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CUSTOMS VALUATION (CV) HANDBOOK
FOR CUSTOMS ADMINISTRATIONS
IN
THE EAST AFRICAN REGION
Programme on Capacity Building of Master Trainers
under the JICA Project on Capacity Building
for the Customs Administrations of the Eastern African Region (Phase 2)
Edition 2012
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© Japan International Cooperation Agency 2012
The Project on Capacity Building for the Customs Administrations of the Eastern African
Region (Phase 2)
Japan International Cooperation Agency (JICA)
P.O. Box 50572-00200 Nairobi, Kenya
Tel: +254-20343027, 202812196
Suggested citation:
JICA Project on Capacity Building for the Customs Administrations of the Eastern African
Region (Phase 2)
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PREFACE
This Handbook has been prepared by the Master Trainers Programme Customs ValuationWorking Group members in the East African Region under the auspices of Japan
International Cooperation Agency (JICA). The aim of this Handbook is to provide Customs
ofcers and other interested persons with information on the Agreement on implementation
of Article VII of GATT 1994 (The Agreement).
The scope of the Handbook covers among others, the Overview of WTO Agreement
on Customs Valuation, Transaction Value Method, Adjustments under Article 8, Other
Methods of Valuation (Article 2 through 7 of the Agreement) and Customs Documentation.
The Agreement referred to above has been domesticated under section 122 read together
with the 4th Schedule of the East African Community Customs Management Act
(EACCMA), 2004.
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ACKNOWLEDGEMENT
Special thanks goes to the Government of Japan for the technical assistance and support
for Capacity Building in the Eastern African Region provided through Japan International
Cooperation Agency (JICA) and the World Customs Organization (WCO) for providing
Customs valuation experts under the Master Trainers Programme. Special thanks goes
to the management of Revenue Authorities of Burundi, Kenya, Rwanda, Tanzania and
Uganda for their nancial and moral support and their commitment to the success of this
Programme.
This acknowledgement would not be complete without special mention of seless efforts
of Facilitators of the Program namely Mr. Tsuneo Yamahara, Mission Head of Japanese
Technical Experts and retired Director General of Okinawa Regional Customs, Mr.
Shigeaki Katsu, Ms. Keiko Ito, Mr. Shigetoshi Aoyama, Mr. Koichi Iwai, Mr. Tsuyoshi
Togoe and Mr. Shingo Tanagami, Japan Customs Valuation Experts, Ms. Maki Kitaura
and Mr. Ian Cremer, WCO Valuation Technical Experts, Mr. Shinji Urakawa and Mr.
Masaharu Shimoya, Chief Advisors JICA Project, Mr. Shoji Maeda, Senior Advisor JICA
Project, Mr.Takao Iwai, Advisor JICA Project, Ms.Yukari Yoshida and Ms. Yoko Konishi,
Project coordinators, Mr. Allan Morgan, Project secretary from the Project Team.
Finally, we hail the working group leader and members for their dedication, sacrice and
team work which made completion of this handbook a success.
The Working Group members including former members are :
Nishirimbere Albert, Marie-Goreth Bizindavyi, Kubwimana Judith, Ndikumana Philipe
(BURUNDI), Abakuk Kasibo, Ebby Khaguli, Esther Watene, Fridah Kimani (KENYA),
Mukamurenzi Providence, Shyaka Alex, Jimmy Mwesigye, Rugema Lucien (RWANDA), George Mnyitafu, Narcis Lumumba, Mary Lyakurwa (TANZANIA), Kagumire Abel,
Twongeirwe Livingstone, Mubiru Salim, Kiconco Kellen (UGANDA).
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Kyoko Kuwajima
Director General
Industrial Development and Public Policy Department
Japan International Cooperation Agency
On behalf of Japan International Cooperation Agency (JICA), I would like to congratulate
the completion of the “Customs Valuation Handbook for Customs Administrations in
the East African Region” which has been developed by the team of the Master Trainers
Programme. JICA expects this “Handbook” would benet both Customs Administrations
and trade partners in East Africa.
JICA is working together with countries of Africa for development of economic corridors
and construction of One Stop Border Post (OSBP) for trade facilitation under the Japan’s
initiative at the Tokyo International Conference on African Development IV (TICAD IV).
As one of the key components, JICA‘s Project on Capacity Building for the Customs
Administrations of the Eastern African Region (Phase 2) (the JICA Customs Project)
has dynamically and speedily been extending a variety of activities hand in hand with
the partner organizations, such as the Revenue Authorities/Customs Administrations
and Clearing and Forwarding Agent Associations of the East Africa Community (EAC)
member states.
One of its highlighted activities is the Master Trainers Prgogramme, whose prime goal
is capacity development of the Customs ofcers in the elds of Customs Valuation, HSClassication and Intelligence Analysis. The programme is an innovative and interactive
programme with specic focus on training of core trainers. The Working Group members,
all of whom have been assigned full-time to this programme by the respective Revenue
Authorities/Customs Administrations since its beginning in January 2010, have not
only gained skills and knowledge, but also strenuously developed and revised a draft
“Handbook”, and conducted a number of their own training courses with support of the
experts from the Japan Customs and the World Customs Organization (WCO). JICA
believes that the “Handbook”, which they have developed by themselves, is the culminationof their hard work and utmost efforts throughout the Master Trainers Programme.
In this regard, I would like to extend its cordial gratitude to our development partners,
especially the Japan Customs, the WCO and the EAC for their dedicated contribution to
the JICA Customs Project, especially to the success of the Master Trainers Programme, in
the development of the above mentioned “Handbook”.
I sincerely hope that this “Handbook” would be fully and widely used as the essential
Training Material for further effective trade facilitation in East Africa and beyond its
boundaries.
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For decades, each Customs Administration of the EAC partner states have placed its primary
role exclusively in collecting revenue, taking advantage of its unique nature of controlling the
trade through its own territorial sea, lake, air, as well as border posts. As we see in the emergingdynamics in the region, however, its roles are drastically changing into trade facilitation, leading
various initiatives of both national and regional level. These initiatives are, for example, “AEO
Program”, “Customs Union”, “Common Market”, “Elimination of NTBs” and so forth.
With this background, the JICA’s Master Trainers Programme was launched in January 2010
under the recognition by all the then-Commissioners General of the 5 Revenue Authorities of
KRA, OBR, RRA, TRA and URA seeking to develop Master Trainers among the nominated
Customs ofcers from the respective Customs Administrations who would be highly valuable
human resources with great deals of knowledge and skills in Customs businesses, specically
Customs Valuation, HS Classication, and Intelligence Analysis. Once they are accredited as the
Master Trainers, they would become indispensable stronghold for the Customs administrations
in leading various Customs’ initiatives, including capacity building of other Customs ofcers as
well as private sectors, such as importers, exporters, and clearing agents.
In this occasion, we are honored to express our utmost gratuity in acknowledging the publication of
the “Handbook” on Customs Valuation, HS Classication, and Intelligence Analysis respectively,
all of which were developed through great efforts by the Master Trainer candidates with support
of JICA and WCO. We all acknowledge here that it will be fully used for long as one of the key
training materials for our training purposes.
John K. Njiraini
Commissioner General
Kenya Revenue Authority
Republic of Kenya
Ben Kagarama
Commissioner General
Rwanda Revenue Authority
Republic of Rwanda
Allen Kagina
Commissioner General
Uganda Revenue Authority
Republic of Uganda
Kieran Holmes
Commissioner General
Ofce Burundais des Recettes
Republic of Burundi
Harry M. Kitillya
Commissioner General
Tanzania Revenue Authority
United Republic of Tanzania
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Masaharu Shimoya
Chief Advisor
The Project on Capacity Building
for the Customs Administrations of the
Eastern African Region (Phase 2)
On behalf of JICA Customs Project team as well as our predecessors who have started the
Master Trainer Programme, Japan Customs Experts, Ofcers of World Customs Organization
who have been involved in this programme, I would like to extend my cordial congratulations
to the members of Master Trainer Programme who have developed the Handbooks for training
of Customs Valuation, HS Classication and Intelligence Analysis.
As Chief Advisor of the Project, I have closely monitored and supervised the activities by all
the Master Trainer Programme members. Their willingness and enthusiasm had been very
strong at each activity, their teamwork and dedicated efforts made it realize these Handbooks.I sincerely congratulate them and am proud of each member of the team who made great
contribution to develop the handbooks.
All three subject areas featured in the Handbook are the KEY areas for Customs operations
in which intensive Customs techniques and knowledge are required. The theories, their key
rules and regulations, are compiled in the Handbooks and we expect these knowledge and
skills will be widely shared among the ofcers and industries. I would like to highlight the
important points in each subject areas as follows;
HS Classication:
Goods must be classied as presented before you, the duty rate is not an issue;
Customs Valuation:
To identify who is the buyer and who is the seller, and to nd out price actually paid or
payable plus adjustment elements;
Intelligence Analysis:
Intelligence Analysis is a tool of trade facilitation. The tool shall be used to differentiate the
customs approach to low risk stakeholders and high risk stakeholders.
I can say that a combination of the above customs technique will provide better trade incentives
to importers, exporters and Customs Clearing Agents.
JICA Customs Project aims for better trade facilitation in this region and I am sure that the
Handbooks will contribute to capacity building of both Government and its stakeholders and
benet them in facilitate smoother Customs clearance for both sides.
The JICA Customs Project team continuously support the various activities for capacity
building of Customs Administrations and the Clearing Agents in this Region. We are very
happy to work together with our counterparts for their reform and modernization.
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LIST OF ABBREVIATIONS
ACV Agreement on Customs Valuation
BDV Brussels Denition of Value
C&F Cost and Freight
CIF Cost Insurance and Freight
CU Currency Unit
DDP Delivered Duty Paid
EAC East African Community
EACCMA East African Community Customs Management Act, 2004
FIS Free in Store
FOB Free on Board
GAAP Generally Accepted Accounting Principles
GATT General Agreement on Tariffs and Trade
GIC General Introductory Commentary
JICA Japan International Cooperation Agency
KRA Kenya Revenue Authority
LC Letter of CreditMTN Multinational Trade Negotiations
OBR Ofce Burundais des Recettes
PAPP Price Actually Paid or Payable
PCA Post Clearance Audit
RRA Rwanda Revenue Authority
TCCV Technical Committee on Customs Valuation
TRA Tanzania Revenue AuthorityTT Telegraphic Transfer
URA Uganda Revenue Authority
WCO World Customs Organisation
WTO World Trade Organisation
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Table of Contents
PREFACE
ACKNOWLEDGEMENT
LIST OF ABBREVIATIONS
CHAPTER 1
1.0 AGREEMENT ON CUSTOMS VALUATION ........................................... 1
1.1 Introduction ............................................................................................... 2
1.2 Historical Background of Customs Valuation .......................................... 2
1.3 Objectives of the WTO Agreement on Customs Valuation ..................... 6
1.4 Structure of the WTO Customs Valuation Agreement ...................... 7 1.4.1 General Introductory Commentary ..................................................... 8
1.4.2 PART I - Rules on Customs Valuation ................................................ 9
1.4.3 PART II - Administrtion, Consultations and Dispute Settlement ........ 10
1.4.4 PART III - Special and Differential Treatment ................................... 11
1.4.5 PART IV - Final Provisions .............................................................. 11
1.5 Annexes ............................................................................................... 12
1.5.1 Annex I - Interpretative notes ............................................................... 12
1.5.2 Annex II - Technical Committee on Customs Valuation .................... 12
1.5.3 Annex III - Provisions for Developing Countries .............................. 13
1.5.4 Customs Valuation Compedium .................................................... 13
CHAPTER 2
2.0 TRANSACTION VALUE METHOD ......................................................... 15
2.1 Introduction ........................................................................................ 15
2.2 Denitions ............................................................................................ 15
2.3 Elements of Transaction Value Method .............................................. 16
2.3.1 Concept of sale ................................................................................ 16
2.3.1.1 Denition of sale ....................................................................... 16
2.3.1.2 Examples of cases where there is no sale ................................. 17
2.3.2 Concept of sale for export .................................................................. 20
2.3.2.1 Meaning of sale for export .................................................... 20
2.3.2.2 Examples .................................................................................. 20
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2.3.3 Concept of Price Actually Paid or Payable ....................................... 22
2.3.3.1 Direct and Indirect Payments ................................................... 23
2.3.3.2 Activities undertaken by the buyer on his or her own account .. 24
2.3.3.3 Flow of Dividends ................................................................... 25
2.4 Discounts and Credits ............................................................................ 25 2.4.1 Cash discounts ..................................................................................... 25
2.4.2 Quantity discounts ................................................................................ 26
2.5 Credits ................................................................................................... 27
2.6 Other factors that can affect the price ..................................................... 28
2.6.1 Case of a Price below Market Price ................................................. 28
2.6.2 Goods subject to export subsidies or bounties ..................................... 28
2.6.3 Goods sold at dumped prices................................................................. 29
2.6.4 Goods not in accordance with the contract .......................................... 29
2.6.5 Split shipments ..................................................................................... 30
2.6.5.1 Splitting up of Industrial Installations or plants ....................... 30
2.6.5.2 Shipments split for reasons of Quality ................................. 30
2.6.5.3 Shipments split for reasons of Geographical dsitibution ......... 31
2.7 Conditions for use of Transaction Value .................................................... 31 2.7.1 Conditions under Article 1 .................................................................. 31
2.7.2 Practical examples in each condition ................................................. 32
2.8 CASE STUDY ............................................................................................ 36
CHAPTER 3
3.0 ADJUSTMENTS UNDER ARTICLE OF THE AGREEMENT ON CUSTOMS
VALUATION ................................................................................................ 38
3.1 Introduction .............................................................................................. 38
3.2 Denition of Adjustments ......................................................................... 39
3.3 Categories of Adjutments .......................................................................... 39
3.4 Compulsory Adjustments ......................................................................... 40
3.4.1 Commissions and Packing ................................................................. 40
3.4.2 Commissions, brokarage except buying commissions ....................... 40 3.4.3 Cost of container and packing .......................................................... 44
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3.4.4 Assists ............................................................................................ 45
3.4.5 Royalties and Licence Fees ................................................................ 52
3.4.6 Proceeds ............................................................................................ 57
3.5 Optional Adjustments ............................................................................... 59
3.6 Additions to PAPP ..................................................................................... 623.7 No additions to PAPP ................................................................................ 64
3.8 Case Studies ............................................................................................ 65
CHAPTER 4
4.0 OTHER METHODS OF VALUATION ..................................................... 71
4.1 Introduction ............................................................................................ 71
4.2 Transaction Value of identical goods ....................................................... 71
4.2.1 Requirements for Transaction Value of identical goods method ......... 72
4.2.2 Adjustments under Transaction Value of identical goods ................... 72
4.2.3 Practical examples of Value Adjustments under identical goods ......... 73
4.3 Transaction value of Similar Goods method ...................................... 74
4.3.1 Requirements for Transaction Value of similar goods method .......... 75
4.3.2 Adjustments under Transaction Value of similar goods method .......... 75 4.3.3 Practical examples of Adjustments under similar goods method ........ 76
4.3.4 Comparisson of Identical and Similar goods ....................................... 77
4.4 Deductive Value Method .......................................................................... 78
4.4.1 Requirements of Deductive Value Method ......................................... 78
4.4.2 Application of Deductive Value Method ........................................ 79
4.4.3 Deductions made under the Veductive Value method ........................ 79
4.4.4. Practical Examples ........................................................................... 80
4.5 Computed Value Method ................................................................... 81
4.5.1 Requirements for Computed Value Method ........................................ 82
4.5.2 Elements to be considered under Computed Value Method ............... 83
4.5.3 Treatment of prots and general expenses ........................................ 83
4.5.4 Application of Generally Accepted Accounting Priciples (GAAP) ..... 84
4.6 Fall Back Method ................................................................................. 85 4.6.1 Requirements of Fallback Method ...................................................... 86
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4.6.2 Right of the importer under Fallback Method ..................................... 86
4.6.3 Demonstration of exible application under each method ................. 86
4.6.4 Prohibited means of determining value under the fallback method .... 89
CHAPTER 55.0 CUSTOMS DOCUMENTATION ......................................................... 90
5.1 Introduction ............................................................................................ 91
5.2 Denitions and Interpretations ................................................................ 91
5.3 Categories of Customs Documents ........................................................... 91
5.4 Importance of Documents ........................................................................ 92
5.5 Vital information contained in documents .............................................. 92
5.6 Relationship between denition of Transaction Value and Documentation. 94
5.7 Overview of International Documents ...................................................... 95
5.8 Analysis of Documents ............................................................................. 95
5.8.1 Commercial Documents ...................................................................... 95
5.8.2 Transport Documents ......................................................................... 97
5.8.3 Financial Documents .......................................................................... 98
5.8.4 Regulatory Documents ........................................................................ 1005.9 Pointers to Authenticity in Documents ...................................................... 101
5.10 Grounds for doubting the truth or accuracy of the declared value ............ 105
CHAPTER 6
6.0 INCOTERMS 2010 .................................................................................. 106
6.1 Common INCOTERMS / Terms of Delivery ............................................ 106
CHAPTER 7
7.0 DOCUMENT CHECKLIST .................................................................... 110
References ................................................................................................... 128
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1
CHAPTER 1
1.0 OVERVIEW OF THE WTO AGREEMENT ON CUSTOMS
VALUATION
The World Trade Organisation (WTO) Agreement on Customs Valuation (here afterreferred to as the “Agreement”) is a trade facilitation based multilateral trade agreement
that requires signatory countries, through their Customs Administrations, to deal with a
detailed set of legislative and administrative requirements which goes further than the six
methods of valuation.
It is an Agreement that was arrived at by the world’s trading community under the auspices
of the Uruguay Round that also resulted to the creation of the World Trade Organization
(WTO), the world body charged with governing world trade. Each contracting member
state has ratied the Agreement into respective national or regional customs legislations.
For the case of the East African Community, this has been included in the East African
Community Customs Management Act vide section 122 read together with the Fourth
schedule.
General Objective
The General objective of the overview of the WTO Agreement on Customs Valuation is
to provide a comprehensive summary of the Agreement on implementation of Article VII
of the General Agreement on Tariffs and Trade, GATT 1994.
Specic Objectives
By the end of this chapter, you should be able to;
(a) State the historical background of Customs Valuation
(b) State the principle objectives of the “Agreement”
(c) Outline the structure of the “Agreement”
(d) List annexes to the WTO Agreement on Customs Valuation
Content
(a) Introduction
(b) Historical Background of Customs Valuation
(c) Objectives of the Agreement
(d) Structure of the Agreement
(e) Annexes
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1.1 Introduction
Customs valuation is the procedure applied to determine the value of imported goods
for the purpose of levying ad valorem customs duties. Customs duties are instruments
of scal and trade policy. They may be based on specic rates, ad valorem rates, or a
combination of the two. The choice of the rate depends on various factors, such as tariff
policy objective which may include and not limited to;
(a) Raise revenue
(b) Facilitate trade
(c) Protect domestic industry
(d) Encourage importation of certain products
(e) Collect trade statistics
Ad valorem duties
Are taxes, duties or fees that vary depending on the value of products, services or property
on which they are levied. They are expressed as a percentage of the value and most of the
countries apply this system.
Ad valorem duty rate is not a recent invention but dates back to the middle ages but what
seems to have been lacking at that time was the application of precise, standard methods
of valuation.
The preference for ad valorem duties re-emerged during the industrial era, when it wasrealized that the system offered greater protection, as it was more adaptable in the face of
price uctuations and differences in the quality of goods.
Specic duties
These are duties, taxes or fees levied based on specic measures of goods such as
number, weight, volume, area, capacity etc. Here, a specic sum is imposed on each
article regardless of its individual value, e.g. price per litre of fuel.
1.2 Historical Background of Custom Valuation
Valuation of goods for exchange purposes has been in place since time immemorial.
Valuation was widely done during the barter trade system which was applied at local trade
as well as foreign trade. At the international level, the existence of different and unstable
valuation systems was a major obstacle to the growth of trade. Valuation system of the
day enabled the incidence of the agreed duties to be manipulated unilaterally by altering
the valuation criteria.
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At the turn of the century, circles interested in the expansion of international trade undertook
studies with a view to replace the unstable and arbitrary methods applied up to that time
by an international valuation system, which would be neutral in its effect.
After several unsuccessful attempts made under the auspices of the League of Nations,
agreement on the general principles of Customs valuation was reached for the rst timeduring the United Nations Conference on Trade and Employment, held in Geneva in 1947
and was signed by 23 nations.
The conclusions of this Conference were embodied in Article VII of the General Agreement
on Tariffs and Trade (GATT)1947. The principle provided for customs valuation to be
based on the transaction value to the greatest extent possible. Nevertheless, that text
merely laid down the general principles and provided little guidance as to their practical
application.
Another progress towards international co-operation in the eld of Customs valuation
was taken by the European Customs Union Study Group set up in Brussels in 1947. The
Group’s tasks included the drafting of a denition of value for use in the framework of
a Customs Union, and a study of the methods and procedures of application of such
denition.
The text of this denition was completed by mid-1949 and it was based on the principles
of Article VII of the GATT 1947. It was incorporated in the Convention on the Valuation
of goods for Customs purposes, which was signed in Brussels on 15th December 1950
and entered into force on 28th July 1953. This resulted into a new valuation method
termed as Brussels Denition of Value (BDV).
The Brussels Denition of Value is based on a notional concept, which treats the customs
value as the price at which in assumed conditions, the merchandise to be valued would
fetch in the open and free market on interaction of the forces of supply and demand when
sold to unrelated parties. The essential elements of this denition are price, time, place,
quantity and commercial level.
The BDV, a product of the trading environment of the 1950’s was seen to be subject
to arbitrary administration, lacking transparency and unresponsive to the prevailing
international trading environment. The system gives too much discretion to the Customs
administration. The value adjustment depended much on the assessment of the assessor,
which allows arbitrary uplifts that are not quantiable and uncertain which is detrimental
to trade.
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Between 1973 and 1979, a new phase in the history of Customs valuation was in the
making. During this period, the GATT multilateral trade negotiations known as the Tokyo
Round took place in Geneva, representing one of the most signicant trade policy events
of our time.
The objective of these negotiations were to achieve the expansion of greater liberalizationof the world trade, inter alia, through the progressive dismantling of obstacles to trade.
One means of achieving this goal was the adoption of a common international valuation
system, more widely accepted than the existing system.
One of the results of these negotiations was the adoption of the Agreement on the
Implementation of Article VII of the GATT in 1981 also known as Agreement on Customs
Valuation (ACV). ACV is a positive concept rather than the notional concept under BDV.
A Protocol to the 1979 Agreement deemed to form the integral part thereof, contained
provisions concerning special problems and trading needs of developing countries,
permitting them some exibility in applying the Agreement. This has become Annex III
of the GATT 1994.
The Agreement on Customs Valuation is based on transaction value that is the price actually
paid or payable for the imported goods when sold for export to the country of importation.
This system is intended to provide a fair, uniform, and neutral way for the valuation of
goods for Customs purposes, conform to commercial realities and precludes the use of
arbitrary and ctitious values. Through its precise methodology, it assists the trading
community and customs authorities to determine the customs values and the amount of
duties payable with more certainty, and therefore, contributes to the facilitation of trade.
The Agreement recognizes that Customs Valuation should, as far as possible, be based
on the actual price of the goods being valued, subject to certain adjustments of elements
which form part of the value but have not been included.
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Uruguay Round
The Uruguay Round of GATT negotiation which started in 1986 was nalized in December
1994. This resulted in the Agreement on Implementation of Article VII of the General
Agreement on Tariffs and Trade 1994, popularly known as, “the Agreement”. It made
several changes to the existing Agreement on implementation of Article VII:
(a) Creation of World Trade Organization (WTO), which came into force 1995
(b) Requirement that all signatories to the WTO accept all GATT instruments, including
the Agreement on implementation of Article VII(c) Some slight amendments to the text of the GATT Agreement on Customs
Valuation
(d) Review of Annex III to the Agreement
(e) Adoption of decisions regarding, Burden of proof, Minimum Values and Sole agents,
Sole distributors and Sole concessionaires
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1.3 Objectives of the WTO Agreement on Customs Valuation
The objectives of the WTO Valuation Agreement are set out in the preamble of the
Agreement as follows:
(a) To further objectives of GATT 1994 and secure additional benets fordeveloping countries
The Agreement is an important step towards a uniform application of valuation
procedures thus promoting international trade. It is also for developing countries
when they become members, for example, they may delay application of its
provisions for up to 5 years and may defer application of some specic rules for an
additional three year period.
It was also agreed that developed countries shall furnish technical assistance whichmay include training personnel, assistance in implementation, access to sources of
information and advice on application of the provisions of the Agreement.
(b) To provide greater uniformity and certainty
An important objective of the Agreement was to establish a precise set of rules
which will be applied in the same way by all the members. This increases
importer’s condence that they will receive the same treatment to avoid distortion
of competition. Article VII of GATT before 1994 was rather general and left each
country with the widest discretion in its valuation system.
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(c) A fair, uniform and neutral system that precludes the use of arbitrary or
ctitious customs values
Arbitrary or ctitious customs values refers to national systems in which customs
values have been assigned to goods without regard to the factors which govern the
transaction between buyer and seller. Many countries have tendencies to protect
domestic industry by uplifting the value of imported goods unfairly. The intention
of precluding the use of arbitrary or ctitious customs values is to ensure that the
valuation of goods is based on the actual circumstances relating to each transaction.
(d) The basis for valuation should, to the greatest extent possible be the Transaction
Value of the goods
Transaction value in its simplest form refers to, the price actually paid or payable
with any necessary adjustments, agreed upon by the buyer and seller. The Agreement
makes clear that the transaction value method should be considered rst whenever
possible.
(e) Customs value should be based on simple and equitable criteria consistent
with commercial practices
Whatever method is applied, the customs value should be determined on the basis
of the examination of accurate commercial documentation in line with generally
accepted commercial practices in the specic industry.
(f) Valuation criteria should be of general application without distinction betweensources of supply
This is another aspect of neutrality. Members are required to apply the provisions
of the Agreement uniformly to importations from all countries without distinction
between the goods and exporters.
(g) Valuation procedures should not be used to combat dumping
This means that if dumping is believed to be taking place, the Agreement
should not be used as a counter measure by increasing the customs value of thegoods in question. The correct procedure is to consider application of the anti
dumping laws (Article VI of GATT 1994).
1.4 Structure of the WTO Customs Valuation Agreement
The full title of the WTO Agreement on Customs Valuation is “Agreement on
Implementation of Article VII of the General Agreement on Tariffs and Trade 1994”,
referred to as “the Agreement”.
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The structure of the Agreement is as follows:
PREAMBLE General Introductory Commentary
PART I Rules on Customs Valuation (Article 1-17)
PART II Administration, Consultations & Dispute settlements (Article18-19)
PART III Special and differential treatment (Article 20)
PART IV Final provisions (Articles 21-24)
Annex I Interpretative Notes
Annex II Technical Committee on Customs Valuation
Annex III Provisions for Developing Countries
1.4.1 General Introductory Commentary (THE PREAMBLE)
The Preamble gives the general introductory commentary of the Agreement which is the
basic introduction of the valuation methods and their hierarchical order of application.
The commentary to the rst paragraph points out that the primary basis of the customsvalue is the transaction value.
The starting point for the transaction value method is the price actually paid or payable
for the goods when sold for export, adjusted to take into account certain additional costs
incurred by the buyer which form part of the transaction value, but are not included in the
basic price paid or payable.
Article 8 provides, inter alia, for adjustments to the price actually paid or payable ofspecic elements that pass from the buyer to the seller that may not necessarily be in the
form of money.
The commentary informs us that such elements form part of the value for customs purposes
if indeed they are incurred by the buyer but are not included in the price actually paid or
payable for the imported goods.
The second paragraph states that if it is not possible to determine the transaction value
of the goods, the Customs administration and the importer must consult with a view to
establishing the basis of value under Articles 2 and 3 (the transaction value of identical
and similar goods respectively). This is because one party may have information about
the customs value of identical or similar goods that may not be available to the other party.
The third paragraph introduces Article 5 and 6 which describe the methods to be used if
the value cannot be determined under the rst three Articles.
The method described in Article 5 (Deductive Value Method) is derived from the price ofimported goods (identical or similar) which are sold after importation to unrelated buyers
in the country of importation.
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Article 6 is the “Computed Value Method” where the customs value is built up from the
value of separate elements incorporated in the production or manufacture of the goods
being valued such as parts, materials, prots, overheads, etc.
However the use of this method may present difculties and that is why Article 4 gives the
importer the option of reversing the order of application of Article 5 and 6 in consultation
with the Customs administration.
The fourth paragraph introduces the “Fall Back Method” for use in determining the value
in the event that customs value cannot be determined under the previous methods.
The Commentary as a preamble to the Agreement makes a statement on behalf of members
recognizing a series of fundamental objectives that underpin the Agreement itself.
1.4.2 PART 1 - Rules On Customs Valuation
Part 1 consists of 17 articles which explain the criteria for determining the Customs value,
adjustments, denitions, rights of importers and Customs Administrations.
Article 1 - Transaction Value Method
Article 2 - Transaction value of identical goods
Article 3 - Transaction value of similar goods
Article 4 - Application of Article 5 & 6
Article 5 - Deductive Value MethodArticle 6 - Computed Value Method
Article 7 - Fall back Method
Article 8 - Adjustments to the transaction Value
Articles 1 to 8 will be discussed in detail in Chapter 2, 3 and 4.
Article 9 - Currency conversion
If conversion of currency is necessary for the determination of customs value, the rateof exchange to be used shall be that duly published by the competent authorities of the
country of importation concerned.
Article 10 - Condentiality of Information
All information which is provided on a condential basis shall be treated as strictly
condential by the authorities concerned and shall not be disclosed without specic
permission of the person who issued except to the extent that it may be required to be
disclosed in the context of judicial proceedings.
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Article 11 - Importer’s rights to appeal without penalty.
The legislation of each member shall provide for the right of appeal without penalty within
the customs administration or an independent body up to the judicial authority.
Article 12 - Obligation to publish laws
Laws, regulations, judicial decisions and administrative rulings of general application
giving effect to this Agreement shall be published in conformity with Article X of GATT
1994 by the country of importation which requires that a member should inform other
members of the amendments made.
Artticle13 - Obligation to provide for a guarantee system
The importer may be allowed to withdraw the goods from customs if it is necessary to delay
the nal determination of customs value provided that sufcient guarantee is provided.
Article 14 - Notes to the articles
These notes are set out under Annex I and the articles of the Agreement are to be read and
applied in line with these notes. Annex I, as well as Annex II and III form an integral part
of the Agreement.
Article 15 - Denitions
This article provides denitions and interpretation of various technical words used in the
Agreement.
Article 16 - Rights of importers to a written explanation
This article explains the rights of importers to an explanation in writing as to how customs
value was determined.
Article 17 - Rights of Customs Administrations
This article explains the rights of Customs administrations to satisfy themselves regarding
the truth or accuracy of any documents or declarations presented to Customs for valuation
purposes.
1.4.3 PART II - Administration, Consultations and Dispute Settlement
This part has two Articles.
Articles 18 - Institutions
This Article established the basic institutions of the implementation of the Agreement;
these are WTO Committee on Customs Valuation and WCO Technical Committee on
Customs Valuation.
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Article19 - Consultations and Dispute Settlement
This article describes the procedure to be followed for consultations and dispute settlement.
1.4.4 PART III - Special and Differential Treatment
This part has only one Article.
Article 20 - Special and Differential Treatment
The Article provides for special provisions available to developing countries. For example
developing countries were given a period of 5 years to delay implementation of provisions
of the Agreement.
1.4.5 PART IV - Final Provisions
This part has 4 Articles.
Article 21 - Reservations
This article states that the reservations may not be entered in respect of any of the provisions
of the Agreement without the consent of other members.
Article 22 - National legislation
This article requires each member to domesticate the Agreement and inform the committee
of any changes in its laws. The EAC domesticated the law in 2005 vide section 122 read
together with fourth schedule to the East African Community Customs Management Act,
2004.
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Article 23 - Review
This article provides for review of implementation and operation of the Agreement by
WTO Committee on Customs Valuation annually.
Article 24 - Secretariat
This Article mandates WTO and WCO Secretariats to service this Agreement.
1.5 Annexes
The purpose of the annexes is to explain further issues covered by the Articles and mainly
the Interpretative Notes to the Articles, the functions of the Technical Committee on
Customs Valuation and the special provisions to the Developing Countries.
1.5.1 Annex I - Interpretative Notes
This annex provides the interpretative notes which supplement provisions of Article 1
until Article 15. In particular, they explain in more detail how the valuation methods are
to be applied. The notes emphasize the use of the methods in hierarchical order.
1.5.2 Annex II - Technical Committee on Customs Valuation (TCCV)
This annex establishes the Technical Committee on Customs Valuation under the auspices
of WCO and describes the role and the responsibility of technical committee with a view
to ensuring that at the technical level, there is uniformity in interpretation and application
of the Agreement.
The Agreement has two committees, the Committee on Customs Valuation based in Geneva
and the Technical Committee on Customs Valuation based in Brussels. The former is
concerned with the trade policy aspects of the Agreement while the latter deals with the
Customs aspects of it. The main role of the TCCV is the examination of specic technical
problems arising in the day to day administration of the Customs Valuation system of
Members and to give advisory opinions on appropriate solutions based upon the facts
presented.
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1.5.3 Annex III - Provisions for Developing countries
This annex provides for:
(a) Five (5) years delay in the application of the provisions of the Agreement paragraph
1 of Article 20;(b) Retention of minimum value on limited and transitional basis;
(c) Reservation and reversal of the sequential order at the request of importer provided
under Article 4 of the Agreement;
(d) Reservation with respect to paragraph 2 of Article 5 of the Agreement, (it allows use
of goods that have gone further process in determination of unit price at which the
greatest aggregate units are sold.);
(e) Provision that developing countries that may have problems in the implementation
of Article 1 of the Agreement insofar as it relates to importations into their countries by sole agents, sole distributors and sole concessionaires, shall request for a study of
this problem with a view to nding appropriate solutions.
1.5.4 Customs Valuation Compendium
The compendium, also called as “WTO Agreement and Texts of Technical Committee”
contains the following sections:
I. List of WTO Members
II. Agreement on Implementation of Article VII of the General Agreement On Tariffs
And Trade, 1994. This is the Agreement itself.
ADVISORY
OPINIONS
COMMENTARIES
EXPLANATORY
NOTES
STUDIES
CASE
STUDIES
Technical Committee on
Customs Valuation
INSTRUMENTS
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III. Article VII of the Agreement on Tariffs and Trade, 1994 and note thereto.
IV. Decisions taken by the WTO Committee on Customs Valuation. This currently
includes seven decisions made by the WTO Committee on Customs Valuation
covering various valuation issues.
V. Texts issued by the WCO Technical Committee on Customs Valuation. These texts
are published in different formats:
Advisory Opinions: These answer questions raised on the application of the
Agreement to a particular set of facts.
Commentaries: These provide comments on parts of the Agreement and intended to
supplement the text with additional guidance.
Explanatory Notes: These provide the Technical Committee’s views on questions
of a general nature arising from the application of the Agreement.
Case Studies: These are based on a set of facts relating to a particular commercial
transaction. They can be used to demonstrate a practical application of the Agreement.
Studies: These set out the results of detailed studies of questions related to the
Agreement.
VI. Index of valuation rulings and conclusions and of GATT/WTO documents containing
national valuation legislation.
N.B. The Index of rulings within this Section has now been replaced by the “Index
of Reference Materials on Customs Valuation”.
VII. Alphabetical Index
This index provides useful references for matters covered in both the Compendium
and the Agreement itself.
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CHAPTER 2
2.0 TRANSACTION VALUE METHOD
Objectives
By the end of this chapter you should be able to;
(a) Dene the term “Transaction Value”
(b) Explain the basis of Customs Value under Transaction Value Method
(c) Enumerate the key elements of Transaction Value
(d) Explain the concept of price actually paid or payable
(e) Conditions for application of Transaction Value
(f) Explain the sale for export concept
(g) State conditions where Transaction Value Method cannot be applied
(h) Apply Transaction Value Method
Outline
(a) Introduction
(b) Denition of terms relating to Transaction Value
(c) Basis of Customs Value under the Transaction Value Method
(d) Elements of Transaction Value
(e) Implication of importations without Sale(f) Concept of sale for export
(g) Concept of price actually paid or payable
(h) Conditions for use of Transaction Value Method
(i) Case studies
2.1 Introduction
The general introductory commentary to the Agreement states that, the basis for customs
value should be wherever possible, the transaction value of the imported goods beingvalued (Article 1). That is the price actually paid or payable (PAPP) for the goods when
sold for export to the country of importation, adjusted in accordance with Article 8,
provided the conditions of Article 1 are met (paragraph 2 of 4th schedule of The East
African Community Customs Management Act, 2004 (EACCMA).
2.2 Denitions
(a) Transaction Value
It is the price actually paid or payable for the goods when sold for export to the country of
importation adjusted in accordance with Article 8.
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(b) Price actually paid or payable (PAPP)
Price actually paid means the price that has already been paid at the time of valuation or
importation. Price payable means the price that has not been paid by the time of valuation
or importation but has already been agreed to be paid. Therefore, the PAPP is the total
payment made or to be made by the buyer to or for the benet of the seller for the imported
goods.
(c) Country of importation
According to Article 15 of the Agreement, country of importation means country or
customs territory of importation where goods are being valued.
(d) Adjustments
Implies any cost elements incurred by the buyer but not included in the price actually paid
or payable for the imported goods being valued.
2. 3 Elements of Transaction Value Method
2.3.1 Concept of sale
In order to establish transaction value there must be a sale of goods before importation. If
the imported goods are not the subject of a sale, there can be no transaction value under
Article 1 of the “WTO Agreement on Customs Valuation”.
2.3.1.1 Denition of sale“The Agreement” contains no denition of “sale”. It merely indicates that “a sale is a
specic commercial operation satisfying certain requirements and conditions”(Advisory
opinion1.1). It implies a transfer of ownership of the goods for some form of consideration.
Hence a sale necessarily requires an agreement between a seller, who agrees to transfer
the ownership of the goods in exchange for a specied price, and a buyer, who agrees
to purchase those goods for a specied price.
Advisory Opinion 1.1 states that the term “sale” should be interpreted as widely as
possible. Moreover, in the absence of a positive denition of “sale”, a list of situations has
been drawn up in which the imported goods are deemed not to have been the subject of a
sale.
The Technical Committee on Customs Valuation expressed the opinion that:
(a) The Agreement on implementation of Article VII of GATT(1994), has no denition
of “sale”. Article 1, paragraph1, merely stipulates a specic commercial operation
satisfying certain requirements and conditions.
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(b) Nevertheless, in conformity with the basic intention of the Agreement that the
transaction value of imported goods should be used to the greatest extent possible for
Customs valuation purposes, uniformity of interpretation and application can be achieved
by taking the term “sale” in the widest sense, to be determined only under the provisions
of Articles 1 and 8 read together.
(c) It would however be useful to prepare a list of cases which would not be deemed to
constitute sales, meeting the requirements and conditions of Articles 1 and 8. In these
cases the valuation method to be used should be in accordance with the order of priority
laid down by the Agreement.
2.3.1.2 Examples of cases where there is no sale
(a) Free of Charge Shipments
Where a transfer of goods is made free of charge, it cannot be regarded as a sale. This is
the case, for example, with certain gifts, samples, prototypes and promotional items. In
this case, Transaction Value may not be applied.
samples gifts
(b) Consignment sales
This refers to goods dispatched to the country of importation not as a result of a sale, butwith the intention that they would be sold on the account of the supplier. The goods remain
the property of the foreign supplier until after they are sold through a selling agent in the
domestic market.
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Illustration of goods imported on consignment for sale by auction
Ilustration No1
(c ) Goods imported by intermediaries
This relates to imported goods which, at the time of Customs clearance, have not yet been
sold but are delivered by the foreign supplier to his/her agent generally to be held in stock
and then sold after importation for the account and the risk of the foreign supplier. Since
there is no transfer of ownership, there is no transaction value for these goods at the timeof importation.
(d) Goods imported by branches
This involves a transaction between two separate persons, the delivery of goods to a branch
ofce which does not have a separate legal status, is merely a transfer of goods from one
ofce to another.
Whether a transaction leading to the importation of goods by the branch ofce qualies asa sale for export depends on the role of the branch in the transaction.
If the main function of the branch is merely to nd customers for the parent company, there
is no sale between the parent company and the branch. As such, the branch simply has a
logistical function and the sale to the end customer is made before the goods are released
into home use. Consequently, valuation considerations will be based on the transaction
value, under usual conditions.
Example of Goods imported by branches
Goods manufactured by company XYZ in a foreign country are imported through branch
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XYZ-1 which does not have separate legal status from its parent company. XYZ-1 obtain
orders from unrelated buyers in the importing country, clears the imported goods, invoice
them to clients and manage a limited stock resulting from any possible surplus. For
accounting reasons, XYZ sends an invoice for these goods to its branch on the basis of a
price representing the manufacturing costs. The sale of goods to customers in the country
of importation takes place either before or after their clearance. The prices invoiced by
XYZ-1 to customers differ from those mentioned on the invoice issued by XYZ, as they
include a commercial prot margin, Customs duties and other costs.
Given that a sale necessarily involves a transaction between two separate persons, the
delivery to XYZ-1 is merely a transfer of these goods from one ofce or section to another
within the same legal entity.
Therefore, when the sale to unrelated buyers takes place before the goods are cleared by
Customs; the customs value must be established on the basis of the PAPP by these buyers,
in accordance with Article 1 of the Agreement, excluding the Customs duties, domestic
transport costs and related charges.
However, as goods imported by XYZ-1 for stock purposes are not the subject of a sale,
Article 1 does not apply and the customs value is to be determined using an alternative
method of valuation.
(e) Goods imported under a hire or leasing contractHire and leasing contracts, even if they include an option to purchase the leased goods,
do not constitute a sale. Leasing contracts are for the purposes of renting (or leasing) of
goods, for example, machinery and equipment for use in the country of importation without
actually purchasing them from the exporter. The goods are valued using an alternative
method and the leasing fees are generally taken to indicate the worth of the goods. Even
though the rights of the importer may extend to the future purchase of the leased goods,
the leasing contract cannot be substituted for a sale.
(f) Goods supplied on loan
If the goods are loaned by an exporter to an importer, this does not constitute a sale and an
alternative method will have to be considered.
(g) Goods imported for destruction
Costs are usually incurred in connection with the importation of waste or scrap for
destruction where the exporter pays the importer an amount for his/her services. As
the importer does not pay for the imported goods but rather, on the contrary, is paid for
accepting and destroying them, such an importation is not considered as a sale. In such a
case, an alternative method of valuation will be applied.
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(h) Goods which are the subject of barter
Barter trade transactions, constitute a specic case in as much as they are totally or
partially expressed in non-monetary terms. They may involve an exchange of goods
of approximately equal value or, expressed in monetary terms but not settled (or only
partially settled) in monetary terms (e.g. merchandise barter which includes a payment to
make up the balance). Hence it is necessary to examine, on a case by case basis, whether
the arrangements can be considered a sale.
2.3.2 Concept of sale for export
2.3.2.1 Meaning of sale for export
The transaction value of the imported goods is based on the price for those goods when
sold. Therefore, in order to establish a transaction value, there must be a sale for export
of goods being valued before importation. If the imported goods are not subject of a sale,
transaction value can not be applied under Article 1.
Furthermore, the sale in question must be one for export to the country of importation. If
the goods have been sold for the domestic market in the country of export or for export to
a third country, those sales cannot be used to establish the transaction value.
When goods are presented for valuation, the fact would be to establish their importation,
and that importation would establish whether goods had been exported or not. It must then
be necessary to identify the transaction relating to that importation.
It must be demonstrated that there was an actual international transfer of title to the goods,
which resulted in an export of the goods to the country of importation.
2.3.2.2 Examples
Example 1:
Seller S in the exporting country X enters into a contract to sell electric appliances to
importer A in the importing country I at a price of 5.75 c.u. per piece. S concludes an
agreement with manufacturer M also in country X to manufacture the goods. Manufacturer
M on behalf of S, ships the goods to A in country I. M’s selling price to S is 5 c.u. per piece.
In this case, the transaction between S and A involves an actual international transfer of
goods and constitutes a sale for export to the country of importation. As such, it would be
a basis for valuation of the imported goods under Article 1 of the Agreement. (Advisory
Opinion 14.1)
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It is not necessary that the sale takes place in a specic country of exportation. Whether
seller S is located in country X or I or a third country is not a relevant factor. The transaction
between buyer B and seller S is a sale for export to the country of importation and would
be the basis for valuation of the goods under Article 1 (Advisory Opinion 14.1).
Example 3
Company X in Japan enters into an agreement to sell electrical appliances to Company
P of East Africa. Company X concludes an agreement with Manufacturer XYZ also in
Japan, to manufacture the goods. XYZ manufactures on behalf of Company X, then ships
the goods to Company P in East Africa.
In this case, the transaction between Company X and Company P involves an actual
international transfer of goods and constitutes a sale for export to East Africa.
Ilustration No 4
2.3.3 Concept of Price Actually Paid or Payable (PAPP)
The Interpretative Note to Article 1 (Note to Paragraph 2 of 4th schedule of EACCMA) provides that the price actually paid or payable is the total payment made, or to be made,
by the buyer to or for the benet of the seller for the imported goods.
It further claries this term by indicating that the PAPP includes all payments actually
made or to be made as a condition of sale for the imported goods, by the buyer to the seller
or by the buyer to a third party to satisfy an obligation of the seller (ANNEX III 7).
The term “paid” or “payable” means that if the goods are paid for before valuation, the
price paid will be used as a basis for valuation. If not paid, then the price to be paid will be
used. The Interpretative Note to Article 1 species that the payment need not necessarily
take the form of a transfer of money. Payment may also be made by letter of credit or
negotiable instruments. The followings are some of the examples in relation to payments;
(JAPAN)(EAST AFRICA)
MANUFACTURER XYZ
COMPANY PCOMPANY X
CARGO
Sales Agreement
Manufacturing Agreement
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deduct 500 c.u. from the next invoice. The price of the shipment being valued reects this
500 c.u. deduction.
In this example, the PAPP is 4,000 c.u. the sum of the direct payment of 3,500 c.u. and
the indirect payment of 500 c.u.
Ilustration No 6
2.3.3.2 Activities undertaken by the buyer on his or her own account
The Interpretative Note to Article 1 (Note to Paragraph 2 of the 4th Schedule of EACCMA)
also species that activities, other than those for which an adjustment can be made under
Article 8 (Paragraph 9 of 4th schedule of EACCMA), which are undertaken by the buyer
on his or her own account are not considered an indirect payment although they might be
regarded as for the benet to the seller. This would include such activities as:
(a) Market studies and market research;
(b) Advertising brand or trademark under which goods are going to be sold;(c) Preparation of showrooms;
(d) Participation in trade fairs and exhibitions;
(e) Testing of machinery and equipment; and
(f) Costs to obtain an irrevocable and conrmed letter of credit.
Example 1
Firm A concludes a long-term contract with foreign manufacturer S for the supply of a
new type of electrical appliance. Under the terms of the contract, the appliance will be
marketed under S’s trademark and A undertakes the cost of marketing it in the country of
importation at his own expense.
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Illustration No 7
In this example the cost of marketing cannot be added to the PAPP because this activity
is related to the marketing of the imported goods and even though this is of benet to the
seller, it is not part of the PAPP.
2.3.3.3 Flow of Dividends
The ow of dividends or other payments from the buyer to the seller that do not relate to
the imported goods are not part of the customs value (Interpretative Note to Article 1).
However, we must make a distinction between dividends and proceeds as dividends will
not be added to the PAPP but proceeds will be added as an adjustment under Article 8.1(d).
In general, proceeds are prots realized on the resale of the imported goods and are thus
directly related to the imported goods. Dividends, while also considered as “prot”, are
paid out to stockholders or shareholders. These dividends relate to the rm’s overall
business and not just to the sale of the imported goods. Hence, they are not directly relatedto the imported goods.
2.4 Discounts and Credits
Discounts are general reductions of the PAPP when certain conditions put by the seller are
met. Such conditions may include prompt payment, quantity bought, etc.
The PAPP is established after deducting any legitimate (meaning supported by quantiable
and veriable data) cash or quantity discounts. The most common discounts include cash
discount and quantity discount.
Note
A discount although not included in the customs value is not part of adjustment under
Article 8, but is excluded by virtue of the denition of transaction value.
2.4.1 Cash discounts
These discounts are granted to buyers for payment in cash or payment made within a
specied period e.g., 5% for a payment made within 10 days of receipt of the invoice and,
for Customs purposes, the discounts must be freely available to all buyers. There should
be a schedule to support the discount levels (Advisory Opinion 5.1 to 5.3).
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Cash Discount
2
5% discount if the
payment is made within
1 month er the day
of contract.
Importer
(Buyer) AExporter
(Seller) B
(Country I) (Country X)
Contract (@ USD 30,000) 20 Jan. 2012
Goods 20 Mar. 2012
Invoice (USD 28,500)
Payment (USD 28,500) 20 Feb. 2012
PAPP = USD 28,500If the importer/buyer A actuallymade the payment of USD 30,000,
12 days a er the arrival of the
goods, the PAPP is USD 30,000. Ar cle 13 may be applied.(If the importer/buyer A is to pay this
amount within the me frame.)
At the me of customs valua on the
payment has not been made yet.
Cash discounts can cause difculties as they are usually effected after importation has
occurred. However, the transaction value method requires the use of the PAPP and
legitimate cash discounts can therefore be accepted as a deduction as the discounted price
is in fact, the PAPP.
The diagram below illustrates that where the goods have not been paid for at the time of
determining a customs value for the imported goods, the amount that the importer will
ultimately pay to acquire them will form the basis of the transaction value.
IIlustration No 8
When the transaction involves a cash discount, the price payable may be determined in
various ways. Thus, the invoice may include a statement specifying the conditions for
granting a cash discount, or the importer will inform Customs, on request, that he/shehas accepted the conditions entitling him/her to the discount and that the price payable
is the discounted price. The documents submitted by the importer should be based on
quantiable and veriable data.
2.4.2 Quantity discounts
Quantity discounts are deductions from the price, allowed according to the quantities
purchased at once or over a period of time. Sellers often encourage buyers to purchase in
bulk as their costs are proportionately reduced. For valuation purposes, it is the quantity
which has determined the unit price of the goods being valued when they were sold for
export to the country of importation that is relevant. In order to be accepted by Customs,
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discounts must be freely available to all buyers. Quantity discounts can be established
prior or subsequent to the importation of the goods (Advisory Opinion 15.1).
Examples: The seller offers the following range of quantity discounts:
1 to 9 units: no discount
10 to 49 units: 5 % discount
Over 50 units: 8 % discount
First situation
Buyer/Importer A purchases 27 units and is granted a 5 % quantity discount. Buyer C also
purchases 27 units and is granted a 5 % quantity discount, but receives these units in three
separate shipments each comprising 9 units. Can the 5 % discount be applied?
Answer: Yes in both cases. The price actually paid or payable for the imported goods
is reduced by the 5 % discount. The quantity purchased contributed to the setting of the price, not the delivery circumstances.
Second situation
B and C each purchase a further 42 units from the same supplier. They each receive an 8
% quantity discount on the shipment of 42 units as the manufacturer grants the discount
on the cumulative purchase of over 50 units. Can the 8 % quantity discount be applied?
Answer: Yes. Once again the quantity purchased contributed to the setting of the purchase price and therefore established the PAPP.
Third situation
In addition to the quantity discounts of 5 % and 8 % granted before Customs clearance, a
further quantity discount of 3 % on the rst shipment of 27 units is granted retrospectively.
Can this additional discount be applied to the second shipment?
Answer: No. The additional quantity discount of 3 % granted retrospectively should not
be allowed for the second importation as it did not contribute to the setting of the unit price
of the 42 units being valued, but relates to the 27 units previously imported. To establish
whether or not the 3 % “credit” should be allowed for the rst shipment, it is necessary to
begin by examining the question of credits.
2.5 Credits
Under normal business transactions, it’s expected that the quantity paid in the invoice
is the quantity delivered. If there is any shortfall it is expected that the buyer could be
refunded the amount equivalent to the shortfall. However in practice, the seller usually
supply excess of the product in the next consignment but decrease the price by the amountequivalent to what was not delivered earlier. In a way the supplier was granted a credit in
the current transaction.
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With regard to the treatment of credits in respect of earlier transactions, Advisory Opinion
8.1 of the Technical Committee on Customs Valuation states that the amount of the credit
represents an amount that has already been paid to the seller and is therefore part of the
price actually paid or payable.
The decision on whether or not to apply the credit to the previous shipment must be taken
independently of the shipment being valued. Any adjustment made to the value of the previous shipment will depend on national legislation.
Example:
Importer I receives a shipment of televisions at an invoiced price of 10,000 c.u. However,
the invoice mentions a credit of 1,000 c.u. which brings the nal invoice price down to
9,000 c.u. The importer informs Customs that the credit was granted because 10 of the
television sets in the previous shipment were damaged. The seller therefore granted a
credit on the present shipment to compensate for the losses. Can this credit be applied to
the shipment currently being valued?
Ilustration No 9
Answer: No. The credit is part of the PAPP for the shipment being valued. This shipment
is therefore valued at 10,000 c.u.. The credit may or may not be allowed for the earlier
shipment, depending on the appropriate national legislation.
2.6 Other factors that can affect the price
2.6.1 Case of a price below market price:
“Advisory Opinion 2.1” states that the mere fact that a price is lower than prevailing
market prices for identical goods should not cause that price to be rejected for purposes
of Article 1.
2.6.2 Goods subject to export subsidies or bounties
This is not a case for rejecting the transaction value, or, a cost element to be added under
Article 8, or, an amount to be added to the price as it has not been paid by the buyer to or
for the benet of the seller (Commentary 2.1).
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2.6.3 Goods sold at dumped prices
Goods sold at dumped prices are treated based on Article VI of the GATT 1994 on anti-
dumping. In addition, there are national laws and procedures regarding dumped goods in
importing countries. This must remain totally separate from the valuation procedures.
Thus, the fact that a good is sold at a dumped price to an importer is not a reason for
rejecting the transaction value (Commentary 3.1).
2.6.4 Goods not in accordance with the contract
A special situation arises when the imported goods arrive and they are not in accordance
with the contract or the sale. This would include, among others, the following (Explanatory
Note 3.1):
a) Goods which are partially or completely damaged
b) Goods which do not conform to sample or specication
c) Replacement goods to cover losses described in situations (a) and (b) above
Where imported goods that do not conform to the contract specications of the transaction,
are delivered to the importer, but, the importer agrees to take delivery of the goods, the
exporter may x a new price to be paid for the goods actually received. The price would
then be the basis for determining the customs value under Article 1. Where the importer
does not take delivery of the goods however, they may be re-exported or, abandoned, in
accordance with the national customs law.
Damaged goodsThe specic Customs treatment for the handling of damaged or defective goods is a matter
resolved through national legislation. However, these types of goods may still require
valuation and as such, would be subject to the Agreement. The valuation of damaged
goods would be as follows :
a) Total shipment - If all of the goods in the shipment are damaged, transaction value
would not apply because the PAPP would not cover goods in a damaged condition.
b) Partial shipment - if only a part of the shipment is damaged, transaction value can
be used for that portion not damaged and alternate basis for that portion which isdamaged.
Goods not meeting specication
If either the wrong goods were shipped, or the goods that were shipped do not meet
specication, it is still possible to have a transaction value. If the transaction otherwise
meets the criteria of Article 1, then transaction value applies.
Replacements
Items included in a shipment which are to replace goods in a previous shipment, will be valued
at full transaction value whether they are invoiced at full price or invoiced “free of charge.”
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However, where it is a trade practice for sellers to include in their shipments a quantity of
articles free of charge as replacements for articles which experience shows are likely to
be defective or damaged, the sales price should be regarded as covering the total quantity
shipped. Therefore, you should not attempt to separately value the free replacements or
take account of the additional quantity for valuation purposes.
2.6.5 Split shipments
“Split shipments” refers to goods which, though forming the subject of one transaction
between a buyer and a seller, are not presented for clearance in a single shipment for
reasons connected with delivery, transportation, payment or the like and are imported in
partial or successive shipments and declared, either through the same Customs ofce or
through different Customs ofces.
Cases of goods being imported in split shipments will fall into one of the following three
categories: (Commentary 6.1)
2.6.5.1 Splitting up of industrial installations or plants
This type of case concerns the importation of certain groups of goods and whole installations
which, on account of their size, have to be imported in several shipments.
The customs value of each shipment will be based on the PAPP, i.e., an appropriate
proportion of the total payment made or to be made by the buyer to or for the benet
of the seller for the imported goods, as reected in the transaction agreed by the parties. If
the partial shipment has been the subject of a separate invoice, it will be necessary to
add to invoice price any adjustments determined under Article 8.If the partial shipment has not been the subject of a separate invoice, in determining the
customs value, apportionment of the total value of the transaction could be made in a
reasonable manner appropriate to the circumstances and in accordance with generally
accepted accounting principles.
2.6.5.2 Shipments split for reasons of quantity
An example of this situation could be that the transaction involves a quantity of goods
consisting of identical units or sets sold at an agreed price. The delivery dates may
have been xed in advance or left to the convenience of the parties.
Since for the purposes of applying Article 1 neither the time at which the sale contract was
concluded nor market uctuations after the date when the contract was concluded have to
be taken into account, the determination of the customs value of the goods will be based
on the PAPP.
However, if importations in split shipments do not occur within a reasonable time reecting
the normal commercial practice in the trade concerned, the Customs administration may
consider it necessary to make enquiries concerning the price actually paid or payable,verifying especially whether there is a complementary agreement which modies the
original price.
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If, in the light of information provided by the importer or otherwise, the Customs
administration has grounds for considering that the relationship inuenced the price, it
shall communicate its grounds to the importer and the importer shall be given a reasonable
opportunity to respond. If the importer so requests, the communication of the grounds
shall be in writing (Article 1 (2) a) .
In a sale between related persons, the transaction value shall be accepted and the goods
valued in accordance with the provisions of Article 1 whenever the importer demonstrates
that such value closely approximates to one of the following occurring at or about the
same time:
(i) the transaction value in sales to unrelated buyers of identical or similar goods for
export to the same country of importation;
(ii) the customs value of identical or similar goods as determined under the provisions
of Article 5;
(iii) the customs value of identical or similar goods as determined under the provisions
of Article 6;
In applying the foregoing tests, due account shall be taken of demonstrated differences in
commercial levels, quantity levels, the elements enumerated in Article 8 and costs incurred
by the seller in sales in which the seller and the buyer are not related.
The tests set forth in Article 1 paragraph 2 (b) are to be used at the initiative of the importer
and only for comparison purposes. Substitute values may not be established under the
provisions of Article 1 paragraph 2 (b).
2.7.2 Practical examples in each condition
In order to have a clear understanding of the situation, we will now examine each of these
conditions.
FIRST CONDITION
The transaction value does not permit restrictions as to the disposition or use of the goods
by the buyer. As a practical matter, where the purchaser is restricted as to the disposition
or use of the goods, the price of those goods may well reect the restriction. Where such
a restriction does exist, it would require the rejection of transaction value.
EXAMPLE
Where the buyer is precluded from reselling the goods, that would be a restriction causing
the rejection of transaction value.
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Where a machine is sold at a nominal price on the condition that the importer must use
it only for charitable purposes, which would be a restriction causing the rejection of
transaction value.
There are, however, three exceptions to this rule. It would permit those restrictions which:
a) Are imposed or required by law or by the public authorities in the country of
importation.
Examples of exceptions
i) requirement to obtain a license or permit prior to any resale or use;
ii) requirement for certain types of labeling or packaging;iii) requirement for testing or inspection before release;
b) Limit the geographical area in which the goods may be resold.
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50 Fax machines for $100 each + 10 Photocopiers for $1000 each
•
•
the value of the fax machines.
EXAMPLE
Where the seller imposes a territorial restriction, such as regional distributorships, requiring
resale only in a given area (e.g., country, region, province, county, etc.)
c) Do not substantially affect the value of the goods
In regards to this situation, there is no precise denition or amount for the term
“substantially.” It must be decided on a case by case basis. In that regard, you may wish
to consider the following:
i) the nature of the restriction
ii) the nature of the goods
iii) the nature of the industry and its practices
iv) whether the monetary effect is commercially signicant
EXAMPLE
Where the seller requires the buyer of automobiles not to sell or exhibit the automobiles
prior to a xed date which represents the beginning of a model year. This would not be a
restriction as it does not substantially affect the price.
Where the seller requires that the imported product be sold to consumers exclusively
through individual sales representatives who use a house-by-house sales technique. This
would not be a restriction as it does not substantially affect the price. (Commentary 12.1).
SECOND CONDITION
Where the sale or price is subject to some condition or consideration for which a valuecannot be determined with respect to the imported goods.
The above situation is further explained in paragraph 1(b) of the Interpretative Notes
through the following three situations:
i) The seller establishes the price of the imported goods on condition that the buyer
will also buy other goods in specied quantities.
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EXAMPLE
Manufacturer F in country of export E sells leather goods to buyer X in country I of
import at a unit price of 50 c.u. on the condition that X also purchases a shipment of shoes
at a unit price of 30 c.u.
ii) The price of the imported goods is dependent upon the price or prices at which the
buyer of the imported goods sell