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:
- The cost or the value of materials and fabrications or other processing employed in producing the imported goods;
- 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;
- The freight, insurance fees and other transportation expenses for the importation of the goods;
- Any assist, if its value is not included under paragraph (1) hereof; and
- 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:
- The selling price in the Philippines of goods produced in the Philippines;
- A system that provides for the acceptance for customs purposes of the higher of two alternative values;
- The price of goods in the domestic market of the country of exportation;
- The cost of production, other than the computed values, that have been determined for identical or similar goods in accordance with Method 5;
- The price of goods for exports to a country other that the Philippines;
- Minimum customs values; or
- 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 email@example.com or at (632) 4002145 / 4050021.