The following communication, dated 16 December 1998, has been received from the Permanent Mission of India.
- The Agreement on Implementation of Article VII (Customs Valuation) of the General Agreement on Tariffs and Trade 1994 (the “Agreement”) sets out the principles and procedures to be followed by WTO Members in their assessment of the value of imported goods, if the rate of duty is ad valorem, for the purpose of levying the appropriate amount of customs duty. It aims to provide a fair, uniform and neutral system for the valuation of goods that precludes the use of values of merchandise of national origin as well as arbitrary or fictitious customs values.
- Under the Agreement, the primary basis for customs value of imported goods in the case of unrelated parties is the “transaction value” as defined in Article 1. It is defined as “the price actually paid or payable for the goods when sold for export to the country of importation” by the buyer to the seller. Freight, packaging, commissions, goods and services supplied to the buyer free of charge and some other costs may be added to the customs value. The Agreement also sets out the measures that may not be used to establish a value. These include, the price of goods on the domestic market of the exporting country, the selling price of goods produced in the importing country, and a system which provides for the higher of two values. If there are suspicions that the transactions value is false, customs administrations may determine the value by going sequentially through five options: (a) the value of identical goods, (b) the value of similar goods, (c) the imported price of identical or similar goods less applicable deductions for costs incurred within the country of import, (d) computed value, constructed by adding to the original cost of materials and fabrication, and (e) if none of these methods work, reasonable means may be used.
- Additional considerations apply where the importer and exporter are related entities.
- Moreover, the Agreement contains provisions for special and differential treatment of developing countries and for technical assistance.
- However, many problems continue to be associated with valuation. One set of problems emanates from the growth over several decades of various preferential agreements, free trade areas, and customs unions, and the need to take into account the rules of product origin at customs entry and to uphold through policies and practices the principle of ‘non-discrimination’ in differentiation of treatment of imports depending on their origin, and the principle of ‘substantial processing’ through either the ‘transformation’ or ‘value added’ approaches of the input goods obtained from another country. Another set of problems emanates from multilateralism in the context of customs valuation. In this paper, we propose to discuss the latter as they emanate from the implementation of the Agreement.
- Article 1 of the Agreement is to be read together with Article 8 which provides inter alia for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are included by the buyer but are not included in the price actually paid or payable for the imported goods. The Agreement, therefore, enjoins customs administrations to accept the transaction value except in specified circumstances as laid down in Article 1. The Agreement makes it clear that what is to be accepted is the “transaction value” and not the declared value which may or may not be equal to the transaction value of the goods being valued.
- Article 17 of the Agreement recognises that in cases where there may be reason for doubt, customs administrations may satisfy themselves as to the truth or accuracy of any statement, document or declaration presented for customs valuation purposes. Paragraph 6 of Annex III to the Agreement secures full co-operation of importers in the conduct of enquiries by a customs administration in this regard.
- However, these provisions are inadequate to deal with situations such as collusion between the importer and exporter for under-valuation of goods aimed at evading customs duty. Verification and enquiry by customs administrations set out in Article 17 would not enable the establishment of fraud in such instances. Furthermore, the importer can not be expected to fully cooperate with customs administrations when he is a party to under-valuation and to suppression of information.
- Since the inception of the Tokyo Round Agreement on Customs Valuation in 1981, developing countries like India were apprehensive of the inadequacy of these provisions, in particular as they do not empower customs administrations to reject the declared value in doubtful cases. Though the existence of the problem has been acknowledged, it was not until the Marrakesh meeting of April 1994 when a decision was taken by the Ministers to deal with it. A “Decision Regarding Cases Where Customs Administrations have Reasons to Doubt the Truth or Accuracy of the Declared Value” was taken by the WTO Committee on Customs Valuation at its first meeting held on 12 May 1995 pursuant to the Marrakesh decision. This Decision sets out the procedures to be observed in such cases and may be particularly useful in cases where a manufacturer’s invoice has not been submitted and where the declared value is much less than the traded prices given in contemporaneous reputed international publications or is less than the price at which the goods are sold in the ordinary course of trade under fully competitive conditions.
- We propose that this Decision may be incorporated in the WTO Agreement itself as it will help in a significant way in tackling the problem of under-valuation which is reported to be rampant in many developing countries, especially those where the rates of customs duty are relatively high.
- The provisions of the Agreement do not address the situation where an exporter files the correct export declaration to the customs authorities, but the importer unilaterally resorts to mis-declaration of value to the customs authorities in the importing country to evade due customs duty. To tackle this problem, the practice of entering into bilateral agreements for exchange of information regarding customs value has evolved. But this is not a practical and enduring solution to the problem.
- A multilateral solution that enables customs administrations of importing countries to seek and obtain information on export values contained in the export declaration to the customs administrations of exporting countries, in a time-bound manner, in doubtful cases merits consideration.
- Where the customs value can not be determined under the provisions of Article 1, Articles 2 and 3 of the Agreement, proceeding sequentially, envisage consultation between the customs administration and the importer with a view to arriving at a ‘identical goods’ or ‘similar goods’ basis of transaction value. The Agreement provides that if in applying these Articles more than one transaction value of identical or similar goods is found, the lowest such value shall be used to determine the customs value of the imported goods.
- This provision creates a bias in favour of importers and could lead to manipulation. In fact, in many instances the variation between the lowest value and the highest value of identical or similar goods is very wide and there may be a concentration of transactions in the higher end of the range. In a situation where the transaction at the far lower end results from a deliberately conducted import consignment, a pilot consignment at a suppressed value, the resultant application of the provision that the lowest value shall be used to determine the customs value of the imported goods may not fall within the general principles of valuation set forth in these Articles.
- This situation needs appropriate correction to avoid manipulation of import prices and to lead to better approximation of ‘transaction value’.
- Under Article 8 of the Agreement, adjustments to the price actually paid or payable is provided in cases where certain elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Commissions and brokerage, except buying commissions, therefore, have to be taken into consideration in determining the customs value.
- “Buying commissions” are payments made by an importer to his agent for the service rendered by the agent towards representing the importer overseas in the purchase of the goods under valuation. Buying agents may also, in some instances, buy the goods from the manufacturer or trader in that country using own funds and re-invoice the purchase to the importer. The Agreements recognises the second invoice price as the transaction value in such instances. However, manipulation through artificially reduced re-invoice prices frequently occurs to mutual benefit. The exclusion of buying commissions from the computation of value encourages such under-invoicing and the artificial splitting of value, especially when purchases are first made by buying agents and are reinvoiced to the importer.
- Buying commissions should, therefore, be taken into account in the determination of customs value of imported goods as it forms a legitimate component of the landed cost of imported goods.
- Under Article 8:1(b)(iv) of the Agreement, addition of cost of services such as engineering, development, and design work, which are supplied directly or indirectly by the buyer free of charge or at reduced cost for the production of goods under import, is permitted only if the services are undertaken other than in the country of importation. This provision provides room for the splitting of the import value, by claiming that part of the services were rendered in the importing country itself.
- It is proposed that the cost of such services, which are integral to the value of the imported goods, should be included in the valuation irrespective of whether they were undertaken in the country of importation.
- Valuation of imports by sole agents, sole distributors, and sole concessionaires of large corporations, including transnational corporations, poses a problem as such entities are not considered as “related persons” automatically under Article 15:5 of the Agreement. If such entities sell the product at specially reduced prices, there may be no means available with customs administrations to check the veracity of such special prices.
- Article 1.2(a) and (b) provide safeguards in the matter of acceptance of transaction value for customs purposes between a buyer and a seller who are ‘related’. In order to shift the burden of proving that the prices quoted are not influenced by the relationship to the agents, distributors or concessionaires, as the case may be, persons associated with each other as sole agents, sole distributors, and sole concessionaires, howsoever described, should therefore automatically be deemed ‘related’.
- Article VII of the GATT 1994 states that the value for customs purposes of imported merchandise should be based on the actual value and that the actual value should be the price at which, at a time and place of importation, such or like merchandise is sold or offered for sale in the ordinary course of trade under fully competitive conditions. This Article stipulates
that “to the extent to which the price of such or like merchandise is governed by the quantity in a particular transaction, the price to be considered should uniformly be related to either (i)
- comparable quantities, or (ii) quantities not less favourable to importers than those in which the greater volume of the merchandise is sold in the trade between the countries of exportation and importation”.
- Ad Article VII states that “it would be in conformity with Article VII to presume that “actual value” may be represented by the invoice price, plus any non-included charges for legitimate costs which are proper elements of “actual value” and plus any abnormal discount or other reduction from the ordinary competitive price”. However, the Agreement does not contain clear provisions to give effect to this, with the result that arbitrary discounts are often built into the invoice price without any demonstrated evidence linking the discounts to the quantities purchased.
- Accordingly, special and arbitrary discounts should be disallowed, and the ordinary competitive price should be taken for assessment purposes.
The determination of customs value under the residual method is set out in Article 7 of the Agreement. Article 7.2 prohibits, inter alia, determination of customs value on the basis of (i) the price of goods in the domestic market of the country of exportation, and (ii) the price of the goods for export to a country other than the country of importation. The exclusion clause (c) in paragraph 2, however, creates a situation of dichotomous treatment. Under the WTO Agreement on Anti-dumping, a product is to be considered as being dumped (that is, introduced into the commerce of another country at less than its normal value), if the export price of the product is less than the comparable price for the like product sold in the domestic market. Therefore, while the Agreement on Anti-dumping takes cognisance of the domestic price, the Customs Valuation Agreement explicitly excludes such a possibility.
The residual method of determining customs value appropriately should be inclusive of all residual eventualities.