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:
- Transaction Value Method
- Comparative Value Method based on the Transaction Value of Identical Goods
- Comparative Value Method based on the Transaction Value of Similar Goods
- Deductive Value Method based on the subsequent sale price in the importing country (Resale Minus Method)
- Computed Value Method based on the cost of materials, fabrication and profit in the country of production (Cost Plus Method)
- 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, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at agatonuvero@yahoo.com and agatonuvero@customstrade.asia
