RESTRICTEDWORLD TRADE
ORGANIZATIONG/VAL/36
7 December 2000
(00-5323)
REPORT OF THE CHAIRMAN OF THE
COMMITTEE ON CUSTOMS VALUATION TO THE GENERAL COUNCIL
1. Following the meeting of the General Council in special session on 18-19 October, I carried
out several rounds of informal consultations among Members, and on 7 November 2000, the Customs
Valuation Committee held a formal meeting, of which a large part was devoted to discussion of the
proposals.  I believe that these consultations and discussion allowed the consideration of these
proposals to move from a political debate to a technically in-depth analysis of the issues.  The reportbelow is based on my consultations as well as the Committee's consideration of the three proposals.
While it is an overview of the analysis where much of the technical details have been necessarily
summarized, it remains a technical report.  I believe in  order to do justice to the full technical debate,
interested Members should refer to the report of the Committee's 7 November 2000 meeting
(G/VAL/M/17, to be issued).
Tiret 1:  A multilateral solution that enables customs administrations of importing countries to
seek and obtain information on export values in a time-bound manner, in doubtful cases, shall
be included in the Agreement.
2. The proponent explained, through the use of specific cases, that this proposal emanated from
his delegation's experience applying the Agreement and the difficulties encountered therein incombatting fraudulent transactions, in particular under-valuation of the importer's declared price.
Although his customs administration had mechanisms in place to investigate fraudulent declarations
by importers, often the information obtained showing the fraud could not be used in judicial
proceedings because the information was either obtained through non-official sources or on a
confidential basis.  The proponent was therefore seeking a formal, binding, multilateral solution
which would authorize the provision of the necessary information from the customs administrations of
the exporting country. If fraud was substantiated by this information, it would be admissible injudicial proceedings.   Furthermore, fraudulent transactions were often in the form of third-country
invoicing for which it was often necessary to go to the original source of the product to obtain an
export price.  In the proponent's view, a multilateral solution would ensure that all WTO Members
were obliged to provide export price information which would reduce the possibilities for these
fraudulent importers to escape detection and ultimately prosecution in courts. The proposal was aimedat establishing such a mechanism through which customs administrations of importing countries,
when they came upon a case where they had reasonable ground for assuming a fraud, i.e. a "doubtful
case", could request export price information from customs administrations of exporting countries and
expect a prompt response.  This information would be kept confidential unless and until such time as
the fraud was substantiated and the information was necessary for proof in a judicial proceeding, inaccordance with Article 10 of the Agreement on Customs Valuation.  The proponent acknowledged
that a situation where the exporter and importer were colluding would not be addressed by the
proposal.
3. Members appreciated that fraud was a problem in international commerce and sympathized
with the proponent's difficulties.  Many had faced similar problems and were working with the World
Customs Organization (WCO) and other providers of technical assistance to develop appropriate
customs techniques and enforcement procedures.  Several Members noted that this was a problem
germane to developing countries where high rates of duties, reliance on customs revenue, and porous
borders were realities.  Some developing countries supported the proposal, particularly those that were
at the pre-implementation or early stages of the transition to the WTO system of valuation.G/VAL/36
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4. The majority of Members considered that the proposal was not the appropriate solution to
combating fraud.  They pointed to other appropriate mechanisms which in their experience were
effective.  Some mentioned, as examples, bilateral agreements between customs administrations, the
WCO Nairobi Convention, and the WTO Ministerial Decision Regarding Cases Where Customs Have
Reasons to Doubt the Truth or Accuracy of Declared Values.  The proponent considered that bilateralsolutions did not work, although his customs administration was party to some such agreements,
because they were difficult to enter into with all trading partners. Also, a multilateral solution would
provide a solution to third-country invoicing where the goods did not undergo further transformation.
In this latter case, the proponent considered a multilateral solution necessary because values from the
country of origin were necessary.  Furthermore, in the proponent's view, the Nairobi Convention was
not signed by most delegations and of those that had signed, only 23 had acceded to the Annex
dealing with exchange of information on the assessable value
5. Many Members wondered what was particular about the proponent's problems with fraud that
it could not deal with it in the country of import as was foreseen under the Agreement. The importer
could deal with fraud through a variety of techniqu es such as record-keeping, research and analysis,
risk assessment, high-risk and low-risk enforcement areas, etc.  There was concern that this proposal
was a substitute for using proper fraud methodologies and modern customs techniques which wereimportant for implementing the Agreement.  The proponent explained that the problem was a limited
one and some goods were more subject to fraud than others.  It stressed that it wished to have this
additional piece of information from the customs administrations of the exporting country to support
its own investigations.  This raised an important  concern for some Members that the proposal, if
adopted, would shift the burden of proof  from the importing country, where all the powers of the
Agreement and necessary evidence presently lay, to the exporting country. If the proposal meant that
exporting authorities would have to verify the accu racy of the information submitted to them, this
would amount to shifting the investigative bur den to the exporting country's authorities.
6. Other technical issues and questions concerned the meaning of the term "doubtful cases"  in
the proposal and how customs would go about determining what was a "doubtful case."  Although itwas acknowledged that the importing country had the right to determine what was a doubtful case for
its own internal investigations, legal difficulties could arise if the determination imposed obligations
on exporting countries' customs administrations.
7. Although acknowledging the proponent's reference to Article 10 of the Agreement, several
Members noted that, according to their national legislation, information provided by exporters to their
national customs administration was governed by confidentiality requirements  which restricted
divulging this information to other bodies.  Even  before exporting authorities could provide the
information, there may be certain domestic procedures that might stand in the way.  One Member, in
support of the proposal, noted that Article 6.2 of the Agreement stated that a request could be made to
the authorities of other countries in order to obta in information for determining the computed value.
This was similar to what the proposal was trying to accomplish and showed a precedent for third
countries assisting in verifying the customs value.
8. Some Members were concerned that the proposal might place undue burden on customs
administrations to provide information to importing countries.  This would be an inappropriate
diversion of resources from customs' prime responsibility. The resource implications  of the proposal
would have to be analyzed and export clearance systems might have to be modified to accommodate
this proposal.  Questions were asked as to whether there would there be an expectation that customsadministrations of exporting countries would visit offices of exporting companies and would the
proponent's customs administration be willing to check its own importers and exporters for such
information.  Although many countries did collect export price data, many Members explained that it
was done primarily for statistical purposes and was not verified, nor was at a transaction-by-
transaction basis, which would be necessary for the functioning of this proposal.  Further, it was notclear whether the proposal required customs administrations to examine exporters' books to determine
the price data for a particular shipment.  If so, it would be problematic.  It was also noted that exportG/VAL/36
Page 3
prices varied considerably depending on the situation.  Therefore, export variables could not under the
Agreement be used as a reasonable basis to determine the customs value of the imported goods.
9. Many Members questioned what was meant by the term "time-bound manner " and what
the legal implications would be if an exporting countries' customs administration was not able to
provide the information requested in a "time bound manner".  The proponent explained that the term"time bound" meant promptly and without inordinate delay when an export value was requested.
Another Member asked what was meant by the term "to seek and obtain information " and how
customs authorities of importing countries would go about seeking and obtaining the information. A
final question concerned whether the importing country would stop the import clearance system
pending the investigation  envisioned by the proposal.  It was clarified that the idea of requesting
information was to cross-check and in cases where there was no problem with the declared value, it
would actually expedite the clearance.  In any case, importing customs administrations would be
bound by Article 13 of the Agreement to  release the goods.
Tiret 2:  The addition of cost of services su ch 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).
10. The proponent explained that the objective of this proposal was to allow the inclusion of the
services listed in Article 8:1(b)(iv) of the Agreemen t into the calculation of the customs value, even if
these services were undertaken in the country of importation.  Presently they are only allowed to be
included if they are provided by the buyer but undertaken elsewhere than in the country of import.
The goods listed under the first three items under Article 8:1(b) could be supplied either by the
exporting, importing or a third country.  No distinction was made and in all three cases, the costs ofthe listed goods would be included in the customs value.  As far as the proponent was concerned,
there was a logic in providing the same treatment for the services listed in item four of this Article.
The proponent explained that the different treatment for goods on one hand, and for services on the
other, under this Article was giving rise to bifurcation of values by fraudulent importers who often
tried to deduct part of the value by claiming that such services, which comprised part of the value,were provided by the buyer and undertaken in the country of importation.  Cases were often difficult
to prove, since money transfers were difficult to trace.
11. It was difficult for many Members to appreciate how this proposal would alleviate the
problem cited by the proponent of fraudulent importers  splitting values into cost elements internally
and externally sourced.  They noted that fraudulent importers could always try to find other ways of
evading the declaration of the value of these services or declaring lower amounts, even if they were
internally sourced and required to be part of the value. Acknowledging that it could be difficult totrace financial transactions in today's world of information technology, some asked why such
transactions would be found through this proposal.  Importers would still have to be monitored and
audited if there were problems in their declarations and there were other tools, instruments and
techniques to deal with fraud and to identify  the actual services involved and their costs.
12. Several Members noted that the Agreement's structure had not changed since its inception
twenty years ago and that it would cause serious di sruption to industry and commerce which had built
up their businesses around the particular valuation treatment presently in the Agreement.  Some
Members wondered what the economic rationale woul d be for including the costs of these services
performed in the country of importation.  By not including internally sourced services into the
customs value, the Agreement as it was presently structured, provided an economic incentive for theuse of these services that were domestically sourced. Another Member explained that the exemption
under Article 8.1(b)(iv) existed because the provision pertained to services carried out in the
importing country.
13. Another Member was concerned that if such services were to be included in the customs
value, it would be a means of inflating the import price which would in the end be paid by thedomestic consumers.  Another Member, while acknowledging the beneficial revenue collectionG/VAL/36
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effects of this proposal for the importing country, noted that it could create a problem of double
taxation for importers.  The cost of a service provided by the buyer may have been subject to domestic
taxation and would then be taxed again in the form of an import duty.  Therefore, the importer could
be paying tax on this service twice.
Tiret 3:  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.
14. The proponent clarified that the proposal was aimed at including two presently prohibited
methods of valuing imports for customs purposes as allowed methods under Article 7 of the
Agreement.  The first, (presently item (c) in Article 7) was the domestic market price in the exporting
country, (not in the importing country);  and the second (presently item (e) in Article 7) was the price
of the goods for export to a country other than the country of importation.  He noted that these priceswere presently used in other Agreements such as the Anti-Dumping Agreement and clarified that
Article 7 and these two additional proposed methods would only be used as a last resort when the
other methods could not be used.  One Member voiced support for the proposal, indicating that it
could facilitate the work of customs administrations in establishing the customs value for new and
innovative products, in the event that the other methods under the Agreement could not be used.
15. A number of questions were raised by Members regarding the necessity of changing a long-
standing provision of the Agreement which prohibited the use of these two price methods under
Article 7 of the Agreement.  It was considered that the negotiating history as to why these methods
were prohibited might be an important element to examine.
16. Several Members asked how the information ne cessary to determine the two proposed price
methods would be obtained. In the event that a wholesale catalogue price or a shopping center price
were used, there was concern that these were not reliable prices, could inflate customs values, and
often were only starting points for downward price negotiation by buyers.  Some Members suggested
that in the domestic market of the exporting countries, the price could be considerably higher because
of overhead costs, advertisement, promotion and other costs that were incurred on the domesticmarket.  In addition, it might be necessary to examine exporter's financial books to ascertain these
additional costs.  This could be problematic and the end result could be the use of high, fictitious
customs values.  Regarding the export value to a third country, it was asked which third country
would be chosen - would it be the highest pr iced country or the lowest.  Would customs
administrations shop for the best price among th ird countries and how would they determine which
best reflected the transaction value.  Furtherm ore, how would the information necessary to make
"appropriate adjustments" be obtained?  The proponent noted that explanations for establishing theproposed prices already existed in these other Agreements so he did not see the difficulty in obtaining
them for use in this context.  Further, he clarified that the prices could not be used directly but
adjustments would have to be made, for example with respect to FOB or CIF basis, for different
quantities, etc.  These were all existing adjustments under the Agreement.
17. A few Members questioned the wisdom of making reference to one Agreement in the context
of discussing another and the risk of mixing c oncepts.  It was pointed out that under the Anti-
Dumping Agreement, the objective was determination of price discrimination which warranted
examination of the domestic price in the exporting country to compare it with the export price to the
importing country or a third country.  Under the Customs Valuation Agreement, the objective wasdetermination of the value of the transaction between the exporter and the importer.  These two
objectives were completely different and therefore the price concepts could not be compared.  The
proponent explained that the proposal was not designed to bring concepts of other Agreements into
the Valuation Agreement and reference to the Anti- Dumping Agreement was simply incidental.  His
delegation was committed to the transaction value and if that failed, to the following methods in theAgreement.  If all failed and the customs administration arrived at Article 7, it wished to be able to
use the two prices proposed which were presently prohibited.G/VAL/36
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18. Another Member reminded delegations of the importance of the interpretative notes to
Article 7 which stressed the importance of using previously determined values and that, under
Article 7, they should be used with reasonable flexibility in their application.  Also, the Agreement
itself clarified that such flexibility could be possible within the provisions of Article 7 and it wasunnecessary to look further.
Summary
19. Some Members supported the proposals and their objectives.  However, of those who spoke
on the proposals, the majority acknowledged the genuine difficulties faced in addressing fraud and the
problems experienced by the proponent of the tirets.  That said, they failed to be convinced that thetirets themselves were appropriate solutions.  Indeed, some of these Members had themselves
experienced the same problems but had dealt with them by using existing mechanisms and
instruments while remaining within the parameters of the Agreement.
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