Page 6 - The South China Business Journal
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The First Sale Rule:
A Way to Reduce Exposure
to US-China Tariffs?
As the US-China trade war continues with no By leveraging the First Sale rule and using the original
resolution in sight, tariffs put in place by both sides manufacturing price of US$10,000,000 rather than the last
have raised costs for many China-based businesses. price of US$12,000,000 as the basis of appraisement, the
importer can save US$200,000 or US$500,000 under a 10
Many of them are considering restructuring their percent or 25 percent tariff, respectively, as shown below.
supply chains as a result, but the deep level of
supply chain integration in China, the high costs of Maximum tariff savings
reconfiguration, and strict rule of origin standards in
the US complicate such efforts. Usually, importers use the First Sale rule when there
are high duty rates, high intermediary markup, or high
A recent report from the South China Morning Post, free on board (FOB) volumes in the transaction.
however, uncovered a potential way for companies to
reduce their exposure to US tariffs. Another way to save more is by restructuring the
supply chain.
The secret lies in a three-decade-old customs rule in
the US called the “First Sale rule”. US Customs and Border Protection (CBP) allows
certain expenditures unrelated to the production of
According to the First Sale rule, a product subject to goods (non-dutiable value) to be transferred from the
tariffs can have its value declared based on its initial manufacturer to the relevant intermediary. As a result,
selling price rather than its final one. the first price could be cut lower without affecting the
last pre-import price.
Will this First Sale rule become a feasible strategy for
exporters looking to reduce the impacts of tariffs? Requirements for First Sale valuation
What is the First Sale rule? The First Sale rule could offer significant tariff savings
for US importers.
The First Sale rule applies to the Importer of Record
(IOR) bringing goods into the US through a “multi- However, few companies have adopted this rule in
tiered” transaction model — where the product is practice, as the legal requirements, documentation
bought and sold multiple times prior to its import into headaches, and practical problems involved can be
the US. daunting at the beginning.
Under this rule, when declaring the customs value of Firstly, the multi-tier transaction generally must meet
the goods to pay the applicable tariff, importers can use the following requirements by CBP:
the lower price of the goods paid in the first or earlier
sale instead of the higher price paid in the last sale. • Bona Fide Sale: The transaction – which is the
first sale – between the manufacturer and the
An example of First Sale into the US intermediary must be a bona fide sale, complete with
a transfer of title.
For example, let’s say a Chinese manufacturer
produces and sells goods at the price of US$10,000,000 • Arm’s Length: The Chinese manufacturer and the
to an intermediary outside the US and the intermediary intermediary must be unrelated or, if related, conduct
in turn sells these goods to an importer in the US with their transactions at “arm’s length”.
a 20 percent mark-up at the price of US$12,000,000.
• Clearly Destined for Export: At the time of the
“first sale”, the merchandise must be clearly destined
3 AmCham South China
The First Sale Rule:
A Way to Reduce Exposure
to US-China Tariffs?
As the US-China trade war continues with no By leveraging the First Sale rule and using the original
resolution in sight, tariffs put in place by both sides manufacturing price of US$10,000,000 rather than the last
have raised costs for many China-based businesses. price of US$12,000,000 as the basis of appraisement, the
importer can save US$200,000 or US$500,000 under a 10
Many of them are considering restructuring their percent or 25 percent tariff, respectively, as shown below.
supply chains as a result, but the deep level of
supply chain integration in China, the high costs of Maximum tariff savings
reconfiguration, and strict rule of origin standards in
the US complicate such efforts. Usually, importers use the First Sale rule when there
are high duty rates, high intermediary markup, or high
A recent report from the South China Morning Post, free on board (FOB) volumes in the transaction.
however, uncovered a potential way for companies to
reduce their exposure to US tariffs. Another way to save more is by restructuring the
supply chain.
The secret lies in a three-decade-old customs rule in
the US called the “First Sale rule”. US Customs and Border Protection (CBP) allows
certain expenditures unrelated to the production of
According to the First Sale rule, a product subject to goods (non-dutiable value) to be transferred from the
tariffs can have its value declared based on its initial manufacturer to the relevant intermediary. As a result,
selling price rather than its final one. the first price could be cut lower without affecting the
last pre-import price.
Will this First Sale rule become a feasible strategy for
exporters looking to reduce the impacts of tariffs? Requirements for First Sale valuation
What is the First Sale rule? The First Sale rule could offer significant tariff savings
for US importers.
The First Sale rule applies to the Importer of Record
(IOR) bringing goods into the US through a “multi- However, few companies have adopted this rule in
tiered” transaction model — where the product is practice, as the legal requirements, documentation
bought and sold multiple times prior to its import into headaches, and practical problems involved can be
the US. daunting at the beginning.
Under this rule, when declaring the customs value of Firstly, the multi-tier transaction generally must meet
the goods to pay the applicable tariff, importers can use the following requirements by CBP:
the lower price of the goods paid in the first or earlier
sale instead of the higher price paid in the last sale. • Bona Fide Sale: The transaction – which is the
first sale – between the manufacturer and the
An example of First Sale into the US intermediary must be a bona fide sale, complete with
a transfer of title.
For example, let’s say a Chinese manufacturer
produces and sells goods at the price of US$10,000,000 • Arm’s Length: The Chinese manufacturer and the
to an intermediary outside the US and the intermediary intermediary must be unrelated or, if related, conduct
in turn sells these goods to an importer in the US with their transactions at “arm’s length”.
a 20 percent mark-up at the price of US$12,000,000.
• Clearly Destined for Export: At the time of the
“first sale”, the merchandise must be clearly destined
3 AmCham South China
