it was produced in 1999, and it is generally known to have a service life of about 15 years. According to the life depreciation calculation, assuming the same model of new CNC machine tool is priced at $100,000, the evaluation value of the second-hand CNC machine tool is: Second-hand CNC machine tool price = $100,000 – $90,000 × (5/15) = $70,000.

 

3.Depreciation based on effective working hours or mileage (usage time depreciation) The length of time that machinery and equipment is used has a critical impact on its depreciation, such as the mileage of a car or the power generation time of a generator set. Therefore, for machinery and equipment with the same service life but different usage times, their performance and depreciation levels may differ. In this case, depreciation can be based on effective working hours or mileage. The evaluation value of second-hand machinery and equipment = Value of new machinery and equipment – (Value of new machinery and equipment – Expected residual value) × (Time of use / Effective usage time). The standards for effective usage time may vary for different machinery and equipment. The main criteria for determining effective usage time of machinery and equipment can be found in the “Standards for Determining the Service Life of Different Machinery and Equipment”.

 

4.The Evaluation Method for Degree of Newness

 

The “Reference Table for Judging the Degree of Newness of Machinery and Equipment” is as follows:

 

Degree of Newness Evaluation Criteria Degree of Newness Rate (%)

 

① Brand New – Unopened, not installed after opening, installed but not used – 95%-100%;

 

② Nearly New – Used, operating normally, no need to replace parts or repair – 85%-94%;

 

③ Good – Can reach the “Nearly New” level after minor repair or replacement of some simple parts – 65%-84%;

 

④ Average – Obvious signs of aging, should replace more parts to reach the “Good” level – 40%-64%;

 

⑤ Usable – Can be used, but needs to update many parts – 20%-39%;

 

⑥ Poor – Cannot be used, requires major repairs and updates of parts before use – 10%-19%;

 

⑦ Scrap – Technically difficult to repair, uneconomical to repair, valued according to residual value – below 9%.

 

Knowledge Extension

 

Key Points for Declaring Second-hand Equipment

 

1.Original value, service life, years of use, residual value rate

 

(1) Original value: Refers to the value of the equipment when it was new;

 

(2) Service life: Refers to the period from the new state of the equipment to the end of its usable life, measured in years;

 

(3) Years of use: Refers to the length of time the equipment has been used, measured in years;

 

(4) Residual value rate: Refers to the proportion of the value contained in the equipment when it can no longer be used, compared to the value when it was originally new.

 

Customs Valuation

 

2.Add the word “(used)” after the machine name.

 

Customs Valuation

 

This is also the most obvious difference between the declaration of old equipment on the customs declaration form and the declaration of new equipment for import.

 

3.An automatic import license should be attached to the electronic data of the customs declaration.

 

How to declare the price?

 

1.Truthfully declare the declared elements such as the goods’ original value and service life. In the process of customs valuation, the original value and service life are one of the elements for verifying the residual value of used equipment, and they are also one of the reference bases for valuation. Falsely reporting these two declared elements is equivalent to falsifying the price.

 

2.Understand the residual value correctly. There are two definitions of residual value online:

 

(1) The residual value of a fixed asset when it can no longer be used is the ratio of the residual value to the purchase price.

 

(2) The residual value of a fixed asset when it needs to be liquidated is the ratio of the residual value to the purchase price.

 

In the customs clearance process, the customs declaration enterprise, operating unit, and receiving unit often tend to accept the second definition based on the literal meaning or their own understanding. However, in the customs valuation process, the first definition of residual value is used, so don’t make mistakes!

 

3.Provide detailed original purchase invoices, payable expense agreements, and invoice data. According to Article 7 of the “Measures for the Determination of the Taxable Value of Imported and Exported Goods by the People’s Republic of China Customs,” “The transaction price of imported goods refers to the total amount of the price paid or payable by the buyer to the seller for the sale of the goods in the territory of the People’s Republic of China, and adjusted in accordance with the provisions of the third section of these measures, including directly and indirectly paid prices.”

 

In the import of second-hand equipment, the original value is a basic element for verifying the residual value of the imported equipment. Providing the original value invoice helps the customs verify the objectivity and authenticity of the direct payment price paid by the enterprise. In addition, second-hand equipment inevitably involves a series of other expenses such as disassembly of equipment from the exporting factory, repackaging, and transportation to the export port. These costs are directly or indirectly borne by the buyer and should be included in the taxable value.

 

a.Purchase invoice of the goods. If it is not available, the reason should be explained in the situation and the original value of the goods should be confirmed.

 

b.Service life certificate, including production service life, total design service life, and service life used. If it is unavailable, the reason should be explained in the situation, and the service life should be confirmed.

 

c.Transportation and insurance expense invoices. Transportation costs include land transportation costs from foreign factories to foreign ports, sea transportation costs from foreign ports to domestic ports, and insurance costs.

 

d.Explanation of relevant expenses incurred in foreign ports, such as dismantling expenses, relevant expenses before shipment, and inspection fees before shipment.

 

e.Structural composition, functional principles, and specific uses of the goods.

 

f. Depreciation value = (1 – (number of years used / usable years) * 0.95) * cargo value (cargo value certificate: preferably available online).

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