The WTO was established as one of the outcomes of the Uruguay round of multilateral trade talks in the year 1995 (Hoekman, Mattoo and English 2002). The Uruguay round of multilateral talks was concluded in 1994 following eight years of complex and contentious negotiations. These talks are a major landmark in the history of the trading system. Following these discussions, agriculture, textiles and clothing became subject to strong multilateral disciplines. In addition to that, the trading system was extended to include intellectual property (Hoekman, Mattoo and English 2002).
The goal of the WTO is to establish rules for the trade policy game for the member countries (Nakagawa 2011). A proper understanding of how the WTO works, and what it is involved in is a necessary condition for maximizing benefits for the members (Hoekman, Mattoo and English 2002). Unlike many international organizations, the WTO has a well functioning and binding dispute resolution mechanism. This component has been found to be very important to developing countries which may be unable to induce compliance with negotiated rules in bilateral disputes involving large industrial economies (Hoekman, Mattoo and English 2002).
As with most important innovations, the WTO Customs Valuation Agreement is based on a very simple concept. The concept for its formation is that it was found that it is in the interests of both the customs administration and traders that taxation be based on the realities of the financial transaction that is taking place (Keen 2003). This is also known as the transaction value method and is the primary method of valuation used in the agreement (Macrory, Appleton and Plummer 2005).
The agreement has four main components, the first being a set of methods to determine customs value with their interpretive notes. The second component is a set of provisions that aim to balance the interests of importers and customs administrations. The third component is a number of supporting provisions including definitions of particular terms. The final component is an institutional framework including provisions for administration, consultation and dispute settlement (Keen 2003).
On observation of historical evidence, it is noted that the collection of customs duty was observed in civilized society many years ago. Evidence of this is seen in the fact that Athens applied 20% import duties of corn and other goods (Rosenow and O’Shea 2010). As important as taxation is the fact that it has also been noted that whenever there is a duty to be collected, there will be disputes over the rates and methods used in collection. It is due to such factors that the WTO Customs Valuation Agreement is important. In this agreement, the rules for valuing imports to assess the customs duties are all settled (Rosenow and O’Shea 2010).
It has been observed that the WTO Customs Valuation Agreement is based on a “positive” principle as opposed to a “normative” economic one (Rosenow and O’Shea 2010). A positive economic principle prefers valuation by considering what the value of goods is rather than what the value of goods should be as the correct customs value (Rosenow and O’Shea 2010). The objective of the agreement is the establishment of a framework for trade policies.
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Based on the above information, it is possible to understand that the WTO is concerned with setting the rules of trade and not with the results of those policies (Nakagawa 2011). To achieve this, the WTO gives consideration to five major principles, namely, non discrimination, reciprocity, enforceable commitments, transparency and safety valves (Hoekman, Mattoo and English 2002). As mentioned in this introduction, the WTO Customs Valuation Agreement serves to bring about uniformity in trade between countries. This report will consider the role of the agreement and its possible effects in the importation of used vehicles between countries.
Treatment of Used Motor Vehicles
It has been observed under the guidance notes on the audit for customs values that the valuation of used motor vehicles for customs purposes poses specific practical problems (HMRC 109). However, upon consideration of the World Customs Organization (WCO) study 1.1, various possible solutions are presented. The study is mainly concerned with the broad spectrum of vehicles regarded to be used at the time of importation. The study mainly addresses whether the vehicles were purchased new or second hand and does not give consideration to limited fields of special purpose vehicles such as vintage or classic cars (HMRC 109).
Basis Used for Valuation of Imported Used Vehicles
Based on the guidance notes on the audit of customs values with respect to imported used vehicles, there are two considerations that need to be addressed (HMRC). The considerations are made based on the World Customs Organization (WCO) study 1.1 (HMRC 109). In the first situation, the vehicle in question is imported following a purchase without any usage before sale. In the second situation, the vehicle is imported after additional use since the period of purchase (HMRC 109).
In cases where the vehicle is imported and has been used following purchase, it has been noted that method 1 cannot be applied. This is due to the fact that there is no price paid or payable for the vehicle in its condition at the time of importation (HMRC 109). This position suggests that the value must be determined by another method. It has been observed that both the situations with regard to used vehicle importation can raise problems when trying to establish the suitable basis for valuation with other methods.
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If the importation is done with no intervening use following a sale, the valuation is made based on the price payable or price paid (HMRC 109). This price will also serve the purpose of establishing transaction value under method 1. This consideration is after all other requirements and conditions have been made. However, if all the necessary requirements and conditions cannot be satisfied, the customs value must be determined applying methods 2 to 5 in a sequential fashion (HMRC 109).
Considerations for Methods 2 and 3
According to the guidance notes on the audit of customs, the applications of the above methods suggest the existence of goods similar or identical to the vehicles to be exported at or about the same time as the goods in question (HMRC 109). In addition to this consideration, the value of such identical or similar goods must have been determined using method 1. In the case of used motor vehicles imported by private individuals, it has been observed that it seems doubtful whether these conditions can be fulfilled. However, on occasion, there may be scope for application of methods 2 and 3 as in the case of importations by commercial dealers (HMRC 109).
Considerations for Method 4
In cases where the imported used vehicles cannot satisfy conditions for Method 2 and 3, method 4 can be applied so long as the requirements can be satisfied (HMRC 110). However, there are cases where the conditions cannot be met, but the method is still used. This case includes those where vehicles are sold after further processing, such as repair, reconditioning or fitting of accessories. In these cases, method 4 can still be applied if the importer makes a request. Thus, deductions will have to be made taking into account the value of such processing.
Considerations for Method 5
This method cannot be applied to the case of used motor vehicles because used vehicles are obviously not manufactured (HMRC 110).
Considerations for Method 6
It has been established that in many cases, the customs value of used motor vehicles will be determined using method 6 (HMRC 110). The provisions for the use of the fallback method require the use of any reasonable approach to the determination of value that is consistent with principles and provisions of the World Trade Organization (WTO) valuation agreement. The flexible use of any of the methods 1 to 5 as agreed with the importer (HMRC 110). Based on this rule, the customs value could be based on the price paid or payable for a vehicle. If this case is used, then the goods will have to be valued with reference to the goods condition at the time of valuation. Adjustments would have to be made to the price that account for depreciation that would cater for use since purchase (HMRC 110).
In some cases where there is no price paid or available, then the value might be reached in consultation with the importer of the goods. That is why it is possible to use the transaction value previously accepted for imported new vehicles of the same make and model (HMRC 110). This price would need to be adjusted to reflect the current state of the vehicle. These adjustments will need to consider depreciation due to age, wear as well as costs to associate with additional accessories that do not normally form part of the vehicle equipment. In some cases, further adjustments are necessary to take into account differences in the level and quantity between transactions. In the event that there are no importations of new vehicles of similar make and model, then method 5 can be applied using transaction values already accepted for similar new vehicles (HMRC 110).
Wrecked cars imported for use as Spares
It is possible that an importer may be interested in wrecked vehicles which could be used for spares. In cases of wrecked vehicles which have been written off for insurance purposes, it is not possible to establish value under methods 1-5 (HMRC 111). Based on recommendations of the WCO study 1.1, it has been suggested that an appropriate customs value under method 6 could be based on the current prices for new and used motor vehicles (HMRC 111). This is based on prices listed in catalogues or specialized periodicals taking into consideration deductions with regard to the vehicle condition and elements affecting its value. Based on experience, it has been observed that a 70% deduction is often appropriate (HMRC 111).
Additional Considerations to be made in establishing Customs Value
In addition to the above considerations in the importation of used motor vehicles, there are other additional considerations that need to be taken into account. An example of this is in relation to discounts and allowances. It has been observed that an invoice for goods may at times indicate a discount from the price payable for goods (HMRC 37). Based on the requirements of the WTO, it is indicated that if the buyer and the seller are not related, any discount indicated on the invoice are normally allowable when calculating customs value. The exceptions to this rule are in instances where the discount is given to account for goods returned by the buyer in partial exchange for goods being imported. Another exception is in instances where the discount relates to a previous purchase (HMRC 37). When a buyer and seller are related, a discount is only allowable when it can be shown that it was accorded for good commercial reasons rather than because of the relationship.
Another possible exclusion in the case of customs value of imported vehicles is that of settlement discounts. These cash or settlement discounts are normally granted for payment made within a specified period of time (HMRC 37). In some cases, a discount may be granted for payments made before the goods are dispatched. Such discounts will be normally indicated on the invoice; they will be products with the entry for free circulation. These discounts are normally accepted without further evidence unless it is thought that the figures are too high. As a general rule, a discount that does not exceed 6.25% is permissible.
Another possible exclusion in the determination of customs value can be attributed to buying commission. This refers to fees paid by an importer to his agent for the service of representation in case of goods being valued (HMRC 40). In some transactions, the buying agent ends the transaction and then re-invoices the importer. This situation suggests that the price and the fees are considered to be different entries, and so the buying commission cannot be included when determining customs value (HMRC 40).
Another consideration that can be made in the case of importation of used motor vehicles is regarding trade or quantity discounts (HMRC 37). A quantity discount can be defined as deductions from the price of goods allowed by a seller based on quantities purchased within a given period (Key 2004). These discounts can be allowed to provide the necessary conditions which would be satisfied. One condition for the discounts is that the seller should be able to indicate that his prices are set based on a fixed scheme that gives consideration to quantity of goods sold (Key 2004). It should be noted that the rate of discount may vary considerably according to the types of goods in question. Discounts of this nature are normally subject to a negotiated contract or pricing structure. The guidelines for the treatment of such discounts are outlined in WCO Advisory Opinion (WCO AO) 15.1 (HMRC 37).
In addition to the consideration with regard to the above discount, further consideration may be given based on distributor’s discounts. These discounts are normally trade discounts based on contracts. Examples of such agreements are those that restrict a seller to trade within a given geographical area. The supplier aids the distributor by providing advertising material, marketing advice and trade discounts (HMRC 38). Payments for sole distribution rights are normally covered by an agreement that involves both the buyer and seller. Where contract based arrangements indicate such payments, they are made as a condition of sale that should be included in the customs value (HMRC 38).
Another consideration that may arise in importation of used vehicles is with regard to brokerage. A broker acts for both the buyer and seller, and their roles are to put the two in touch with each other (HMRC 33). The brokerage fee is normally calculated as a percentage of the total business conducted and is added to the price paid (Cheng 2010). In such cases, those payments are normal where the broker is paid by the supplier, and as such, the fee will be included in the invoice price. In such cases, there is no difficulty with regard to valuation. However, when the broker is paid separately by the buyer the fee is added to the price paid (HMRC 33).
Another consideration that may need to be made with regard to customs value is concerned with freight and insurance. According to the WTO agreement, it is left to the customs administration to decide to what extent freight charges are to be included in the customs value (HMRC 18). With regards to this, it has been observed that the European Commission (EC) has decided that this includes all the costs of transport up to the place of introduction into the customs territory of the EC (HMRC 18).
Brief Description on each of the Valuation Methods
Based on the WTO Customs Valuation Agreement, there are six different methods that can be used for determination of the customs value of used motor vehicles (WCO 2006). These six methods are the only ones that can be used for valuation under the terms of the agreement. It is also crucial to note that the order identified above is binding. This suggests that when valuing imported goods, such as used motor vehicles, the first method to be considered is always the transaction value method, and the second one can be only invoked if the first method is found unsuitable for some reason (WCO 2006).
Under the WTO treaty transaction, value is identified as the preferred method for customs valuation (Laro and Pratt 2011). Based on this primary standard, it is mentioned that goods should be priced at the actual quantity with consideration to level of trade, not as usual wholesale quantities. The definition under the treaty states that transaction value is the price actually paid or payable for goods when sold for export (Laro and Pratt 2011). There are some permissible additions to this price namely packing costs incurred by the buyer, selling commission accrued by customer, apportioned value of any assists, any royalty or license fee, and proceeds from any subsequent sale payable to the seller (Sherman, Jarreau and Brew 2009). In addition, three items should be deducted from the market price of goods, namely, any reasonable costs incurred for construction, assembly, maintenance, etc., any reasonable transportation cost following importation, any customs or other excise duties imposed (Laro and Pratt 2011).
When the transactional value cannot be determined, the next method considered is the transactional value of identical merchandise (Laro and Pratt 2011). Under this method, the valuer is permitted to consider the price of any identical merchandise produced by the same or even a different manufacturer in the same country (Laro and Pratt 2011). In this method, the applicable additions and deductions are similar to those of the primary method. In addition, adjustments can be made to accommodate differences in commercial and quantity levels between the identical product and the product being imported. It is suggested that if several different values are available, the lowest value should prevail.
If the above method fails, then the transaction value of similar merchandise method can be used (Laro and Pratt 2011). The method is similar to the above mentioned one with the exception of similar merchandise being used as a basis. Similar merchandise refers to products that are produced by the same or other manufacturer in the same country and appear to be similar in nature to the goods being imported (Laro and Pratt 2011). The goods need to be commercially interchangeable with the goods to be imported. Factors to consider when deciding whether merchandise is similar include quality, reputation of the merchandise and whether it is trademarked (Laro and Pratt 2011).
When all the three methods fail at valuing goods, the next way out that may be used in valuation is the deductive value method (Laro and Pratt 2011). This refers to the price at which identical goods will be sold in the country of purchase. This is with consideration to adjustments and factoring in the condition of the goods on resale at the time of resale (Laro and Pratt 2011). This value can be determined by looking at the unit price for which the goods are sold in the greatest quantity. Four items must be deducted from the identified amount, namely, commissions, importer profits and general expenses are included in the unit, transportation and insurance costs, customs duties and other taxes, and any costs associated with additional processing (Sherman, Jarreau and Brew 2009).
If the deductive value method fails as well, then the computed value method is considered (Laro and Pratt 2011). This is a mathematical equation which is based on the cost of production of the goods to be valued. It is also usually used to determine value in the context of related party transactions. The formula states that computed value is equal to cost or value of materials plus manufacturing costs plus profit plus overhead plus any assist plus packing costs (Laro and Pratt 2011). The cost of material is derived from the producer unless it is inconsistent with industry standards.
The final method for valuation considered is the derived value (Laro and Pratt 2011). The method is also known as the fall back method and allows for the use of any formula that is derived from one of the acceptable methods. This may be applied where it is necessary to reflect accurately value with suitable adjustments made to approximate results from one or more acceptable methods (Laro and Pratt 2011).
It is observed that between deductive and computed value, customs are to use deductive value unless all the required elements are not present, or the importer elects the use of computed value (Laro and Pratt 2011). The agreement states that the importer may request that the order in which the deductive and the computed value methods are applied is reversed (WCO 2006). It should be noted that by virtue of paragraph 3 of Annex III, developing countries which request it may be authorized to submit this reversal order for prior agreement by customs authorities (WCO 2006).
It should be noted that the purpose of the Customs Valuation Agreement is the provision of reciprocity between nations during the process of imposing import duties (Laro and Pratt 2011). It is for this specific reason that the treaty highlights the above mentioned methods for imposing taxes on imported goods. The use of the same valuation approach makes it possible to prevent the use of taxation as an instrument during trade wars in all the signatory countries Laro and Pratt 2011).
In addition to that, it has been observed that such uniformity is suitable for corporations which can calculate the cost of doing business in other countries accurately. Based on the same valuation methods, each country will charge its own import duty to the product based on a percentage of the reported value individually. This approach takes away the uncertainty involved in predicting the cost of exporting products, thus encouraging trade (Laro and Pratt 2011). Customs treaties and statutes require that companies apply internationally accepted methods in declaration of the value of imported goods. The use of standardized methods is aimed at allowing companies to make better predictions, calculations and reporting of goods and associated import duties. It has been reported that internal revenue and the customs laws have competing goals which may interact or overlap resulting in tensions with taxpayers reporting to both the agencies.
References
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HMRC n.d., Guidance on the Audit of Customs Values, HM Revenue & Customs, 2011, Web.
Hoekman, BM, Mattoo, A, and English, P 2002, Development, trade, and the WTO: a handbook, Part 1, The World Bank, Washington.
Keen, M 2003, Changing customs: challenges and strategies for the reform of customs administration, International Monetary Fund, Washington.
Key, CM 2004, Principles of Valuation: Export & Import, Trafford Publishing, Canada.
Laro, D, and Pratt, SP 2011, Business Valuation and Federal Taxes: Procedure, Law and Perspective, John Wiley & Sons Inc., New Jersey.
Macrory, PFJ, Appleton, AE, and Plummer, MG 2005, The World Trade Organization: legal, economic and political analysis, volume 2, Springer Science+Business Media Inc., New York.
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World Customs Organization (WCO) 2006, Customs Valuation, World Customs Organization, Brussels.