WORLD TRADE
ORGANIZATIONG/VAL/W/109
29 October 2002
(02-5941)
Committee on Customs Valuation
DRAFT REPORT OF THE COMMITTEE ON CUSTOMS VALUATION ON THE
IMPLEMENTATION-RELATED ISSUES IN ACCORDANCE WITH
PARAGRAPH 12(b) OF THE MINISTERIAL DECLARATION
1. Following adoption of the Ministerial Declaration (WT/MIN(01)/DEC/1) and the Decision on
Implementation-Related Issues and Concerns (W T/MIN(01)/17) at Doha, the Committee on Customs
Valuation has held [seven] meetings this year to carry out the mandate contained in paragraph 12(b)
of the Ministerial Declaration and paragraph 13 of the Decision on Implementation-Related Issues and
Concerns.  These meetings were held on 26 February, 27 March, 6-7 May, 3 July,
30 September-1 October, 4-5 November [and 29 November].  The reports of these meetings arecontained in documents G/VAL/M/25, G/VAL/M/26, G/VAL/M/27 and Corr.1 and 2, G/VAL/M/28,
G/VAL/M/29, G/VAL/M/30 and Corr.1 an d Add.1, G/VAL/M/31 [and G/VAL/M/32].
2. The Committee's mandate in paragraph 12(b) states,
"the other outstanding implementation issues shall be addressed as a matter of priority by the
relevant WTO bodies, which shall report to the Trade Negotiations Committee, established
under paragraph 46 below, by the end of 2002 for appropriate action."
For the Committee on Customs Valuation, the other outstanding issues which it shall address are
contained in the five tirets in paragraph 7 of document Job(01)/152/Rev.1.  These tirets are listed in
the body of the technical analysis below.
3. At the meeting of 26 February, the Committee adopted its schedule of work for the year
(G/VAL/44).  It heard a re-introduction by the proponent of the five tirets.  At the March meeting, the
Committee agreed to work on the basis of in-depth discussions at the Committee meetings as well as a
question and answer exercise.  It took note of a Se cretariat document on the negotiating history of the
Agreement (G/VAL/W/95) and another containing a compilation of discussions in various WTO
bodies on implementation-related issues concerning customs valuation (G/VAL/W/97).  At the May,
meeting, the Committee noted the numerous questions posed to the proponent, as contained in
documents G/VAL/W/98 and Adds.1-5.  It continued it s technical discussions of the tirets.  At the
July meeting, a schedule of meetings for the autumn was confirmed.  At the September-Octobermeeting, the Committee took note of India's responses to the questions in document G/VAL/W/101
which provided the basis for further in-depth discussion of the tirets.
4. This report is based on the work carried out in the Committee during this year. It is a factual
overview of the technical analysis where much of the technical details have been necessarilysummarized.  For a fuller understanding of the technical debate, Members should refer to the reports
of the Committee meetings listed above.G/VAL/W/109
Page 2
- Tiret 57:  The addition of cost of services such as engineering, development, and design
work, which are supplied directly or indirectly by the buyer free of charge or at reduced cost
for the production of goods under import, shall be included in Article 8:1(b)(iv).
5. Article 8 of the Agreement lists the adjustments that are to be made to the invoice price in
order to determine the transaction value under Article 1 of the Agreement.  Article 8.1(b) contains onetype of adjustment that are termed "assists."  They are the value of goods or services which are
supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with
the production and sale for export of the imported goods.  Four categories of assists are listed in
Article 8.1(b).  The first three concern goods that, when supplied free of charge or at a reduced price
by the buyer, will be included in the transaction value regardless of their source.  The fourth categoryconcerns services (engineering, development, artwork, design work, and plans and sketches) that,
when supplied free of charge or at a reduced price by the buyer, will be included in the transaction
value on the condition that the services are undertaken elsewhere than in the country of importation.
6. The proponent of the proposal in tiret 57 claimed that the distinction between the origin of the
goods and services in Article 8.1(b) was discriminatory and provided scope for duty evasion.  The
latter was perpetrated through manipulation of invoices to declare such services as having been
supplied by the buyer when they were not, or to inflate the services component supplied by the buyer
in the total value.  The proponent argued that enforcement against fraudulent practices and valuation
were linked.  Therefore, the proposal was aimed at preventing fraudulent practices by closing aloophole in the Agreement.  Some Members also considered the provision discriminatory in its
treatment of goods versus services and questioned the logic in exempting only services sourced
domestically from the customs value.
7. Several Members considered that duty evasion and fraud were enforcement problems, and not
necessarily valuation issues.  The scope for duty evasion existed in all trade transactions.  They
questioned the legitimacy of altering the balance of rights and obligations between importers and
customs administrations in the Agreement to deal with the domestic enforcement problems of one
Member.  Accepting the proposal would imply taxing the domestic suppliers of these services and
raising the dutiable value.  One Member explained that suppliers of economic activity in the country
of importation should not be affected by the tariffs in their own country.  The rationale for the
different treatment for services and goods in Article 8.1(b) had its origin in the tariff practices in somecountries whereby tariff exemptions were provided to goods that had been exported and then
re-imported in a final good.  Providing such exemptions for services was more problematic.  Several
Members, in addition, raised the related problem of double-taxation at the level of the internal
domestic economy.  The value of the service provided by the buyer as an assist would have been
subject to domestic taxation and then taxed again through an import tariff if it was added to thecustoms value of the goods.  The beneficial result of the current Article 8.1(b)(iv) was the creation of
an economic incentive for buyers to procure these services from domestic suppliers and hence, the
development of these indigenous service industries.  Some Members claimed that, in the negotiation
of the Agreement, an explicit decision to provide such an incentive was made.
8. The proponent, supported by some Members, argued that if double-taxation existed, it would
also be a problem for the goods "assists" in sub-paragraphs (i)-(iii)  of Article 8.1(b).  These
sub-paragraphs provided for goods procured domestically and supplied as an assist to be added to the
dutiable value.  Presumably these goods would have been subject to domestic sales taxes or VAT
when procured by the buyer.  Furthermore, the proponent argued that the provision did not provide aeconomic  incentive for development of the domestic services industry.  The proponent understood
the provision to mean that only when such services were supplied by the buyer would they not be
included in the dutiable value.  Such services, when provided by any other supplier, even in the
country of importation, would be included in the dutiable value.  Therefore, there was no incentive to
procure the services domestically.  The proponent considered that, in any case, development ofG/VAL/W/109
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specific domestic industry as well as the avoidance of double-taxation should be a function of
domestic fiscal policy and not customs valuation policies.
9. This discussion, in fact, raised an issue of interpretation of the provision of Article 8.1(b)(iv)
because many of other Members that spoke on the issue did not share the understanding as putforward by the proponent.  These Members understood the provision to mean that the service "assists"
would be excluded from the dutiable value no matter who supplied it within the importing country,
not just when the buyer supplied the service.  Furthermore, it was stated that double-taxation would
not exist for sub-paragraphs (i)-(iii) because many countries exempted goods to be exported from
domestic sales taxes or VAT under the "destination principle" (i.e. goods were taxed at their
destination or point of consumption).  However, this principle often did not exist for services which
were taxed at the origin.
- Tiret 58:  The residual method of determining customs value under Article 7 shall be
inclusive of all residual eventualities, thus allowing valuation based on domestic market price or
export price in a third country with appropriate adjustments.
10. Article 7 of the Agreement contains the provisions for the residual method as well as a list of
prohibited methods for determining value.  Two of these methods, Articles 7.2(c) and (e) concern the
use of prices in the country of export and prices in a third country respectively.
11. The proponent of the proposal explained that the situations whereby customs administrations
arrived at Article 7, having not been able to determine value under the previous methods of the
Agreement, posed serious problems for customs administrations in the absence of adequate
information.  Under these circumstances, the requirement in Article 7.1 that customs value should be
determined on the basis of data available in the country of importation, and the prohibitions in
Articles 7.2(c) and (e) were difficult to rationalize and created implementation problems.  Article 7provided for determination of value using "reaso nable means consistent with the principles and
general provisions of this Agreement…".  In this regard, it was not "reasonable" to exclude these two
methods.  The proposal sought to remove these two, currently prohibited, methods from the list of
such methods in Article 7 and allow for their use, subject to the appropriate adjustments, as means to
determine customs value under the residual method.  Appropriate adjustments could be made for FOB
or CIF charges, differences in commercial and quantity levels, as well as for local selling expenses.
The information to be used would be provided by the importer and on the basis of prevailinginternational business practices such as determin ed by internationally published bulletins, commodity
price bulletins, catalogues, price lists, etc.  The proposal was supported by another Member.
12. One Member supported the inclusion of the method in Article 7.2(e) on the basis that
developments in the international trading environment had undergone considerable change since theAgreement was negotiated, particularly with the growth of intra-firm trade.  The use of a price in a
third market might be an appropriate mechanism to use under the residual method.  However, this
Member considered that the method in Article 7.2(c) conflicted with the Preamble of the Agreement
which said that valuation procedures should not be  used to combat dumping.  Some other Members
also raised the potential conflict of this proposal with the Preamble of the Agreement.
13. Many delegations raised concerns that inclusion of these prohibited methods would
compromise the fundamental principles of the Agr eement.  Under the Agreement, valuation was to be
based on the commercial reality that was pertinent to a particular transaction in the country of
importation.  The prohibited methods in Article 7 were designed to ensure that no parallel oralternative systems could be devised that would compromise the integrity of the valuation system as
prescribed in the Agreement.  They considered that the Agreement contained a sufficient number of
methods including the five main methods and the flexibility allowed in Article 7.  These Members
raised other issues such as how the prices in the exporting country would be obtained;  how wouldG/VAL/W/109
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these prices be adjusted to reflect the particular transaction;  would commercial catalogues be relied
upon which were often not final prices;  how could adjustments be made for different market
situations (different countries would have different cost elements in their domestic prices);  and which
country would be used for third-market comparisons?
- Tiret 59:  The Agreement should be amended to provide for the highest value when
more than one transaction value of identical or similar goods is found.
14. Articles 2.3 and 3.3 of the Agreement state that, in applying these Articles, if more than one
transaction value is found, the lowest such value shall be used to determine the customs value.
Furthermore, the list of prohibited methods in Articl e 7 of the Agreement, includes "a system which
provides for the acceptance for customs purposes of the higher of two alternative values."
15. The proponent explained that Articles 2.3 and 3.3 provided vast opportunities for misuse by
unscrupulous traders.  Small pilot consignments were cleared through customs at low values.  These
were intentionally followed by larger consignments for which the transaction value could not be used
and the low values previously assessed had to be used under the provisions of Articles 2.3 and 3.3.Also, instances of a number of small consignments imported at low prices by cartels were also cited.
Therefore, the proponent sought to amend Articles 2.3 and 3.3 in order to provide for use of the
highest value of identical or similar goods.  This would prevent misuse of the provisions, curb invoice
manipulation, prevent trade distortion and revenue loss.
16. In response to several Members who indicated that this was, once again, an enforcement
problem and not a valuation problem, the proponent explained that fraudulent traders were extremely
difficult to detect.  Often the initial pilot consignments were imported by fly-by-night importers who
could subsequently not be tracked down.  They we re often imported at remote customs posts where
information was not readily available.  Some Members suggested that customs administrations shouldcarry out post-audits in order to address the initial fraudulent import.  A correction could then be
made that would benefit the subsequent consignments.  Again, addressing the fundamental
enforcement problem was the more long-term solution.  While agreeing that enforcement was
necessary, the proponent considered that it could not be done in contravention of the Agreement.  The
proponent argued that unless customs could provide that a particular consignment had been
deliberately under-valued and had the evidence to show that fraud had taken place, it would be
difficult to reject the declared value.
17. Several Members did not consider that the problem outlined by the proponent warranted
changing a fundamental tenet of the Agreement.  There was concern that the proposal was motivated
by a desire for higher valuation and increased revenue than for addressing fraud or problems with
implementation.  They considered that the provisi ons in the Agreement allowing for adjustments in
quantity and commercial level, as well as the time constraints, when using identical or similar goods
were sufficient to counter any such efforts at fraudulent transactions.  Another Member was
concerned that searching for the highest value would be burdensome and impair the trade facilitating
objectives of the WTO.  In addition, another Member questioned the very existence of such schemes,
given the extremely complicated nature of ensuring that the second consignment would be followedsoon after the first and that it would not be valued on the basis of the transaction value but on the basis
of identical or similar goods.
- Tiret 60:  Buying commissions should be taken into account in the determination of
customs value of imported goods as it forms a legitimate component of the landed cost of
imported goods.
18. Article 8.1(a)(i) stipulates that commissi ons and brokerage, except buying commissions,
should be added to the invoice price to the extent that they are incurred by the buyer but are notG/VAL/W/109
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already included in the price.  Buying commissions were defined in the note to Article 8.1(a)(i) as fees
paid by an importer to the importer's agent for the service of representing the importer abroad in the
purchase of the goods being valued".  The proponent of the proposal considered that, buying
commissions, being part of the price paid for the goods, should not be excluded from the customs
value.  There was no rationale for its exclusion which was giving rise to misuse by fraudulentimporters.  Large-scale buyers set up buying agents abroad and claimed large buying commissions to
substantially reduce the dutiable value of their imports.  Customs administrations of developing
countries had difficulty distinguishing buying commissions from other sources of commissions;
sometimes brokers acted for both parties and the limits of buying and selling commissions were
difficult to discern.  The proposal was supported by one other Member.
19. The majority of delegations who spoke on this proposal considered that buying agents were
an extension of the buyer, the benefits from which did not accrue to the seller.  Therefore, these
commissions were not part of the price paid to the seller and therefore should not be included in the
customs value.   To do so, would be to punish those importers which relied on buying agents and
would create a disincentive to trade in general.  Some Members even considered that the proposal was
punitive in nature and would represent a drastic solution to a domestic enforcement problem.
20. While some Members agreed that there was a relevant definitional question, they noted that
these had been dealt with by the WCO Technica l Committee through guidelines and explanatory
notes.  One Member explained that its government had adopted internal legislation which laid out
guidelines regarding the elements of proof necessary for the establishment of circumstances whichmay be considered as buying commissions or commissions or costs incurred by the buyer to an
intermediary, and regarding the nature of these paym ents.  According to these guidelines, the customs
administration had at its disposal all the means to conclude whether the services provided by the
intermediary were part of the price effectively pa id in the importation.  When there was insufficient
evidence to determine the relationship between the buyer and the agent, the regulations said thatcustoms could conclude non-existence of a relationship between the buyer and the agent.
21. The proponent explained that it also had similar guidelines and instructions on how to deal
with buying commissions and how to ascertain if a particular element was a buying commission.
However, it was concerned that if customs disallowed buying commissions by an administrative order
based on the guidelines, an importer would initiate judicial proceedings to argue that the buying
commission existed and customs would not be able to prove the contrary.
- Tiret 61:  Persons associated with each oth er as sole agents, sole distributors, and sole
concessionaires, howsoever described, sh ould automatically be deemed "related".
22. Article 15.5 of the Agreement states that "persons who are associated in business with one
another in that one is the sole agent, sole distributor or sole concessionaire (hereafter, sole agents,
etc.), however described, of the other shall be deemed to be related for the purposes of this Agreement
if they fall within the criteria of paragraph [15.]4 [of the Agreement].  Article 15.4 contains the
definition of related for the purposes of the Agreement.  In effect, the Agreement stipulates that such
sole agents, etc. are not automatically deemed to be related unless they fulfil the criteria forrelationship in the Agreement.
23. The proponent of the proposal noted that Article 15.5 put the burden of proving a relationship
on the customs administration.  It was unlikely that the customs administration in the importing
country would have access to pertinent business documentation on contracts that would be necessaryto prove such a relationship.  The proposal sought to introduce a provision in the Agreement that
would designate sole agents, etc. as related parties in the transaction in question.  In these types of
transactions, the buyer and seller were not independent of each other and prices involved specialG/VAL/W/109
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discounts to these exclusive agents. The criteria in Article 15.4 might not capture all the possible
types of relationships that might exist.
24. Several Members considered that sole agents, etc. were normal commercial operators and
their transactions were simply under a form of distribution contract that involved some territorialexclusivity.  This differed considerably from the type of relationship envisaged in Article 15.4, which
were quite intimate associations.  If the obligation were imposed on the sole agent, etc. to prove that
there was not a relationship, the burden of proof would be impossible to meet because it would imply
proving a negative. The Agreement, in Article 15.4, provided sufficient and precise criteria on the
basis of which to determine relationship.
25. One Member, while sharing the view that the Agreement should not be changed, considered
that sole agents, etc. did not have any incentive to produce documentary evidence as requested by
customs.  They were safeguarded because if the customs administrations could not prove a
relationship, they were in a comfortable position.  Thus, when customs suspected a relationship might
exist they could request that the sole agent, etc. provide the necessary documentary evidence for
customs administrations to determine if the conditions in Article 15.4 were being met.  While notautomatically presuming a relationship for sole agents , etc, in the event that sole agents, etc. did not
provide documentary evidence to the contrary, customs could presume a relationship existed.
26. Some Members considered that Article 17 and the Ministerial Decision Regarding Cases
Where Customs Has Reasons to Doubt the Truth or Accuracy of the Declared Value allowedsufficient flexibility to deal with situations where the importer failed to provide documentary
evidence.  Another Member asked what would prevent fraudulent importers from presenting a
fictitious contract to hide the relationship if the intent was really to misuse the provisions?  Another
Member asked what should be done in the event that a relationship did exist but it did not effect the
price?  The proponent expressed interest in the idea put forward in paragraph 25.  If modified toinclude not only the contract between the buyer and the seller, but also all information necessary to
satisfy customs that the relationship did not exist, the proponent expressed interest in examining the
idea further as a possible practical compromise.
Summary
27. All Members acknowledged the existence of fraud and the genuine difficulties in addressing
it.  However, many Members consider that the implementation difficulties cited relate to problems of
domestic enforcement, rather than problems in the Agreement itself.  Therefore, most of the Members
who spoke on the issues remain to be convinced that the tirets represent the appropriate solutions. In
addition, some Members consider that the Committee's work over the year on the tirets has analyzed
sufficiently the issues and that there are no new aspects to consider.  A few other Members do notbelieve that the work is completed until appropriate solutions are found to the problems cited in the
tirets.  Consequently, the Committee has not been able to achieve any consensus on the issues nor to
suggest a course of appropriate action on the matter referred to it by Ministers at Doha.
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