Specific and ad valorem customs duties back to top
Customs duties can be designated in either specific or ad
valorem terms or as a mix of the two. In case of a specific duty, a concrete sum is
charged for a quantitative description of the good, for example USD 1 per item or per
unit. The customs value of the good does not need to be determined, as the duty is not
based on the value of the good but on other criteria. In this case, no rules on customs
valuation are needed and the Valuation Agreement does not apply. In contrast, an ad valorem duty depends on the value of a good. Under this system, the customs valuation is
multiplied by an ad valorem rate of duty (e.g. 5 per cent) in order to arrive at the
amount of duty payable on an imported item.
Definition back to top
Customs valuation is a customs procedure applied to determine
the customs value of imported goods. If the rate of duty is ad valorem, the customs value
is essential to determine the duty to be paid on an imported good.
Short historical overview back to top
Article VII GATT
Article VII of the General Agreement on Tariffs and Trade laid
down the general principles for an international system of valuation. It stipulated that
the value for customs purposes of imported merchandise should be based on the actual value
of the imported merchandise on which duty is assessed, or of like merchandise, and should
not be based on the value of merchandise of national origin or on arbitrary or fictitious
values. Although Article VII also contains a definition of actual value, it
still permitted the use of widely differing methods of valuing goods. In addition,
grandfather clauses permitted continuation of old standards which did not even
meet the very general new standard.
Brussels definition of value
Starting in the 1950s, customs duties were assessed by many
countries according to the Brussels Definition of Value (BVD). Under this method, a normal
market price, defined as the price that a good would fetch in an open market between
a buyer and seller independent of each other, was determined for each product,
according to which the duty was assessed. Factual deviations from this price were only
fully taken into account where the declared value was higher than the listed value.
Downward variations were only taken into account up to 10 per cent. This method
caused widespread dissatisfaction among traders, as price changes and competitive
advantages of firms were not reflected until the notional price was adjusted by the
customs office after certain periods of time. New and rare products were often not
captured in the lists, which made determination of the normal price difficult.
The USA never became part of the BVD. It was clear that a more flexible and uniform
valuation method was needed which would harmonize the systems of all countries.
Tokyo Round Valuation Code
The Tokyo Round Valuation Code, or the Agreement on
Implementation of Article VII of the GATT, concluded in 1979, established a
positive system of Customs Valuation based on the price actually paid or payable for the
imported goods. Based on the transaction value, it was intended to provide a
fair, uniform and neutral system for the valuation of goods for customs purposes,
conforming to commercial realities. This differs from the notional value used
in the Brussels Definition of Value (BVD). As a stand-alone agreement, the Tokyo Round
Valuation Code was signed by more than 40 contracting parties.
The new Agreement back to top
The Tokyo Round Code was replaced by the WTO Agreement on
Implementation of Article VII of the GATT 1994 following conclusion of the Uruguay
Round. This Agreement is essentially the same as the Tokyo Round Valuation Code and
applies only to the valuation of imported goods for the purpose of levying ad valorem
duties on such goods. It does not contain obligations concerning valuation for purposes of
determining export duties or quota administration based on the value of goods, nor does it
lay down conditions for the valuation of goods for internal taxation or foreign exchange
Basic principle: Transaction value back to top
The Agreement stipulates that customs valuation shall, except in
specified circumstances, be based on the actual price of the goods to be valued, which is
generally shown on the invoice. This price, plus adjustments for certain elements listed
in Article 8, equals the transaction value, which constitutes the first and most
important method of valuation referred to in the Agreement.
The 6 Methods back to top
For cases in which there is no transaction value, or where the
transaction value is not acceptable as the customs value because the price has been
distorted as a result of certain conditions, the Agreement lays down five other methods of
customs valuation, to be applied in the prescribed hierarchical order. Overall the
following six methods are considered in the Agreement:
Method 1 Transaction value
Method 2 Transaction value of identical goods
Method 3 Transaction value of similar goods
Method 4 — Deductive method
Method 5 Computed method
Method 6 — Fall-back method
Other provisions back to top
The sequence of methods 4 and 5 can be switched at the
request of the importer (not, however, at the discretion of the customs officer).
Moreover, the Agreement contains provisions for special and differential treatment of
developing countries and for technical assistance. Since this Agreement is an integral
part of the single WTO undertaking, all WTO Members are Members of the Customs Valuation
Method 1 Transaction value back to top
Definition of transaction value
The price actually paid or payable is the total payment made or
to be made by the buyer to or for the benefit of the seller for the imported goods, and
includes all payments made as a condition of sale of the imported goods by the buyer to
the seller, or by the buyer to a third party to satisfy an obligation of the seller.
Conditions to be fulfilled
The customs value is the transaction value if all of the
following conditions have been fulfilled:
Evidence of sale
There must be evidence of a sale for export to the country of
importation (i.e. commercial invoices, contracts, purchase orders, etc.).
No restriction on the disposition or use
There must be no restriction on the disposition or use of the
goods by the buyer, other than restrictions which:
are imposed or required by law in the country of importation;
are limited to the geographic area in which the goods may be resold;
do not substantially affect the value of the goods.
Not subject to additional conditions
The sale or price must not be subject to conditions or
considerations for which a value cannot be determined with respect to the goods being
valued. Some examples are provided in Annex I, Note to Article 1:1(b):
the seller establishes the price of the imported goods on the condition that the
buyer will also buy other goods in specified quantities;
the price of the imported goods is dependent upon the price or prices at which the
buyer sells other goods to the seller;
the price is established on the basis of a form of payment extraneous to the
Full prices, unless...
No part of the proceeds of any subsequent resale, disposal or
use of the goods by the buyer will accrue directly or indirectly to the seller, unless
adjustment can be made in accordance with provisions in Article 8.
Sufficient information for adjustments
Sufficient information is available to enable the specific
adjustments to be made under Article 8to the price paid or payable such as;
commissions and brokerage, except buying commissions
packing and container costs and charges
royalties and licence fees
the cost of transport, insurance and related charges up to the place of importation
if the Member bases evaluation on a C.I.F. basis
but not: costs incurred after importation (duties, transport, construction or
assembly), [Annex I, Note 3 to Article 1].
Buyer and seller not related, otherwise ...
The buyer and seller are not related, but even if so, the use of
the transaction value is acceptable if the importer demonstrates that:
the relationship did not influence the price, or
the transaction value closely approximates a test value.
The definition of related persons is found in Article 15 of
the Agreement, which states that persons are to be deemed to be related only if:
they are officers or directors of one another's businesses;
they are legally recognized partners in business;
they are employer and employee;
any person directly or indirectly owns, controls or holds 5 per cent or more
of the outstanding voting stock or shares of both of them;
one of them directly or indirectly controls the other (the Interpretative Note to
Article 15provides that for the purposes of the Agreement, one person shall be
deemed to control another when the former is legally or operationally in a position to
exercise restraint or direction over the latter. The note also states that
persons includes a legal person, where appropriate).
both of them are directly or indirectly controlled by a third person; or
they are members of the same family.
Cases where Customs Administrations have reasons to doubt
the truth or accuracy of the declared value back to top
Customs valuation based on the transaction value method is
largely based on documentary input from the importer. Article 17of the Agreement
confirms that customs administrations have the right to satisfy themselves as to the
truth or accuracy of any statement, document or declaration. A Decision
Regarding Cases Where Customs Administrations Have Reasons To Doubt The Truth Or Accuracy
Of The Declared Value taken by the Committee on Customs Valuation pursuant to a
Ministerial Decision at Marrakesh spells out the procedures to be observed in such cases.
As a first step, customs may ask the importer to provide further explanation that the
declared value represents the total amount actually paid or payable for the imported
If the reasonable doubt still exists after reception of further information (or in absence
of a response), customs may decide that the value cannot be determined according to the
transaction value method. Before a final decision is taken, customs must communicate its
reasoning to the importer, who, in turn, must be given reasonable time to respond. In
addition, the reasoning of the final decision must be communicated to the importer in
Method 2 Transaction value of identical goods
(Article 2) back to top
The transaction value is calculated in the same manner on
identical goods if the goods are:
the same in all respects including physical characteristics, quality, and
produced in the same country as the goods being valued;
and produced by the producer of the goods being valued.
For this method to be used, the goods must be sold for export to the same country of
importation as the goods being valued. The goods must also be exported at or about the
same time as the goods being valued.
Some exceptions are accepted, in particular:
where there are no identical goods produced by the same person in the country of
production of the goods being valued, identical goods produced by a different person in
the same country may be taken into account.
minor differences in appearance would not preclude goods which otherwise conform to
the definitions from being regarded as identical.
The definition excludes imported goods which incorporate engineering, artwork etc,
provided by the buyer to the producer of goods free of charge or at a reduced cost,
undertaken in the country of importation for which no adjustment has been made under
Method 3 Transaction value of similar goods
(Article 3) back to top
The transaction value is calculated in the same manner on
similar goods if:
goods closely resembling the goods being valued in terms of component materials and
goods which are capable of performing the same functions and are commercially
interchangeable with the goods being valued
goods which are produced in the same country as and by the producer of the goods
being valued. For this method to be used, the goods must be sold to the same country of
importation as the goods being valued. The goods must be exported at or about the same
time as the goods being valued.
Method 4 Deductive value back to top
Deduction of value from the price of the greatest aggregate
The Agreement provides that when customs value cannot be
determined on the basis of the transaction value of the imported goods or identical or
similar goods, it will be determined on the basis of the unit price at which the imported
goods or identical or similar goods are sold to an unrelated buyer in the greatest
aggregate quantity in the country of importation. The buyer and the seller in the
importing country must not be related and the sale must take place at or about the time of
importation of the goods being valued. If no sale took place at or about the time of
importation, it is permitted to use sales up to 90 days after importation of the
goods being valued.
Determination of the greatest aggregate quantity sold
Under Article 5.1, the unit price at which the imported
goods or identical or similar imported goods are sold in the greatest aggregate quantity
is to be the basis for establishing the customs value. The greatest aggregate quantity is,
according to the Interpretative Note to that Article, the price at which the greatest
number of units is sold to unrelated persons at the first commercial level after
importation at which such sales take place. To determine the greatest aggregate quantity
all sales at a given price are taken together and the sum of all the units of goods sold
at that price is compared to the sum of all the units of goods sold at any other price.
The greatest number of units sold at one price represents the greatest aggregate quantity.
Deductions from the price at the greatest aggregate quantity
Since the starting point in calculating deductive value is the
sale price in the country of importation, various deductions are necessary to reduce that
price to the relevant customs value:
commissions usually paid or agreed to be paid, the sum of profits and general
expenses added in connection with sales must also be deducted;
the usual transport costs and corresponding insurance are to be deducted from the
price of the goods when these costs are usually incurred within the country of
the customs duties and other national taxes payable in the country of importation
by reason of the importation or sale of the goods are also to be deducted;
value added by assembly or further processing, when applicable.
Method 5 Computed value back to top
Definition: Production cost and profits and
Computed value, the most difficult and rarely used method,
determines the customs value on the basis of the cost of production of the goods being
valued, plus an amount for profit and general expenses usually reflected in sales from the
country of exportation to the country of importation of goods of the same class or kind.
Computed value is the sum of the following elements:
Production cost = value of materials and
The cost or value of materials and fabrication or other
processing employed in producing the imported goods. Materials would include, for example,
raw materials, such as lumber, steel, lead, clay textiles, etc.; costs to get the raw
materials to the place of production; subassemblies, such as integrated circuits; and
prefabricated components which will eventually be assembled. Fabrication would include the
costs for labour, any costs for assembly when there is an assembly operation instead of
manufacturing process, and indirect costs such as factory supervision, plant maintenance,
overtime, etc. Cost or value is to be determined on the basis of information relating to
the production of the goods being valued, supplied by or on behalf of the producer. If not
included above, packing costs and charges, assists, engineering work, artwork, etc.
undertaken in the country of importation would be added.
Profit and general expenses
Profit and general expenses usually reflected in export sales to
the country of importation, by producers in the country of importation on the basis of
information supplied by the producer, of goods of the same class or kind. The latter
phrase means goods which fall within a group or range of goods produced by a particular
industry or industry sector and includes identical or similar goods. The amount of profit
and general expenses has to be taken as a whole (i.e. the sum of the two). General
expenses could include rent, electricity, water, legal fees, etc.
Other expenses to be added
Finally, other expenses should be added to the price such as the
cost of transport of the imported goods to the port or place of importation, loading,
unloading and handling charges associated with the transport of the imported goods to the
port or place of importation, and the cost of insurance.
Method 6 Fall-back method back to top
Customs value determination based on reasonable means
consistent with the principles and general provisions of the Agreement, Article VII
GATT and on the basis of available data.
When the customs value cannot be determined under any of the
previous methods, it may be determined using reasonable means consistent with the
principles and general provisions of the Agreement and of Article VII of GATT, and on the
basis of data available in the country of importation. To the greatest extent possible,
this method should be based on previously determined values and methods with a reasonable
degree of flexibility in their application.
Valuation criteria not to be used
Under the fall-back method, the customs value must not be based
the selling price of goods in the country of importation (i.e. the sale price of
goods manufactured in the importing country);
a system which provides for the acceptance for customs purposes of the higher of
two alternative values (the lowest should be used);
the price of goods on the domestic market of the country of exportation (valuation
on this basis would go against the principle in the Preamble that valuation
procedures should not be used to combat dumping);
the cost of production other than computed values which have been determined for
identical or similar goods (valuation must be arrived at on the basis of data available in
the country of importation);
the price of goods for export to a third country (two export markets are always to
be treated as separate and the price to one should not control the customs value in the
minimum customs value (unless a developing country has taken the exception which
allows for use of minimum values);
arbitrary or fictitious values (these prohibitions are aimed at systems which do
not base their values on what happens in fact in the marketplace, as reflected in actual
prices, in actual sales, and in actual costs, reason of the importation or sale of the
goods are also to be deducted;
Special and differential treatment back to top
Delay of application of the Agreement for five years for
Article 20.1 allows developing country Members, not party
to the Tokyo Round Code, to delay application of the provisions of the Agreement for a
period of five years from the date of entry into force of the WTO Agreement for the Member
Delay of application of the computed value
method for three years following the application of all other provisions
of the Agreement
Article 20.2 allows developing country Members, not party
to the Tokyo Round Codes to delay application of the computed value method for a period
not exceeding three years following their application of all other provisions of the
Agreement. In practice, this means that developing country Members, not party to the Tokyo
Round Code, can delay the computed value method a total of 8 years.
Extension of the transition period
Paragraph 1 of Annex III of the Agreement allows
developing country Members for whom the five-year delay in the application of the
provisions of the Agreement provided for in Article 20.1 is insufficient to request,
before the end of the five-year period, an extension of such a period, it being understood
that the Members will give sympathetic consideration to such a request in cases where the
developing country Member in question can show good cause.
Reservations to retain established minimum
Paragraph 2 of Annex III provides that developing
country Members may make a reservation to retain an already-existing system of officially
established minimum values on a limited and transitional basis under such terms and
conditions as may be agreed to by the Committee (even though minimum prices are prohibited
under the Agreement).
Reservation against Article 4
Paragraph 3 of Annex III allows developing country Members
the right to make a reservation permitting them to refuse the request of importers
(allowed under Article 4 of the Agreement) to reverse the order of the deductive and
computed value methods.
Special application of the deductive method
Paragraph 4 of Annex III allows developing country
Members the right to value the goods under the deductive method even if the goods have
undergone further processing in the country of importation, whether or not the importer so
Under Article 20.3 developed country Members shall furnish,
on mutually agreed terms, technical assistance to developing country Members that so
request. On this basis, developed country Members shall draw up programmes of technical
assistance which may include, inter alia, training of personnel, assistance in
preparing implementation measures, access to sources of information regarding customs
valuation methodology, and advice on the application of the provisions of the Agreement.
Institutions back to top
Committee on Customs Valuation
The Agreement establishes a Committee on Customs Valuation
composed of representatives from each of the Members for the purpose of affording Members
the opportunity to consult on matters relating to the administration of the customs
valuation system by any Member or the furtherance of the objectives of the Agreement.
Technical Committee on Customs Valuation
The Agreement also establishes a Technical Committee on Customs
Valuation under the auspices of the World Customs Organization with a view to ensuring, at
the technical level, uniformity in interpretation and application of the Agreement. The
responsibilities of the Technical Committee include advising on specific technical matters
as requested by Members or by a panel in a dispute.