Most customs duties are calculated on an ad valorem basis; that is, as a percentage of the value of the imported goods. Therefore, what value Customs assigns to imported goods will directly affect the amount of duty the importer will pay, and the amount of revenue the government will collect.
WTO Agreement
The internationally-accepted rules for customs valuation are defined by an agreement of the World Trade Organization (WTO), the member countries of which cover 98 percent of the world’s trade. Under that WTO agreement, Customs is required to use the “transaction value” as the primary method of valuation of the imported goods. “Transaction value” is based on the actual price that the buyer pays (or agrees to pay) the seller for the imported goods. The underlying principle is that, for customs duty purposes, the imported goods are considered “worth” whatever price the particular buyer and seller negotiated, and not, for example, what a Customs officer believes the “true” or correct value of the goods, what another buyer might have paid for them, or the price published in a catalogue or on a website. The WTO agreement recognizes certain types of transactions where the buyer and seller’s price is not an appropriate basis for customs valuation. A common case is when the importer is related to the foreign seller – such as a parent and subsidiary company – and the price is distorted by the relationship. In these kinds of situations, the agreement provides that the import value of the goods shall be derived from certain specified alternative valuation methods, such as transaction value of identical or similar goods, the costs of production of the goods, or the resale price in the importing country market.
The Implementation Challenge
A “transaction-value” based method of valuation has important implications for Customs control. One is that (with some defined exceptions) Customs must accept the importer’s price for the goods, regardless how low or high it seems, if it is fully and accurately declared. Moreover, because customs valuation is based on the commercial transaction, the documents and information required to validate declared prices is in the possession of the buyer and seller, not Customs. Under the WTO agreement, a Customs officer may reject a declared price, and use an alternative valuation method, if he or she has “reasonable doubts” about the truth or accuracy of the price. But because prices for the same goods can vary between parties and over time, Customs control challenge is to detect a declared price that is truthful and accurate from one that is not. Customs administrations have developed procedures and methods of working to deal with these challenges, such as customs audit, risk assessment and selectivity, and specific documentary requirements. To further combat valuation fraud, new rules are being discussed at the WTO level for exchange of information between customs administrations. Automated systems, such as targeting systems or valuation databases designed in conformity with WTO principles, likewise play a key role to support Customs effective implementation of valuation.
Acknowledgement: Brian J. O’Shea is an experienced customs consultant working on the implementation of automated systems, including risk assessment and valuation application, in South Africa and Europe. Brian was part of co-authoring a book "A Hanbook on the WTO Customs Valuation Agreement" by Sheri Rosenow and Brian J. O'Shea, forming part of a series of Handbooks that support the WTO Secretariat's efforts to assist Member countries in their efforts to build capacity, implement obligations and realize the benefits of WTO Membership. Brian has been an integral part of the TATIS team for the past years.