Understanding
the WTO: Nature and concept (1) (September 29, 2003)
This is a three-part series
on the WTO, its nature, concept, principles and agreements.
Philippine
Membership to the WTO. On January 1, 1995, the World
Trade Organization (WTO) was officially established
with more than 120 countries, including the Philippines,
as members. However, prior to the formal establishments
of the WTO, a multilateral trading system was already
operational for almost 50 years through the General
Agreement on Tariffs and Trade (GATT), which first
started in 1948.
As
a requirement to membership to the WTO, the Philippines
acceded to numerous agreements governing the trade
in goods and services and other trade-related activities.
For the international trading community, the agreements
covered a wide array of subjects such as agriculture,
customs valuation, tariff restructuring, dumping,
countervailing, safeguards, rules of origin, and the
intellectual property rights.
Since that time, there had been much controversy following
the Philippines' membership in the WTO. Much has already
been written on the advantages and benefits (including
the ill-effects) of the trade reforms resulting from
the WTO membership. In the latest meeting of the 146-member
WTO in Cancun, Mexico, talks on further trade reforms
collapsed due to the unwillingness of various parties
to compromise on issues such as agricultural subsidies
and trade facilitation.
What
is the World Trade Organization (WTO)? For many in
the trading community, the concept of the WTO remains
something of a mystery even if most would agree that
the positive (or negative effects) on local industries
have been widely felt. Thus, the questions remain
- what really is the WTO?
The
WTO actually has many faces and there are various
ways to look at it. In layman's terms, the WTO is
an international agreement, an international forum,
an intergovernmental body and at the same time, an
international court.
An
International Agreement on Trade in Goods and Services.
The WTO is an international general agreement governing
trade in goods and services. It operates a system
of trade rules resulting from decades of negotiations
and agreements among trading countries. In other words,
it is a multilateral trading system. At the heart
of the WTO are the agreements which have been negotiated
and signed by most member countries. Most of the agreements
under the WTO resulted from the Uruguay Round of negotiations
under GATT during the period 1986-2004. From the original
15-point agenda in 1986, the present set of agreements
now covers over 30 items ranging from customs valuation
and intellectual property to maritime, telecommunication
and financial services. The agreements are essentially
contracts that bind the countries in regards to their
trade policies.
An
Intergovernmental Body. The WTO is an intergovernmental
body with its own structure and set of officials similar
to the United Nations (UN) and other international
bodies. It is composed of 4 levels of structure. The
first level is the Ministerial Conference composed
of all WTO members and meets at least once every two
years, the last of which was this September 2003 in
Cancun, Mexico. The second level is the General Council
composed of three bodies, namely: (a) The General
Council; (a) The Dispute Settlement Body, and (c)
The Trade Policy Review Body. The third level of the
WTO is composed of three councils and six committees,
which report directly to the General Council. The
councils, with each handling a broad area of trade,
are as follows:
a.
The Council for Trade in Goods (Goods Council)
b. The Council for Trade in Services (Services Council)
c. The Council for Trade-Related Aspects of Intellectual
Property Rights (TRIPS Council)
The
six committees handle specific areas of trade and
report directly to the General Council. The fourth
level of the WTO refers to the various other committees
and bodies under the three main councils mentioned
above.
An
International Forum and Court. As an intergovernmental
body, the WTO likewise serves as a forum for governments
to negotiate further agreements governing the trade
in goods and services. As trade agreements often involve
conflicting interests, disputes in regards to the
interpretation and application of the various agreements
normally arise. In order to settle the differences
among countries, the WTO provides a forum for countries
to resolve trade disputes among themselves. In addition,
a dispute settlement process provides the legal foundation
on the procedure for resolving trade disputes among
countries.
The
dispute settlement process is one of the central pillars
of the multilateral trading system. It underscores
the rule of law, making the system more secure and
predictable. Under the system, countries are obliged
to first consult with each other within a period of
60 days before formal action is taken. If consultations
fail, a panel is appointed to settle the dispute.
Since the recommendation of the panel can only be
rejected by the Dispute Settlement Body in consensus,
it is often the case that the panel's recommendation
becomes the final ruling of the dispute body. From
1995 to March 2003, there had been 286 complaints
filed under the dispute settlement mechanism of the
WTO. One of the complaints is the one filed by the
US against the Philippines for the removal of the
local content rule under the Philippine Car Development
Program.
Our
next Article will discuss the various principles governing
the WTO.
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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How
MNCs set the Price of Exported Goods
(September 15, 2003)
Related Party Transactions.
One common issue for Multinational Companies (MNCs)
when clearing goods with customs is how to prove that
the price paid for the imported article has not been
influenced by the relationship between the buyer and
supplier. Under current customs laws and procedures,
customs may reject the invoice price (price paid)
if there is sufficient ground to believe that relationship
has influenced the price. In practice, customs can
test the acceptability of the declared price by using
"test" values of previously imported identical
or similar goods.
When
confronted with these issues, how can the company
prove that the price paid has not been influenced
by the fact that the buyer and the supplier are related
parties? To address this question, one has to understand
that most MNCs, if not all, have internal transfer
pricing policies established for setting the prices
of goods in cross border transactions. What is the
concept of Transfer Pricing? How is it related to
customs valuation?
Transfer
Pricing. It is roughly estimated that at least 50%
of the world's trade in goods and services are between
related parties. With the continuing trend towards
mergers, acquisition, consolidation and partnering,
it is expected that cross border transactions among
member-companies within a group or conglomerate will
likely continue to grow at a tremendous rate.
Transfer
Pricing is the term used to describe how related parties
set the price for goods, services, loans, intangibles
(e.g. royalty payments) and property rentals when
engaged in transactions among themselves. Obviously,
companies want to maximize profits by paying as little
tax as possible while on one hand, tax authorities
want to maximize revenues by taxing as much profit
as possible.
In
most developed countries, tax (and customs) authorities
review the transfer pricing policies of companies
to ensure that companies do not shift as much profit
to low tax jurisdictions and that governments are
able to collect their fair share from companies conducting
cross-border transactions with related companies.
In the US, even if the transacting parties are unrelated,
tax authorities may apply transfer pricing rules if
it can be shown that the parties are controlled directly
or indirectly by the same or common interests. Thus,
transfer pricing rules apply to companies within a
controlled group.
Arms
Length Principle. Central to the concept of transfer
pricing is the arm's length principle, which has been
used by MNCs for decades. This principle provides
that where one company transacts with a related party,
the prices and terms of the related party transaction
should not differ from the prices and terms which
would have prevailed between unrelated parties. Arm's
length pricing simply means that prices should be
the same as that between independent parties, under
similar set of circumstances. The international application
of the arm's length principle in transfer pricing
is coordinated by the Organization for Economic Cooperation
and Development (OECD). The OECD has issued guidelines
since 1979 to serve as the consensus interpretation
of the arm's length standard and to act as bridge
among the various transfer pricing laws of many countries.
Pricing
Methods. Under the OECD guidelines, the various methods
to determine if the price between related parties
is arm's length can be grouped under the following
categories: (a) transactional methods and (b) profit
based methods. Based on these guidelines, various
countries have individually established their transfer
pricing rules. The United States, which has probably
the most complex rules on transfer pricing, has different
transfers pricing methods depending on the property
or service involved (tangible property, intangibles,
services and loans and property rentals). For determining
the arms' length pricing of tangible property (in
contrast to intangibles), the US has 6 methods, as
follows:
a.
Comparable Uncontrolled Price (CUP) method
b. Resale Price method
c. Cost Plus method
d. Comparable Profits method
e. Profit Split Method
f. Any unspecified method
The
first three methods are quite similar to Methods 2
to 4 of the customs valuation system provided under
TCCP Section 201. The CUP method refers to comparison
with prices in uncontrolled transactions. Resale Price
method refers to comparison with the gross profit
margin in an uncontrolled transaction. Cost Plus method
normally applies to producer or manufacturers and
uses comparison with the gross profit mark up of uncontrolled
transactions. The Comparable Profits method refers
to the use of objective measures of profitability
(e.g. profit level indicators such as capital employed
and financial ratios, including ratios of operating
profit to sales and gross profit to operating expenses).
The Profit Split method is determined by allocating
the profit or loss between the controlled parties.
Impact
of Transfer Pricing on Customs Valuation. In transfer
pricing, certain year end adjustments to inventory
sales between a seller and buyer may be made to maintain
certain profit levels or gross margins. However, such
adjustments may be not allowed by customs. To illustrate,
the Philippine subsidiary of a US electronics company
was given a huge discount on its last quarter importation
of electronic products for year 2002. The discount
was given to cover foreign currency exchange losses
incurred by the Philippine subsidiary, thereby ensuring
its gross margin as a distributor of US products in
the Philippines is maintained (ref. Resale Minus method).
Using test values of previously imported identical
goods, customs rejected the discounted price of the
last quarter importation and subsequently, assessed
the company for additional taxes and duties.
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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Latest
update on the customs audit system
(September 1, 2003)
New Customs Positions. Last June 15, 2003, the Bureau
of Customs (BoC) advertised in major newspapers a
list of vacancies under the Post Entry Audit (PEA)
group. Of the 65 positions available, more than two-thirds
referred to technical positions. For most trading
companies, including those in the customs brokerage
and freight forwarding business, the question now
is what is the implication of this latest development
in the PEA system.
The
succeeding discussion provides some updates on the
Customs Compliance Audit system (also known as the
PEA system), particularly, in regards to the preparations
being made by the BoC prior to full implementation
of the system.
Recent
Issuances. There had been several related issuances,
both by the Office of the President and the Bureau
of Customs, in regards to the PEA system, including:
(a)
Executive Order No. 160 entitled: "Creating the
Post Entry Audit Group in the Bureau of Customs"
(b)
Customs Memorandum Order No. 11 - 2003 "Policies,
Rules, Regulations and Procedures in the Selection
and Appointment of Personnel to the Post Entry Audit
Group"
To
further enhance the PEA system, which was established
under Republic Act No. 9135, EO 160 was issued on
January 6, 2003. Among the notable features of EO
160 are:
(a)
Creation of a new office know as the Post Entry Audit
Group (PEAG);
(b) Appointment of an Assistant Commissioner as head
of PEAG; and
(c) Creation of two operating units under PEAG, namely:
Trade Information and Risk Analysis Office (TIRAO)
and Compliance Assessment Office (CAO).
PEA
System - A Review. The PEA system is an international
best practice aimed at increasing trade facilitation,
encouraging voluntary disclosures, reducing incidence
of fraud and protecting government revenues. Also
known as the Customs Compliance Audit, the system
provides a control mechanism for the BoC to verify
the correct payment of taxes and duties after the
goods have been released from custom custody.
Within
a period of 3 years from date of final payment of
taxes and duties, the BoC may visit a company and
conduct an audit of the records kept. A finding of
underpayment of taxes and duties arising from negligence
or fraud will likely result in very stiff administrative
fines and/or criminal prosecution.
Previous
Articles on the PEA system. For more information on
the PEA and Record Keeping systems, reference can
be made on the following previous articles:
(a)
Why should importers prepare for customs audit (September
23, 2002)
(b) How can importers can prepare for customs audit
(October 21, 2002)
(c) How to conduct a customs compliance self-assessment
(November 4, 2002)
(d) Assistant Commissioner for Customs Audit: Powers
and Functions (January 27, 2003)
What
will happen in a Customs Audit? Based on similar experiences
in other countries, the selection of companies for
custom audit will likely be focused initially on the
top 1,000 importers based on such factors as:
(a)
Track record of the importer and its customs broker;
(b) Statistical data from the computer-aided risk
management system;
(c) Risk assessment of the company; or
(d) Previous records of errors in the import declaration.
Once an audit notice has been sent to an importer,
the audit team will meet with company officials to
discuss and agree on the purpose and scope of the
audit, and the records to be reviewed. While conducting
the audit in the company's premises, the audit team
will, among others, verify the following issues as
against the company's business records:
(a)
Valuation method used
(b) Correct declaration of customs values
(c) Product description and classification
(d) Country of origin certificate (e.g. AFTA Form
D)
(e) Special or preferential tariffs (e.g. AFMA)
(f) Inventory records
Customs
Auditors. After conducting qualifying examinations
a month ago, the BoC is reportedly in the process
of selecting, from hundreds of applicants, the qualified
members of the PEA group. CMO 11-2003 specifically
provides the guidelines in the selection and appointment
of personnel to the audit group. Once the customs
auditors are selected and appointed, the BoC will
likely conduct additional technical trainings for
the successful applicants.
Given
these developments, it would be reasonable to expect
that by the first quarter of next year, several companies
will be the subject of compliance audits to be conducted
by the new customs auditors. In addition to regular
BIR audits, these companies will also be audited for
compliance with customs laws and regulations.
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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Prohibited
Methods on Customs Valuations (August
18, 2003)
THIS
is the sixth and last consecutive article relating
to the WTO-based customs valuation system. In the
first five articles, we discussed about methods 1
to 4 of the WTO Agreement on Customs Valuation (Transaction
Value system), as implemented under Section 201 of
the Tariff and Customs Code and its implementing rules.
The
succeeding discussion will focus on the last two methods
of valuation, namely: (a) Computed Value Method based
on the cost of materials, fabrication and profit in
the country of production (Cost Plus Method); and
(b) Fallback Method based on previous methods applied
with greater flexibility (Flexible Method). In addition,
we will provide an overview of prohibited methods
of valuation under the Transaction Value (TV) system.
Method
5 - Computed Value Method. Section 201(E), TCCP provides
that the dutiable value of the imported goods under
this method shall be "the sum of:
(1)
The cost or the value of materials and fabrications
or other processing employed in producing the imported
goods;
(2)
The amount for profit and general expenses equal to
that usually reflected in the sale of goods of the
same class or kind as the goods being valued which
are made by producers in the country of exportation
for export to the Philippines;
(3)
The freight, insurance fees and other transportation
expenses for the importation of the goods;
(4)
Any assist, if its value is not included under paragraph
(1) hereof; and
(5)
The cost of containers and packing, if their values
are not included under paragraph (1) hereof."
Practical
Issues in the Application of Method 5. The Computed
Value Method is the "last" basis of customs
valuation and is very similar to the "cost-plus
method" under international Transfer Pricing
principles. This method is normally applied when customs
cannot determine the dutiable value under the previous
methods of valuation in their order of priority.
It
has been observed that the "use of the computed
value method will generally be restricted to those
cases where the buyer and the seller are related,
and the producer is prepared to supply to the authorities
of the country of importation the necessary costings
and to provide facilities for any subsequent verification
which may be necessary" (Note 60, Interpretative
Notes to the WTO Agreement on Customs Valuation -
Agreement on Implementation of Article VII, GATT).
Subject to generally accepted accounting principles
(GAAP), an importer may thus submit a value to customs
based on the following: cost or value of materials
and fabrication; usual profit and general expenses;
and transportation and related expenses. In developed
countries, the Computed Value method is unpopular
to many customs officials and companies simply because
the method involves a process of verifying information
from the country of export by customs authorities
in the country of import. Under this method, customs
officials face the practical obstacles of inquiring
into the business practices of a company located in
another country. In the Philippines, we have yet to
see an actual application of this method of valuation.
Method
6 - Flexible Application of the first Five Methods.
When the first five methods of valuation cannot apply,
the TV system provides that the dutiable value "shall
be determined using other reasonable means and on
the basis of data available in the Philippines".
While the TCCP does not expressly provide the parameters
for the application Method 6, Notes 68 - 69 of the
Interpretative Notes to the WTO Agreement on Customs
Valuation provide that
"1.
Customs values determined under the provisions of
Article 7 should, to the greatest extent possible,
be based on previously determined customs values.
2.
The methods of valuation to be employed under Article
7 should be those laid down in Articles 1 to 6, inclusive,
but a reasonable flexibility in the application of
such methods would be in conformity with the aims
and provisions of Article 7"
Stated
otherwise, Method 6 allows the flexible use of the
first five methods of valuation so long as it is consistent
with the principles of the TV system.
Prohibited
Methods of Valuation. As restated in Section 201 (F),
TCCP, the TV system prohibits customs authorities
from using the following basis to determine the dutiable
value:
(a)
The selling price in the Philippines of goods produced
in the Philippines;
(b) A system that provides for the acceptance for
customs purposes of the higher of two alternative
values;
(c) The price of goods in the domestic market of the
country of exportation;
(d) The cost of production, other than the computed
values, that have been determined for identical or
similar goods in accordance with Method 5;
(e) The price of goods for exports to a country other
that the Philippines;
(f) Minimum customs values; or
(g) Arbitrary or fictitious values.
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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What
is the customs value of goods on consignment? (August
4, 2003)
Scenario. ABC Singapore (ABC SGP) manufactures, distributes
and sells branded consumer items across the Southeast
Asia region. In the Philippines, it sells its products
to an unrelated selling agent - RP Distribution, Inc.
(RPDI). ABC SGP consigns the goods to RPDI, which
sells the same in the domestic market at a price established
by ABC SGP. Upon sale of the goods in the domestic
market, RPDI deducts from the gross revenue a fixed
percentage as commission. The balance of the gross
revenue is remitted to ABC SGP on a monthly basis.
For purposes of documentation and billing, ABC SGP
issues a consignment invoice to RPDI for the goods
consigned.
Customs
has raised issues against the consignment invoice.
Specifically, customs noted that there is no sale
for export since the goods are for consignment and
as such, the declared price is not acceptable. Inasmuch
as the goods being imported are branded and unique,
there are no reference values of identical or similar
goods. What should now be the basis of the customs
value?
The
above case scenario is a variation of an actual customs
case, which was decided using Method 4 (Deductive
Method) of the Transaction Value (TV) system under
Section 201, TCCP. Said actual case is the first and
only case where the Deductive Method was applied to
determine the dutiable value of imported goods.
Absence
of Reference Values. We have previously discussed
the first three methods of valuation under the TV
system. As previously stated, customs may use previously
accepted values of similar or identical goods as a
substitute value in case the declared value has been
rejected on valid grounds.
In
the above case, there is certainly no sale for export
and as such, the declared value in the consignment
invoice cannot be used unless there are other grounds
to support the same. In addition, there are no applicable
reference values based on similar or identical goods
given the unique characteristics and the particular
brand of the imported products.
Faced
with such issues, RPDI submitted in its position paper
a sample computation based on the Deductive Method
to support the declared price. After deliberations
and review of the documents submitted, the declared
price in the consignment invoice was accepted using
Method 4 - Deductive Method.
Method
4 - Deductive Method. Paragraph D of Section 201,
TCCP provides that the "dutiable value of the
imported goods under this method shall be the deductive
value, which shall be based on the unit price at which
the imported goods or identical goods are soled in
the Philippines, in the same condition as when imported,
in the greatest aggregate quantity, at or about the
time of the importation of the goods being valued,
to persons not related to the persons from whom they
buy such goods, subject to deductions for the following:
(1)
Either the commissions usually paid or agreed to be
paid or the additions usually made for profit and
general expenses in connection with sales in such
of imported goods of the same class or kind;
(2)
The usual costs of transport and insurance and associated
costs incurred within the Philippines; and
(3)
Where appropriate, the costs and charges referred
to in subsection (A) (3), (4) and (5); and; [this
refer to transport, freight and insurance costs incurred
from port of exportation to port of entry]
(4)
The customs duties and other national taxes payable
in the Philippines by reason of the importation or
sale of the goods.".
Practical
Application. Also known as the Resale Minus Method,
the general approach for Method 4 (Deductive Method)
is that
(a)
valuation begins with the resale price in the domestic
market; and
(b) appropriate deductions (such as profit and expenses)
are made to arrive at a value at the point of importation
(CIF value).
Thus,
the Deductive Method may apply when the goods are
"consigned to an agent/sales representative which
imports the goods and is paid by a commission for
performing selling agency functions on behalf of the
vendor located outside the Philippines". In the
scenario provided above, the Deductive Method was
applied considering that the commission of RPDI covers
the service fee as selling agent as well as the sales,
distribution and other expenses (e.g. transport costs,
taxes and duties). To arrive at the value for customs,
a net selling price per unit for each type of imported
article was established, after which deduction for
the commission (service fee and expenses) was made.
The resulting amount closely approximated the declared
price in the consignment invoice.
Conclusion.
There are many instances where imported articles are
not covered by an export sale. Examples of these would
be donations, lease or consignment. In these instances,
customs may reject the declared price and may look
at reference values of identical or similar goods
for possible use as substitute values. However, not
all imported articles have their corresponding reference
values of previously imported identical or similar
goods. When faced with such a situation, the remedy
is to use the other methods of valuation (e.g. Deductive
Method or Computed Method) to support the declared
price to customs.
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments or inquiries, he may be contacted
at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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Why
Customs rejects the invoice price of imported goods
(July 23, 2003)
In our previous article entitled
"WTO Agreement on Customs Valuation: An Introduction",
we discussed the background of the present WTO-based
customs valuation system and provided the basic concept
on the "Transaction Value". This article
will now discuss in more detail the first method of
valuation (Transaction Value of the imported article)
and the grounds for rejecting the same by the Bureau
of Customs (BOC).
Methods
of Customs Valuation. Section 201 of the Tariff and
Custom Code (TCCP) provides the basic framework of
the Transaction Value system. Under said section,
there are six (6) methods of valuing the goods for
purposes of computing the taxes and duties payable,
as follows:
(a)
Transaction Value Method
(b) Comparative Value Method based on the Transaction
Value of Identical Goods
(c) Comparative Value Method based on the Transaction
Value of Similar Goods
(d) Deductive Value Method based on the subsequent
sale price in the importing country (Resale Minus
Method)
(e) Computed Value Method based on the cost of materials,
fabrication and profit in the country of production
(Cost Plus Method)
(f) Fallback Method based on previous methods applied
with greater flexibility (Flexible Method)
In
most developed countries presently applying the Transaction
Value system, it is estimated that at least 90% of
importations apply Method 1. In the Philippines, it
is widely perceived that roughly 40% of the importations
use Method 2 and 3 as the basis of valuation.
Grounds
for Rejecting the Transaction Value (Method 1). The
Transaction Value (TV) of the imported article is
basically defined as "the price actually paid
or payable for the goods when sold for export to the
Philippines" plus the adjustments that can be
made to it (e.g. insurance, freight, royalty payments).
In the Philippines, importers normally negotiate their
trading terms on a CIF basis, which is roughly equivalent
to the TV plus insurance and freight. In case there
are no other adjustments to be added, the CIF value
may be assumed as the TV. However, Method 1 provides
additional conditions for accepting the TV. Failure
to comply with such conditions will be a ground for
the BOC to reject the TV and apply the other methods
of valuation in sequential order.
In
our last article, we enumerated what these conditions
are. The succeeding paragraphs discuss these conditions
with more clarity.
Absence
of a Sale for Export. The application of Method 1
requires that there should be a "sale for export".
A sale for export refers to the cross-border sale
of goods from the country of export to the country
of import. Simply stated, a sale for export involves
the transfer of ownership/title of property from one
party to another for financial or pecuniary consideration.
The transfer must involved exportation - meaning movement
of goods from one customs jurisdiction to another.
A sale requires a "buyer" who agrees to
obtain certain goods for a certain amount and a "seller"
who agrees to transfer ownership of those goods for
a certain amount. When parties agree, there is a sale.
In cases when (a) there is no transfer of ownership;
(b) there is no sale (e.g. donations, consignment
or lease); and (c) there is no physical transfer of
property, there cannot be a sale for export. In which
case, the alternative valuation methods must be applied.
Restrictions
and Conditions that Affect the Value. These types
of restrictions or conditions are normally present
in barter trades, package deals and counter trades.
The fact that there is a restriction to the use or
disposition of the goods does not necessarily mean
that the transaction value is not acceptable. If the
restriction or condition can be valued, then it may
be added to the transaction value. Where the condition
or consideration cannot be valued, the transaction
value may not be accepted and thus, the subsequent
methods of valuation have to be used. If the restriction
does not affect value of the imported goods, then
it cannot affect the transaction value. One example
of a restriction that does not affect the transaction
value would be the case where the seller requires
the buyer of the imported goods not to sell the same
prior to a fixed date in consonance with a promotion
campaign strategy.
Subsequent
Proceeds. Proceeds of resale refer to the value of
any part of the proceeds of any subsequent resale,
disposal or use of the imported goods that accrue,
directly or indirectly, to the seller. Dividend payments
that may be made by the buyer to the seller (or a
party related to the seller) are not considered proceeds
of resale. Proceeds of resale are dutiable and must
be added to the price paid or payable. To be treated
as dutiable, they must be: (a) paid by the buyer to
the seller, and (b) based on the resale, disposal
or use of the imported goods. When the subsequent
proceed is determined to be dutiable and can be valued,
it must simply be added to the transaction value.
When it cannot be valued in relation to the TV, then
other methods of valuation will be applied.
Related
Party Transactions. Section 201, TCCP defines what
are "related parties". If the buyer is related
to the seller, the TV may still be accepted under
Method 1, provided it can be shown that the circumstances
surrounding the transaction demonstrates that the
relationship has not affected the price. Although
the burden is on the customs authority to prove whether
the price in a related party transaction is influenced
by the relationship, it is commonly assumed that it
has and thus, customs may require the importer to
prove otherwise. When confronted with the "relationship"
issue, the TV system has various "qualitative"
and "quantitative" methods to demonstrate
that there is an "arms length transaction"
or that relationship did not influence the price.
[Our next article will discuss how importers can support
their invoice price before the BOC, particularly the
Valuation and Classification Review Committee (VCRC)
of each collection district.]
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments or inquiries, he may be contacted
at worldtrade@skyinet.net
or at (632) 4002145 / 4050021.
Back
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Customs
use of Reference Values of Identical and Similar Goods
(July 21, 2003)
This is the fourth consecutive article on the WTO-based
customs valuation system.
Our
previous article was on defending the invoice price
(price paid or payable) before the Bureau of Customs
(BoC), particularly the Valuation and Classification
Review Committee (VCRC). The succeeding discussion
will focus on the use of the following methods as
alternative methods of customs valuation.
(a)
Method 2 - Comparative Value Method based on the Transaction
Value of previously imported Identical Goods
(b)
Method 3 - Comparative Value Method based on the Transaction
Value of previously imported Similar Goods
Methods
2 and 3 of the Transaction Value (TV) system. Under
the TV system, there is a strong policy in favor of
applying the Transaction Value (Method 1) to the greatest
extent possible, and the grounds for departure should
be narrowly construed as much as possible. There are
also very few instances for departing from the price
paid or payable. Other than the conditions for the
acceptability of the Transaction Value, there are
no other grounds for departing from the Transaction
Value. Where the Transaction Value cannot be applied
or where customs has valid grounds to reject the same,
the various alternative methods (e.g. Methods 2 -
6) shall then be followed in sequential order.
Comparative
Value of Identical or Similar Goods. Under paragraph
(B) of Section 201, TCCP, "identical goods"
shall mean goods "which are the same in all respects,
including physical characteristics, quality and reputation".
Accordingly, minor differences in appearances shall
not preclude goods otherwise conforming to the definition
being regarded as identical. Paragraph (C) of the
same section provides that "similar goods shall
mean goods "which, although not alike in all
respects, have like characteristics and like component
materials which enable them to perform the same functions
and to be commercially interchangeable". In addition,
the quality of the goods, their reputation and the
existence of a trademark shall be among the factors
to be considered in determining whether goods are
similar.
Goods bearing a trademark known to the general consumers
will generally not be treated as similar to goods
without a trademark. Likewise, two trademarks are
not necessarily similar and more often than not, two
goods with different trademarks may not qualify as
similar. In general, similar goods, while not identical,
are so much alike that the differences are not important
to buyers or consumers. In reality, the concept of
similar goods is a very narrow concept such that is
really unlikely that goods are similar except for
standardized goods and agricultural products.
Conditions
for the application of Methods 2 and 3. To be considered
as identical or similar, the goods being compared
must satisfy the following conditions:
(a)
It must have been produced from the same country.
The country of production is not necessarily the same
as the country of exportation.
(b)
It must have been sold for export to the same country
of importation.
(c)
It must have been exported at or about the same time
as the goods being valued. The term "at or about
the same time" shall mean a period of time as
close to the date of exportation as possible within
which commercial practices and market conditions,
which affect the price, remain the same.
(d)
The sale of the identical or similar goods is at the
same commercial level and in substantially the same
quantity as the goods being valued. If that is not
the case, adjustment should be made. If there is more
than one Transaction Value of identical or similar
goods, "the lowest of such value shall be used
to determine the customs value of the imported goods".
(e)
Where transport costs are included in the value of
the identical or similar goods, adjustments can be
made to account for significant differences in such
costs or charges between the imported goods and the
identical or similar goods.
Customs
use of reference values as substitute values. Based
on prevailing customs rules and procedures, published
or established customs value and other customs value
references may be used as a risk management tool when
reviewing the acceptability of the invoice price of
the imported goods. The same may also be used as a
substitute value when the invoice price is rejected
under Method 1 and the reference value qualifies under
the alternative methods of valuation.
This
practice finds legal basis in the provisions of both
in RA 9135 and its implementing rules. Section III.A
of CAO 5-2001 states that reference values "cannot
be used as substitute value for customs valuation
purposes unless it can, in appropriate cases, qualify
as a Transaction Value under any of the alternate
valuation methods when any of such methods of valuation
is applicable in their order of priority".
When
reference values are not considered as substitute
values. Reference values can only be used for customs
valuation when the Transaction Value (invoice price)
is rejected on valid grounds and the same qualifies
under the alternative methods of valuation. The use
of the reference value, which does not qualify under
the other methods of valuation, constitutes the "minimum
customs values" or "arbitrary and fictitious
values" prohibited under the TV system. Likewise,
it does not reflect actual commercial arrangements,
which is the basis of the Transaction Value (price
paid or payable).
The
author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner
of the law firm of David Leabres Uvero Gaticales Sto.
Tomas. For your comments or inquiries, he may be contacted
at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
Back
to Top
How
to defend your invoice price before the VCRC
(July 3, 2003)
This is the third part of a series of articles on
the subject of customs valuation. Our previous article
was on "why customs reject the invoice price
of imported goods". At the outset, let me point
out that under present customs rules and procedures,
customs has the right to satisfy itself as to the
truth or accuracy of any statement, document or declaration
presented for customs valuation purposes. Thus, when
customs rejects the declared price of the importers
upon filing of the import entry, it becomes the burden
of the importer to prove the acceptability of the
declared price to customs. In such a case, the importer
normally has 2 options: (a) pay under protest and
(b) request for release under tentative liquidation.
Payment under Protest.
Customs rules provide that when there is a dispute
as to the assessment of the collector of customs as
to the liability of the importer for taxes and duties
payable on the imported goods, the importer may file
a written protest within 15 days from payment of taxes
and duties (Section 2308, TCCP). The protest is normally
filed with the law division of the port concerned.
In case of a favorable ruling, the same shall be automatically
reviewed by the Commissioner of Customs and the Secretary
of Finance. A final ruling favorable to the importer
should result in the issuance of a Tax Credit Certificate.
This process is quite tedious and cumbersome, and
may take months and even years before a final ruling
is secured.
Release under Tentative
Liquidation. In case customs rejects the invoice price
of the imported article, another option for the importer
is to raise the issue before the Valuation and Classification
Review Committee (VCRC) of the port (collection district)
concerned. Where the "valuation" screen
under the Automated Customs Operations System (ACOS)
hits the imported article, the importer will have
to post a cash bond prior to release of the imported
article. If the issue is raised by customs based on
other reference values of identical or similar goods,
the importer does not have to post a cash bond.
In contrast to the procedure
in Payment under Protest, the procedure in the VCRC
is summary in nature, and in case of a favorable ruling,
a tax refund may be issued to the importer. In addition,
the resolution of the issue is limited to the VCRC
and a review by a higher office is not necessary.
VCRC Procedures. At the
VCRC, the importer will be required to submit a position
paper as well as relevant documents to support the
declared price to customs. As far as the VCRC is concerned,
it will have to satisfy itself that the declared price
satisfies all the conditions as provided under Method
1 of the Transaction Value system. In case there is
legal or technical basis to reject the declared price,
the VCRC will have to adopt the reference value of
identical or similar goods.
What exactly happens
at the VCRC? To illustrate, the VCRC Notice of Hearing
from the Manila International Container Port (MICP)
will notify an importer to appear before the committee
and will require the following:
(a) Submit a position
paper outlining the chronological order of events
from the beginning of the negotiation up to the conclusion
with corresponding proof of what transpired during
the transaction (e.g. letter, e-mail, offers, confirmation,
bank documents, etc.
(b) Submit list of name
of officials, and employees, that are involved in
the transaction (e.g. purchasing officer, finance
officials, etc.)
Failure to respond to
the notice or to submit the requirements will result
in the waiver of the importer to present his evidence
or arguments before the VCRC. Consequently, the committee
will decide on the case based on the documents at
hand.
Supporting a "Sale for Export".
The documentary requirements for submission to the
VCRC are normally required to support the following
premises: (a) that there is a sale for export and
(b) that the declared price is the price actually
paid for the imported article covered by the sale.
To answer the question whether there
is a "sale for export", the following basic
questions must first be addressed: (a) who are the
parties; (b) is there property involved; (b) is there
a transfer of ownership involving a financial consideration;
and (c) is there exportation from one country to another.
As previously mentioned, a sale requires a "buyer"
who agrees to obtain certain goods for a certain amount
and a "seller" who agrees to transfer ownership
of those goods for he said amount. And when parties
agree, there is a sale.
Evidence of "Sale" and "Price
Paid". What are the documents that should prove
a "sale for export"? From a commercial perspective,
a sale should start with a tender offer or a purchase
order, followed by a confirmation or contract of sale.
The sale contract itself may contain the provisions
for payment. Normally, international sale transactions
are executed through banking institutions.
Financial consideration in a "sale
for export" usually refers to the payment. Payment
may be made directly or indirectly, may be made to
a third party if the supplier provides so, or may
be made in cash or in kind. An example of an indirect
payment is the settlement of a debt. Commercial transactions
usually involve the use of banking instruments such
as such as letters of credit, cable transfers, negotiable
instruments, etc. The submission of the documentary
evidence of the "sale for export" and "price
paid" should serve as one the bases for the acceptability
of the declared price to customs.
[Our next article will discuss customs
use of reference values in relation to Method 2 and
3 of the Transaction Value system.]
The author is an international trade
and customs specialist, and a licensed customs broker.
He is also a partner of the law firm of David Leabres
Uvero Gaticales Sto. Tomas. For your comments or inquiries,
he may be contacted at worldtrade@skyinet.net
or at (632) 4002145 / 4050021.
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