In the past, the Customs duties were mainly specific. However in recent times almost all countries have changed from specific rate of customs duties to ad valorem rates due to inherent advantage of buoyancy in an ad-valorem tax system. Therefore for purpose of calculation of duty leviable, it is necessary to ascertain the Customs value on which ad-valorem rate can be applied.
Concept of Valuation under Sea Customs Act, 1878.
Value under Sea Customs Act. 1878 was based on “real value”. Real value was defined as the wholesale price for which like goods are capable of being sold at the time and place of importation (excluding duties payable). The Sea Customs Act also contained provisions for taking over the imported goods by Government on payment of an amount equal to declared real value (Section 32).
Brussels Definition of Value (Customs Cooperation Council, now WCO)
After Second World War, some countries of Europe formed Customs Cooperation Council in 1952 with headquarters at Brussels. The Council has now grown into a full-fledged international organization World Customs Organization with more than 150 country members. Among the various aspects looked by the Council, uniform valuation code was one of the important assignments, The Council developed a valuation method commonly called Brussels Definition of Value and abbreviated as BDV.
BDV is based on a notional concept, which treats Customs value as the price at which, the goods would be sold (the price which goods would fetch) in the course of international trade, the essential elements being price, time, place, quantity and commercial level. The emphasis was on the intrinsic value of the goods.
Over 100 countries were applying BDV by 1970. However USA, Canada, Australia and New Zealand refused to join the BDV and advocated a “positive concept” requiring Customs to determine the value on the basis of actual price paid for the goods. In their view the positive concept considerably reduced the discretion available to the Customs and thus facilitated trade. However, in practice, the perceived difference between the notional concept (BDV) and positive concept were not significant, as explanatory notes to BDV had considerably reduced the discretion.
Tokyo Round and Uruguay Round (WTO agreement on Valuation)
Efforts to limit further the discretion available to customs were made during the preparatory and the first phase of the Tokyo Round of negotiations (1970 – 1977) by developing in GATT “draft principles and interpretative notes” to BDV. It was expected that the resulting precise criteria would induce the four major countries namely USA, Canada, Australia and New Zealand to change their systems and join the BDV. The elaboration of these texts did not have however, any perceptible influence on their negotiating approach and stand.
In November 1977, however, the European Union (EU) suddenly and unexpectedly announced dramatic change in its position. It declared that the Community countries had agreed to make a fundamental change in the valuation system by opting out for a positive approach and that the proposals it was making were based on what it “believed to be good features of the United States Valuation System”. The draft Agreement which it presented, provided that in almost all cases customs should determine dutiable value on the basis of “price paid or payable” for imported goods in the particular transaction. The customs could reject transaction value only in a limited number of exceptional cases. In all such cases however, the customs were expected to determine it by using the five prescribed methods by applying them in the hierarchical order in which they were listed.
In the international negotiations, countries often change their position by redefining their objectives. But in this case, the decision of the European Union almost amounted to agreeing with the adversary, in the mid-term of the negotiations, that the position that the adversary was taking was right and its own stand was worng.
The reactions of developing countries to the EU proposal were of complete surprise and disbelief. Many of them were only recently persuaded by CCC to join BDV or to apply on de facto basis. The CCC, while was working towards BDV, a global system considered itself badly let down by the EU on whose support they had relied till then.
One of the major concerns of developing countries was that the system proposed by EU, which required customs to accept transaction value declared by the importers, would not enable them to deal with the practice resorted by traders of under valuation of goods and with other customs related malpractices. They therefore wanted a certain degree of flexibility in the rules to enable their customs authorities to reject transaction value when they has reasons to doubt its truth or accuracy.
This EU and USA refused to concede once they were able to secure support to the basic ideas in the proposal from the other developed countries. In the Tokyo Round the only concession which developing countries were able to achieve, despite the arduous efforts made by them was the acceptance that a developing country acceding to the Agreement could delay its implementation by five years.
Uruguay Round : Adoption of a decision giving authority to customs to reject in case doubts the transaction value declared by the importer
The Tokyo round ended in 1979. The developing countries had to wait till the end of the Uruguay Round to get acceptance of their contention that the difference in economic situation and trading realities would require provision in the rules that would enable them to reject the transaction value when they have reasons to believe that goods have been deliberately under or over-valued by importers in collusive deals with exporters. The “Decision regarding cases where customs administration have reasons to doubt the truth or accuracy of the declared value”, which has been adopted in the Uruguay Round, provides now subject to certain conditions the right to customs to reject the transaction value in cases, inter alia, of deliberate under-valuation and proceed to determine value on the basis of other methods provided in the Agreement.
Adoption in the Uruguay round of the “Single undertaking concepts” and its implications
The negotiations at technical level for improvement in the provision of the Agreement, which resulted in the adoption of the Decision described above, took place on the understanding that even after its adoption, it would be open to the countries to decide on whether or not to join the Agreement. In other words, a developing country could have an option of not joining the Agreement. Towards the end of the Uruguay round negotiations however, this situation changed, as a result of the decisions taken at political level while establishing WTO. The Marrakesh Agreement establishing the organization, visualizes that the WTO legal system is a “Single undertaking”. Consequently all countries, which are members of WTO, are bound by the obligations, which the multilateral agreements constituting the WTO system impose.
The single undertaking rule has thus made it obligatory on all countries, including those which are developing or least developed, to apply the rules of the Agreement on Customs Valuation, after the expiry of the transaction period that is available to them in accordance with its provision.
Valuation for Customs Purposes
The contracting parties recognize the validity of the general principles of valuation set forth in the following paragraphs of this Article, and they undertake to give effect to such principles, in respect of all products subject to duties or other charges*or restrictions on importation and exportation based upon or regulated in any manner by value. Moreover, they shall, upon a request by another contracting party review the operation of any of their laws or regulations relating to value for customs purposes in the light of these principles. The CONTRACTING PARTIES may request from contracting parties reports on steps taken by them in pursuance of the provisions of this Article.
(a) The value for customs purposes of imported merchandise should be based on the actual value of the imported merchandise on which duty is assessed, or of like merchandise, and should not be based on the value of merchandise of national origin or on arbitrary or fictitious values.*
(b) "Actual value" should be the price at which, at a time and place determined by the legislation of the country of importation, such or like merchandise is sold or offered for sale in the ordinary course of trade under fully competitive conditions. 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.*
(c) When the actual value is not ascertainable in accordance with subparagraph (b) of this paragraph, the value for customs purposes should be based on the nearest ascertainable equivalent of such value.*
The value for customs purposes of any imported product should not include the amount of any internal tax, applicable within the country of origin or export, from which the imported product has been exempted or has been or will be relieved by means of refund.
(a) Except as otherwise provided for in this paragraph, where it is necessary for the purposes of paragraph 2 of this Article for a contracting party to convert into its own currency a price expressed in the currency of another country, the conversion rate of exchange to be used shall be based, for each currency involved, on the par value as established pursuant to the Articles of Agreement of the International Monetary Fund or on the rate of exchange recognized by the Fund, or on the par value established in accordance with a special exchange agreement entered into pursuant to Article XV of this Agreement.
(b) Where no such established par value and no such recognized rate of exchange exist, the conversion rate shall reflect effectively the current value of such currency in commercial transactions.
(c) The CONTRACTING PARTIES, in agreement with the International Monetary Fund, shall formulate rules governing the conversion by contracting parties of any foreign currency in respect of which multiple rates of exchange are maintained consistently with the Articles of Agreement of the International Monetary Fund. Any contracting party may apply such rules in respect of such foreign currencies for the purposes of para graph 2 of this Article as an alternative to the use of par values. Until such rules are adopted by the Contracting Parties, any contracting party may employ, in respect of any such foreign currency, rules of conversion for the purposes of paragraph 2 of this Article which are designed to reflect effectively the value of such foreign currency in commercial transactions.
(d) Nothing in this paragraph shall be construed to require any contracting party to alter the method of converting currencies for customs purposes which is applicable in its territory on the date of this Agreement, if such alteration would have the effect of increasing generally the amounts of duty payable.
The bases and methods for determining the value of products subject to duties or other charges or restrictions based upon or regulated in any manner by value should be stable and should be given sufficient publicity to enable traders to estimate, with a reasonable degree of certainty, the value for customs purposes.
The expression "or other charges" is not to be regarded as including internal taxes or equivalent charges imposed on or in connection with imported products.
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.
It would be in conformity with Article VII, paragraph 2 (b), for a contracting party to construe the phrase "in the ordinary course of trade ... under fully competitive conditions", as excluding any transaction wherein the buyer and seller are not independent of each other and price is not the sole consideration.
The standard of "fully competitive conditions" permits a contracting party to exclude from consideration prices involving special discounts limited to exclusive agents.
The wording of subparagraphs (a) and (b) permits a contracting party to determine the value for customs purposes uniformly either (1) on the basis of a particular exporter's prices of the imported merchandise, or (2) on the basis of the general price level of like merchandise.