Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (Customs Valuation Agreement)

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I. General  

A. Concept of Customs Valuation

1.   In Colombia — Ports of Entry, the parties focused their arguments relating to Colombia’s use of indicative prices on a series of factual determinations concerning the actual nature and functioning of indicative prices within Colombia’s customs procedures. Panama considered that the use of indicative prices for the payment of customs duties and taxes constituted customs valuation, whereas Colombia was of the view that the indicative prices regime did not constitute customs valuation but was used as a customs control mechanism. To address the question whether indicative prices are used for the purpose of customs valuation within the meaning of the Customs Valuation Agreement, the Panel in Colombia — Ports of Entry first examined the concept of customs valuation pursuant to the Customs Valuation Agreement:

“The Panel notes that the Customs Valuation Agreement does not provide a definition for customs valuation. Article 15 of the Customs Valuation Agreement does however include a definition of ‘customs value’. The term ‘customs value of imported goods’ is defined in Article 15.1(a) of the Customs Valuation Agreement as ‘the value of the goods for the purposes of levying ad valorem duties of customs on imported goods’. The Panel believes that this definition of customs value is useful in understanding what customs valuation means within the Customs Valuation Agreement. …

…

In light of the dictionary definitions of valuation and value, as well as the definition of customs value provided in Article 15 of the Customs Valuation Agreement, the Panel considers that the ordinary meaning of the concept of customs valuation is straightforward. Essentially, customs valuation involves the process of determining the monetary worth or price of imported goods for the purpose of levying customs duties. With this understanding of the meaning of customs valuation, the Panel will consider whether Colombia determines the customs value of imports through the use of its indicative prices regime.”⁽¹⁾

2.   The Panel in that dispute further elaborated on the meaning of customs valuation in the context of its analysis of indicative prices used by Colombia:

“In the Panel’s view, the two central aspects within the concept of customs valuation are (i) the value of the goods, which is used (ii) for the purposes of levying ad valorem customs duties.

 

The first question is whether the indicative prices set by Colombia represent the ‘value of the goods’. In light of the ordinary meaning of customs valuation, indicative prices whenever higher than the declared value reflect the ‘value of the goods’ imported into Colombia. Accordingly, the question arises whether the value assigned to goods entering Colombia is used for the purposes of levying customs duties. The Panel notes that the term ‘levy’ is defined in the Oxford English Dictionary as ‘the collection of an assessment, duty or tax’, while the Black’s Law Dictionary defines ‘levy’ as ‘the imposition of a fine or tax’. The key issue is thus whether Colombia’s customs authorities collect customs duties on the basis of indicative prices.

 

…

 

The parties disagree on whether Colombia collects duties based on indicative prices. This raises the larger issue of whether the ‘payment’ of duties is in fact a payment strictu sensu or instead a guarantee in the form of a cash deposit, as claimed by Colombia.

 

In the Panel’s view, ‘payment’ and ‘guarantee’ are two different legal concepts that may not be equated lightly. This is true irrespective of the form that the guarantee may take, whether a bank guarantee, guarantee provided by an insurance company, cash deposit, or any other kind of guarantee. …the future obligation of payment that is secured by a guarantee cannot be confused with the obligation to provide that guarantee.”⁽²⁾

3.   In light of the meaning of customs valuation as clarified above and having assessed how the indicative prices regime operates in Colombia, the Panel in Columbia — Ports of Entry concluded that Colombia’s use of indicative prices constitutes customs valuation within the meaning of the Customs Valuation Agreement because payments made by importers are payments strictu sensu and not guarantees in the form of a cash deposit.⁽³⁾

B. Standard of Review

4.   In Thailand — Cigarettes (Philippines), the Panel set out that an objective assessment under Article 11 of the DSU was the proper standard for its review of the complainants’ claims under the Customs Valuation Agreement. The Panel further elaborated that the objective assessment must be understood in the light of the relevant obligations of the substantive agreement at issue.⁽⁴⁾ As for the claims under the Customs Valuation Agreement, the Panel therefore observed that its objective assessment must be understood in the light of the relevant obligations under the Customs Valuation Agreement, particularly the grounds and explanations to be provided by the customs authority at the time of determination pursuant to Articles 1.2(a), 7.3 and 16 of the Customs Valuation Agreement.

1. Claims under Articles 1.1 and 1.2(a)

5.   With respect to the complainant’s claims under Articles 1.1 and 1.2(a) that Thai Customs improperly rejected the transaction value of the imported cigarettes at issue, the Panel in Thailand — Cigarettes (Philippines) considered that the appropriate standard of review for it was to assess the consistency of Thai Customs’ decision based on the grounds as well as the explanation provided by Thai Customs pursuant to Articles 1.2(a) and 16. The Panel explained that:

“[T]he precise standard applicable to a panel’s review of a claim, and in particular to the factual aspects of a claim, depends on whether the panel must conduct an analysis of the facts as the first trier of facts or as a reviewer of factual determinations made by domestic authorities. We understand this distinction to be based on the nature of the specific obligations under the particular provision of a given WTO-covered agreement. …

 

The Philippines’ claim under Articles 1.1 and 1.2(a) of the Customs Valuation Agreement that Thai Customs improperly rejected the declared transaction values of the subject entries of cigarettes, requires us to make an objective assessment of whether Thai Customs examined the circumstances of the sale between PM Thailand and PM Philippines within the meaning of Article 1.2(a). … the parties’ arguments in this regard are focused on whether Thai Customs examined the evidence submitted by PM Thailand at the time of determination and whether the Thai Customs’ determination not to accept the transaction value of the cigarettes at issue can be justified by such evidence. Our mandate in examining the claims under Articles 1.1 and 1.2(a) is therefore to assess whether the Thai Customs’ determination under Article 1.2(a) is supported by the factual evidence before it, but not to determine as the first trier of facts whether the relationship between PM Thailand and PM Philippines influenced the price based on the information submitted by PM Thailand at the time of the valuation determination.

 

The substantive obligation under the Customs Valuation Agreement that is relevant to the formulation of the applicable standard of review of the Philippines’ claims under Articles 1.1 and 1.2(a), is the obligation imposed on a customs administration under Article 1.2(a) to communicate its grounds for considering that, in the light of the information provided by the importer, the relationship influenced the price. Further, under Article 16, upon request from the importer, the customs administration must provide a written explanation as to how the customs value was determined …

 

Consequently, an objective assessment of whether Thai Customs properly rejected the transaction value by examining the circumstances of sale within the meaning of Article 1.2(a) must be based on the grounds as well as on the explanation provided by Thai Customs under Articles 1.2(a) and 16 respectively.⁽⁵⁾ We find support for our view in the Appellate Body’s statement in US — Lamb …

…

The Appellate Body also emphasized that a panel must critically examine a domestic authority’s explanation ‘in depth, and in the light of the facts before the panel’… .

 

In this connection, we further recall the Appellate Body’s reasoning that panels need not necessarily confine their review of a domestic authority’s determination to an examination of that determination in terms of the factual and legal arguments put forward by the interested parties during the domestic investigation. The Appellate Body in US — Countervailing Duty Investigation on DRAMS also stated, ‘this is not to say that a panel is prohibited from examining whether the agency has given a reasoned and adequate explanation for its determination, in particular, by considering other inferences that could reasonably be drawn from — and explanations that could reasonably be given to — the evidence on record. Indeed, a panel must undertake such an inquiry’.⁽⁶⁾

2. Claims under Article 7.1

6.   The Panel in Thailand — Cigarettes (Philippines) prescribed the standard appropriate for its review of the Philippines’ claim under Article 7.1. The Panel explained that the basis for its assessment of whether Thai Customs’ application of the deductive valuation method was consistent with Article 7.1 was Thai Customs’ explanations provided pursuant to Article 16 as well as information given to the importer under Article 7.3.⁽⁷⁾ The Panel stated that:

“Our mandate in examining the Philippines’ claim under Article 7.1 is to make an objective assessment of whether Thai Customs properly applied the deductive valuation method in determining the customs values of the cigarettes at issue in accordance with the disciplines under Article 7.1 and the principles of the deductive valuation method as prescribed in Article 5. We considered above that in objectively assessing the factual aspects of the customs administration’s determinations, we may neither conduct a de novo review nor completely defer to the administration’s determination.

 

In examining the Philippines’ claim Articles 1.1 and 1.2(a) …, we clarified that our objective assessment of the claims must be based on the grounds and explanations provided by Thai Customs at the time of determination pursuant to Articles 1.2(a) and 16. Under Article 16, in particular, a customs authority is required to make clear and give details of not only the basis for rejecting the transaction value, but also how the chosen deductive valuation method was applied for the calculation of the final customs value.

 

In applying a valuation method falling under Article 7, customs authorities are required under Article 7.3 to inform the importer in writing of the customs value determined under Article 7 and the method used to determine such value if the importer so requests. …the Philippines made a claim under Article 7.3 in this dispute. In order to set the standard for our review of the Philippines’ claim under Article 7.1, we consider the obligation imposed on the customs authority under Article 7.3 also relevant. This is because our objective assessment of Thailand’s compliance with its obligations under Article 7.1 requires us to base our review of the factual determinations made by Thai Customs when it applied the valuation method under Article 7.1 on Thai Customs’ explanations and information at the time of determination.”⁽⁸⁾

7.   In examining the parties’ substantive arguments on the Philippines’ claim under Article 7.1, the Panel observed that Thai Customs never explained at the time of the determination why it decided not to deduct certain items under the deductive valuation method used. The Philippines argued that Thai Customs’ failure to explain the basis for its decision pursuant to Articles 7.3 and 16 prevents the Panel from basing its decision on ex post explanations provided by Thailand in the Panel proceeding.⁽⁹⁾ The Panel considered that in light of the standard of review formulated for its examination of the Philippines’ claim under Article 7.1, it could conclude based on the absence of such explanation that Thai Customs failed to apply the deductive valuation method consistently with Article 7.1.⁽¹⁰⁾ Nonetheless, the Panel proceeded to examine the parties’ substantive arguments under Article 7.1:

“[D]uring the course of the proceeding, both parties heavily substantiated their arguments related to the deductibility of the three items at issue. Particularly, Thailand explained in detail the reason why Thai Customs, at the time of the domestic proceeding, decided not to deduct the three items at issue. In these circumstances, we consider that making an assessment of Thai Customs’ decision not to deduct these three items, as explained in this proceeding based on the evidence before Thai Customs at the time of the determination, helps to resolve the parties’ dispute relating to the deductibility of the concerned items.⁽¹¹⁾”⁽¹²⁾

C. Sequential Nature of the Valuation Methods in Articles 1 Through 7

8.   In Colombia — Ports of Entry, the Panel explained the sequential nature of the valuation methods in Articles 1 through 7.1 of the Customs Valuation Agreement:

“[T]he Customs Valuation Agreement provides for sequential valuation methods in Articles 1 through 7.1. Article 1 establishes the primacy of the transaction value as the valuation method. Whenever customs authorities consider that the transaction value of the imported good, as defined in Article 1, cannot be used, authorities must follow, in a sequential manner, the valuation methods provided for in Article 2 (transactional value of identical goods), Article 3 (transaction value of similar goods), Article 5 (deductive method) and Article 6 (computed value) of the Customs Valuation Agreement. Where none of the methods in Articles 1 to 6 are available, Article 7 allows customs authorities to resort to any other reasonable means to determine the customs value, provided such methods are consistent with the principles and general provisions of the Customs Valuation Agreement and of GATT 1994. In doing so, customs authorities must not use any of the methods prohibited in paragraph 2 of Article 7.

…

The Panel considers that national customs authorities are required to apply the various customs valuation methods laid down in Articles 1, 2, 3, 5 and 6 of the Customs Valuation Agreement on a case-by-case basis, so as to reflect the particular conditions of the sale of the product in question. The Panel considers that, inasmuch as the customs values for subject goods are established on a fixed basis for broad categories of products without any examination of the specific circumstances surrounding the transaction at issue, indicative prices do not reflect any of the methodologies set out in the referred provisions.

…

The Panel acknowledges that the sequential nature of the various valuation methods permits national customs authorities to proceed from one method to the next without violating the previous method, provided the former cannot be used. However, the structure and design of the indicative prices system … prevents Colombian customs authorities from sequentially applying the customs valuation methods provided in Articles 1 through 6. Indeed, when determining the value of subject goods imports, Colombian customs authorities are required to systematically apply a methodology that does not reflect any of the methods provided for in these provisions, i.e. the use of indicative prices, unless the transactional value is higher than the indicative price.

 

The Panel therefore finds that … as well as the various resolutions establishing indicative prices, which together mandate the use of indicative prices for customs valuation purposes, are inconsistent with the obligation to conduct customs valuation of subject goods based on the sequential application of the methods established by Articles 1, 2, 3, 5 and 6 of the Customs Valuation Agreement.”⁽¹³⁾

9.   In Thailand — Cigarettes (Philippines), regarding the Philippines’ claim under Article 7.1 in respect of Thailand’s alleged violation of the sequencing obligation, the Panel did not consider that Article 7.1 could form the basis for an independent sequencing claim under the Customs Valuation Agreement:

“As we noted above, the primary basis for customs value under the Customs Valuation Agreement is the transaction value. Whenever the customs value cannot be determined based on the transaction value under Article 1 for the reasons authorized under the same provision, the methods under Articles 2 through 7 are to be used in the sequential order. …

…

Next, we address the Philippines’ claim under Article 7.1 in respect of Thailand’s alleged violation of the sequencing obligation. The text of Article 7.1 stipulates that resort to Article 7.1 for customs valuation is conditioned on the situation where ‘the customs value of the imported goods cannot be determined under the provisions of Articles 1 through 6’. As such, Article 7 may only be applied if the customs value of the imported goods cannot be determined under the provisions of Articles 1 through 6. We understand that the Philippines’ sequencing claim under Article 7.1 stems from this part of Article 7.1. In our view, this phrase in Article 7.1 lays down a condition or requirement that needs to be met before a customs authority can use the valuation principles under Article 7.1. As such, we do not consider that Article 7.1 can form the basis for an independent sequencing claim under the Customs Valuation Agreement. We consider that the Philippines’ claim pertaining to this part of Article 7.1 rather falls within the Philippines’ claim that Thailand improperly applied the deductive valuation method under Article 7.1 …”⁽¹⁴⁾

 

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II. General Introductory Commentary  

A. Text of General Introductory Commentary

1.   The primary basis for customs value under this Agreement is “transaction value” as defined in Article 1. Article 1 is to be read together with Article 8 which provides, inter alia, for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Article 8 also provides for the inclusion in the transaction value of certain considerations which may pass from the buyer to the seller in the form of specified goods or services rather than in the form of money. Articles 2 through 7 provide methods of determining the customs value whenever it cannot be determined under the provisions of Article 1.

 

2.   Where the customs value cannot be determined under the provisions of Article 1 there should normally be a process of consultation between the customs administration and importer with a view to arriving at a basis of value under the provisions of Article 2 or 3. It may occur, for example, that the importer has information about the customs value of identical or similar imported goods which is not immediately available to the customs administration in the port of importation. On the other hand, the customs administration may have information about the customs value of identical or similar imported goods which is not readily available to the importer. A process of consultation between the two parties will enable information to be exchanged, subject to the requirements of commercial confidentiality, with a view to determining a proper basis of value for customs purposes.

 

3.   Articles 5 and 6 provide two bases for determining the customs value where it cannot be determined on the basis of the transaction value of the imported goods or of identical or similar imported goods. Under paragraph 1 of Article 5 the customs value is determined on the basis of the price at which the goods are sold in the condition as imported to an unrelated buyer in the country of importation. The importer also has the right to have goods which are further processed after importation valued under the provisions of Article 5 if the importer so requests. Under Article 6 the customs value is determined on the basis of the computed value. Both these methods present certain difficulties and because of this the importer is given the right, under the provisions of Article 4, to choose the order of application of the two methods.

 

4.   Article 7 sets out how to determine the customs value in cases where it cannot be determined under the provisions of any of the preceding Articles.

 

Members,

    

    Having regard to the Multilateral Trade Negotiations;

 

    Desiring to further the objectives of GATT 1994 and to secure additional benefits for the international trade of developing countries;

 

    Recognizing the importance of the provisions of Article VII of GATT 1994 and desiring to elaborate rules for their application in order to provide greater uniformity and certainty in their implementation;

 

    Recognizing the need for a fair, uniform and neutral system for the valuation of goods for customs purposes that precludes the use of arbitrary or fictitious customs values;

 

    Recognizing that the basis for valuation of goods for customs purposes should, to the greatest extent possible, be the transaction value of the goods being valued;

 

    Recognizing that customs value should be based on simple and equitable criteria consistent with commercial practices and that valuation procedures should be of general application without distinction between sources of supply;

 

    Recognizing that valuation procedures should not be used to combat dumping;

 

    Hereby agree as follows:

B. Interpretation and Application of the General Introductory Commentary

1. General

(a) Adoption of the decisions of the Tokyo Round Committee

10.   At its meeting of 12 May 1995, the Committee on Customs Valuation agreed, inter alia, to adopt the decisions adopted by the Tokyo Round Committee on Customs Valuation relating to the interpretation and administration of the Customs Valuation Agreement.⁽¹⁵⁾

(b) Implementation of the Customs Valuation Agreement

11.   At its meeting of 18–19 October 2000, the General Council requested the Committee on Customs Valuation to consider three proposals relating to the implementation of the Customs Valuation Agreement.⁽¹⁶⁾ The Committee reported to the General Council on its consideration of these matters.⁽¹⁷⁾ Following adoption of the Ministerial Declaration⁽¹⁸⁾ and the Decision on Implementation-Related Issues and Concerns⁽¹⁹⁾ at Doha, the Committee on Customs Valuation was requested to carry out the mandate contained in paragraph 12(b) of the Ministerial Declaration and paragraph 13 of the Decision on Implementation-Related Issues and Concerns, as well as paragraph 8.3 of the Decision on Implementation-Related Issues and Concerns. The Committee reported to the Trade Negotiations Committee on its consideration of the former⁽²⁰⁾, and to the General Council on its consideration of the latter.⁽²¹⁾

2. Transaction value as the primary basis for customs value

12.   In Colombia — Ports of Entry, the Panel confirmed that the Customs Valuation Agreement prescribes the transaction value as the primary customs valuation method:

“The primacy of the transaction value as a customs valuation method and the sequential nature of the valuation methods derives from the ‘General Introductory Comment’ to this Agreement. This Comment explains that the ‘primary basis for customs value under this Agreement is “transaction value” as defined in Article 1’, while also indicating that ‘Articles 2 through 7 provide methods of determining the customs value whenever it cannot be determined under the provisions of Article 1’. In addition, the Preamble to the Agreement makes explicit reference to the crucial role of the transaction value in customs valuation.

 

The Panel therefore understands that the Customs Valuation Agreement imposes an obligation on national authorities to determine the customs value of imported goods based on the ‘transaction value’ and, whenever that is not possible, to sequentially apply the customs valuation methods provided for in Articles 1, 2, 3, 5, 6 and 7.1 of the Agreement.”⁽²²⁾

 

Part I: Rules on Customs Valuation

 

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III. Article 1  

A. Text of Article 1

Article 1

1.   The customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation adjusted in accordance with the provisions of Article 8, provided:

 

(a)   that there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which:

 

(i)   are imposed or required by law or by the public authorities in the country of importation;

 

(ii)   limit the geographical area in which the goods may be resold; or

 

(iii)   do not substantially affect the value of the goods;

 

(b)   that the sale or price is not subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued;

 

(c)   that 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 an appropriate adjustment can be made in accordance with the provisions of Article 8; and

 

(d)   that the buyer and seller are not related, or where the buyer and seller are related, that the transaction value is acceptable for customs purposes under the provisions of paragraph 2.

 

2.   (a)   In determining whether the transaction value is acceptable for the purposes of paragraph 1, the fact that the buyer and the seller are related within the meaning of Article 15 shall not in itself be grounds for regarding the transaction value as unacceptable. In such case the circumstances surrounding the sale shall be examined and the transaction value shall be accepted provided that the relationship did not influence the price. If, in the light of information provided by the importer or otherwise, the customs administration has grounds for considering that the relationship influenced the price, it shall communicate its grounds to the importer and the importer shall be given a reasonable opportunity to respond. If the importer so requests, the communication of the grounds shall be in writing.

 

b)   In a sale between related persons, the transaction value shall be accepted and the goods valued in accordance with the provisions of paragraph 1 whenever the importer demonstrates that such value closely approximates to one of the following occurring at or about the same time:

 

(i)   the transaction value in sales to unrelated buyers of identical or similar goods for export to the same country of importation;

 

(ii)   the customs value of identical or similar goods as determined under the provisions of Article 5;

 

(iii)   the customs value of identical or similar goods as determined under the provisions of Article 6;

 

In applying the foregoing tests, due account shall be taken of demonstrated differences in commercial levels, quantity levels, the elements enumerated in Article 8 and costs incurred by the seller in sales in which the seller and the buyer are not related that are not incurred by the seller in sales in which the seller and the buyer are related.

 

(c)   The tests set forth in paragraph 2(b) are to be used at the initiative of the importer and only for comparison purposes. Substitute values may not be established under the provisions of paragraph 2(b).

B. Text of Interpretative Note to Article 1

Note to Article 1: Price Actually Paid or Payable

1.   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. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller.

 

2.   Activities undertaken by the buyer on the buyer’s own account, other than those for which an adjustment is provided in Article 8, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the customs value.

 

3.   The customs value shall not include the following charges or costs⁽²³⁾, provided that they are distinguished from the price actually paid or payable for the imported goods:

 

(a)   charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;

 

(b)   the cost of transport after importation;

 

(c)   duties and taxes of the country of importation.

 

4.   The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value.

Paragraph 1(a)(iii)

Among restrictions which would not render a price actually paid or payable unacceptable are restrictions which do not substantially affect the value of the goods. An example of such restrictions would be the case where a seller requires a buyer of automobiles not to sell or exhibit them prior to a fixed date which represents the beginning of a model year.

Paragraph 1(b)

1.   If the sale or price is subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued, the transaction value shall not be acceptable for customs purposes. Some examples of this include:

 

(a)   the seller establishes the price of the imported goods on condition that the buyer will also buy other goods in specified quantities;

 

(b)   the price of the imported goods is dependent upon the price or prices at which the buyer of the imported goods sells other goods to the seller of the imported goods;

 

(c)   the price is established on the basis of a form of payment extraneous to the imported goods, such as where the imported goods are semi-finished goods which have been provided by the seller on condition that the seller will receive a specified quantity of the finished goods.

 

2.   However, conditions or considerations relating to the production or marketing of the imported goods shall not result in rejection of the transaction value. For example, the fact that the buyer furnishes the seller with engineering and plans undertaken in the country of importation shall not result in rejection of the transaction value for the purposes of Article 1. Likewise, if the buyer undertakes on the buyer’s own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities is not part of the customs value nor shall such activities result in rejection of the transaction value.

Paragraph 2

1.   Paragraphs 2(a) and 2(b) provide different means of establishing the acceptability of a transaction value.

 

2.   Paragraph 2(a) provides that where the buyer and the seller are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the customs value provided that the relationship did not influence the price. It is not intended that there should be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubts about the acceptability of the price. Where the customs administration have no doubts about the acceptability of the price, it should be accepted without requesting further information from the importer. For example, the customs administration may have previously examined the relationship, or it may already have detailed information concerning the buyer and the seller, and may already be satisfied from such examination or information that the relationship did not influence the price.

 

3.   Where the customs administration is unable to accept the transaction value without further inquiry, it should give the importer an opportunity to supply such further detailed information as may be necessary to enable it to examine the circumstances surrounding the sale. In this context, the customs administration should be prepared to examine relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seller, although related under the provisions of Article 15, buy from and sell to each other as if they were not related, this would demonstrate that the price had not been influenced by the relationship. As an example of this, if the price had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way the seller settles prices for sales to buyers who are not related to the seller, this would demonstrate that the price had not been influenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is representative of the firm’s overall profit realized over a representative period of time (e.g. on an annual basis) in sales of goods of the same class or kind, this would demonstrate that the price had not been influenced.

 

4.   Paragraph 2(b) provides an opportunity for the importer to demonstrate that the transaction value closely approximates to a “test” value previously accepted by the customs administration and is therefore acceptable under the provisions of Article 1. Where a test under Paragraph 2(b) is met, it is not necessary to examine the question of influence under paragraph 2(a). If the customs administration has already sufficient information to be satisfied, without further detailed inquiries, that one of the tests provided in Paragraph 2(b) has been met, there is no reason for it to require the importer to demonstrate that the test can be met. In Paragraph 2(b) the term “unrelated buyers” means buyers who are not related to the seller in any particular case.

Paragraph 2(b)

A number of factors must be taken into consideration in determining whether one value “closely approximates” to another value. These factors include the nature of the imported goods, the nature of the industry itself, the season in which the goods are imported, and, whether the difference in values is commercially significant. Since these factors may vary from case to case, it would be impossible to apply a uniform standard such as a fixed percentage, in each case. For example, a small difference in value in a case involving one type of goods could be unacceptable while a large difference in a case involving another type of goods might be acceptable in determining whether the transaction value closely approximates to the “test” values set forth in paragraph 2(b) of Article 1.

 
C. Interpretation and Application of Article 1

1. Valuation of carrier media bearing software for data-processing equipment

13.  At its meeting of 12 May 1995, the Committee on Customs Valuation adopted the decision of the Tokyo Round Committee on the valuation of carrier media bearing software for data-processing equipment.⁽²⁴⁾

2. Article 1.1

14.  In Thailand — Cigarettes (Philippines), the Panel explained that Article 1.1 sets out the principle that the transaction value is the customs value of imported goods provided certain conditions are met. The Panel further elaborated that, in a related-party transaction, this principle is linked to the conditions prescribed in Article 1.2(a):

“Article 1 sets out the principle under the Customs Valuation Agreement that the customs value of imported goods must be the transaction value provided that the conditions set out in paragraphs (a)–(d) are met.

 

Sub-paragraph (d) of Article 1 stipulates, as one of the conditions for accepting the transaction value, that the buyer and the seller should not be related. In a situation where they are related within the meaning of Article 15, the customs value of the concerned imported goods will be the transaction value if that transaction value is acceptable for customs purposes under Article 1.2. Therefore, the obligation under Article 1.1 of the Customs Valuation Agreement to use the transaction value as the customs value of imported goods is linked to Article 1.2(a) in a situation where the buyer and the seller are related.”⁽²⁵⁾

3. Article 1.2(a)

(a) Obligation to “examine” the circumstances of sale in a related-party transaction to determine the acceptability of the transaction value as the customs value of imported goods

15.  Based on the text of the first two sentences of Article 1.2(a), the Panel in Thailand — Cigarettes (Philippines) considered that, in a related party situation, Article 1.2(a) imposes an obligation on customs authorities to “examine” the circumstances of the sale before deciding the acceptability of the importer’s declared transaction value. The Panel observed that the fact that the importer and the exporter were related was not a sufficient basis for the customs authorities to reject the transaction value.⁽²⁶⁾ The Panel further explained that, based on the results of such examination, the customs authorities must then accept the transaction value provided that the relationship did not influence the price. Regarding the examination to be conducted by the customs authorities under Article 1.2(a), the Panel clarified that Article 1.2(a), read in conjunction with the Interpretative Note to Article 1.3, entails certain procedural as well as substantive obligations.

16.  As for the procedural steps that the customs authorities’ examination entails under Article 1.2(a), the Panel clarified that:

“Article 1.2(a), taken together with paragraph 2 of the Interpretative Notes to Article 1.2, indicates that only when customs authorities have doubts about the transaction value in a related-party transaction, they will need to inquire into the acceptability of the transaction value.

 

… In examining the circumstances of the sale, therefore, the customs administration may, if and to the extent necessary, choose to ask the importer to provide information relevant to the customs authorities’ examination. Paragraph 3 of the Interpretative Notes to Article 1.2(a) illustrates specific examples of the aspects of the transactions that the customs administration should be prepared to examine.

 

Article 1.2(a) further requires that if the customs administration has grounds for considering that the relationship influenced the price ‘in light of the information provided by the importer or otherwise’, the customs administration shall communicate such grounds to the importer so as to ‘give the importer a reasonable opportunity to respond’. The phrase ‘in light of the information provided by the importer or otherwise’ indicates that Article 1.2(a) does not impose an obligation on the customs administration to seek information or clarification from the importer when it decides to look further into the circumstances of sale. Particularly, the term ‘or otherwise’ in the subject sentence and the absence of the requirement to seek information from the importer in Article 1.2(a) confirms that a customs administration may reach the decision on whether it has grounds for preliminarily considering that the relationship influenced the price without informing the concerned importer of its need for further inquiry or seeking information from the importer. In other words, while a customs administration may choose to inform the importer of its decision to examine the circumstances of sale, it is not required to do so in the light of the absence of language to that effect in Article 1.2(a). This is in contrast to the phrase in Article 1.2(a) — ‘[the customs administration] shall communicate its grounds to the importer’ — that imposes an explicit obligation on the customs administration to communicate its grounds regarding its consideration to the importer.

 

Despite the absence of the explicit obligation to inform the importer of its decision to examine the circumstances of the sale, however, we wish to emphasize that it may still be highly desirable for the customs administration to do so in order to facilitate the valuation process by respecting the transparency principle underlying the process. …

 

Although Article 1.2(a) does not further elaborate on specific procedures subsequent to customs authorities’ communication of grounds, it is logical to understand that the scope of Article 1.2(a) extends to the submission by the importer of further information in response to the customs authorities’ communication of grounds for its consideration and the customs authorities’ subsequent determination to accept or reject the declared transaction value. If a customs authority decides to reject the transaction value, another valuation method must be used by observing the sequential order of the methods stipulated in Articles 2, 3, 5, 6 and 7.

 

Overall, therefore, the determination of whether to accept the transaction value as the customs value in a related-party situation under Article 1.2(a) entails the following procedural steps:

• The importer declares a transaction value for the goods imported;
   
• The customs authority is required to examine the circumstances of the sale only if it has doubts about the validity of the transaction value of the imported goods, because the fact that the buyer and seller are related should not in itself be grounds for regarding the transaction value as unacceptable;
   
• The customs authority shall examine the circumstances of the sale in the light of the information provided by the importer or otherwise and communicate to the importer the grounds for preliminarily considering that the relationship influenced the price;
   
• The customs authority gives the importer a reasonable opportunity to respond. Given the opportunity, the importer submits further information; and
   
• The customs authority makes a .final decision on whether to accept the transaction value.

Based on the procedural steps required in the customs authorities’ examination of the circumstances of the sale as above, we can infer that the temporal scope of an examination under Article 1.2(a) begins when a customs authority’s doubts on the validity of the transaction value trigger the need for an examination of the acceptability of the transaction value, and ends when the customs authority makes a final decision on the acceptability of that transaction value. Once that determination is made, either the transaction value will be accepted as declared by the importer Articles 1.1 or another method will be used according to the sequential order of the valuation methods to determine the value of the goods imported. …”⁽²⁷⁾

17.  Having clarified the procedural aspect of the examination under Article 1.2(a), the Panel in Thailand — Cigarettes (Philippines) proceeded to analyse the substantive nature of the examination of the circumstances of sale that the customs administration must conduct. The Panel first observed the different positions put forward by the parties on this issue. The Philippines argued that a customs authority is obliged to undertake an active investigative role by requesting and gathering information from the importer as well as other WTO Members and by analysing information pertaining to the circumstances of the concerned transaction. On the other hand, Thailand was of the view that the obligation on the customs authority will be met as long as it notifies the importer of its preliminary determination and reviews the information provided by the importer before reaching a final conclusion on the acceptability of the transaction value. The Panel turned to the ordinary meaning of as well as the context for the term “examine” in Article 1.2(a) to reach the conclusion that both the customs authorities and importers have respective responsibilities under Article 1.2(a):

“The ordinary meaning of the term ‘examine’ signifies that the customs authorities must carefully consider, investigate and inquire into the information provided by importers concerning the circumstances of the transaction. We also consider that the principle under the Customs Valuation Agreement that the primary basis of valuation is the transaction value sheds light on the nature of examination to be conducted concerning the circumstances of sale in a related-party situation. Given that the transaction value should normally form the basis of a valuation, any situation giving rise to a reason(s) for questioning the transaction value would naturally demand the customs authorities’ critical consideration of, inquiry into, and investigation of, the relevant situation.

 

At the same time, we understand that the principal responsibility of providing relevant information that may show the acceptability of the transaction value, in accordance with the method under either Article 1.2(a) or 1.2(b), rests upon the importer. This is related to the fact that the importer and, in certain situations, its related seller in an exporting country are in possession of the facts relevant to the question before the customs authorities and therefore responsible for providing customs authorities with sufficient information to enable them to assess the acceptability of the transaction value. Specifically, for example, Article 1.2(a) refers to ‘in the light of information provided by the importer’. The Interpretative Note to Article 1.2(a) also stipulates in paragraph 3 that the customs administration should ‘give the importer an opportunity to supply such further detailed information as may be necessary to enable it to examine the circumstances surrounding the sale’. The text of paragraph 3 of the Interpretative Note to Article 1.2(a) therefore makes it clear that the responsibility imposed on importers for providing sufficient information is directly linked to the objective of enabling the customs authorities to examine the circumstances of the sale.

…

In sum, we consider that the customs authorities and importers have respective responsibilities under Article 1.2(a). The customs authorities must ensure that importers be given a reasonable opportunity to provide information that would indicate that the relationship did not influence the price. Importers are responsible for providing information that would enable the customs authority to examine and assess the circumstances of sale so as to determine the acceptability of the transaction value. Provided with such information, the customs authorities must conduct an ‘examination’ of the circumstance of sale, which would require an active, critical review and consideration of the information before them.”⁽²⁸⁾

18.  In reaching this conclusion, the Panel in Thailand — Cigarettes (Philippines) also referred to the Appellate Body’s analysis in US — Wheat Gluten of the nature of the investigation to be conducted by the competent authorities in the context of the Agreement on Safeguards. The Panel recalled the Appellate Body’s statement that the Agreement on Safeguards envisages that the interested parties play a central role in the investigation and that they will be a primary source of information for the competent authorities.⁽²⁹⁾ The Panel stated, “both the obligation to examine the validity of the transaction value under Article 1.2(a) of the Customs Valuation Agreement and the obligation to carry out a full investigation to conduct a proper evaluation of all of the relevant factors under Article 3.1 of the Agreement on Safeguards are imposed on ‘domestic authorities’.”⁽³⁰⁾ The Panel further elaborated that: 

“As the Appellate Body inferred from the term ‘investigate’, we consider therefore the word ‘examine’ also suggests ‘a proper degree of activity on the part of the [customs authorities] because authorities charged with conducting an inquiry or a study … must actively seek out pertinent information’. To that extent, in order to properly examine the circumstances of a given transaction, the customs authority must clearly indicate to the importer how it evaluates the information submitted by the importer, including the insufficiency of the information submitted and, if necessary and feasible, any further particular type of information that may help them assess the validity of the transaction value. This must, in our view, be carried out at the communication of grounds stage (the required step under Article 1.2(a) identified … above) whereby the customs authority will explain the grounds for considering preliminarily that the relationship influenced the price so as to give a reasonable opportunity for the importer to respond.

…

We underline in this regard that the obligations imposed on the customs authorities to examine the circumstances of sale under the Customs Valuation Agreement at the same time need to be understood against the succinct language of Article 1.2(a) of the Customs Valuation Agreement. Particularly, for this reason, we are mindful that the extent and scope of the obligations imposed on customs authorities to ‘examine’ under Article 1.2(a) of the Customs Valuation Agreement cannot be the same as that imposed on domestic investigative authorities under the WTO agreements concerning trade remedy measures.”⁽³¹⁾

19.   The Panel in Thailand — Cigarettes (Philippines) found that Thailand acted inconsistently with Articles 1.1 and 1.2(a) in rejecting the transaction value of the concerned imported cigarettes because Thai Customs failed to properly examine the circumstances of the transaction between PM Thailand (the importer) and PM Philippines (the seller). In this connection, the Panel highlighted the following factors: (i) the importer did provide evidence to Thai Customs to establish that the relationship between the importer and the seller did not influence the price and thus fulfilled its procedural responsibility under Article 1.2(a) to provide information to the customs administration; and (ii) upon receiving the evidence submitted by the importer, Thai Customs failed to explain to the importer why it considered the information provided by the importer was insufficient and consequently decided to reject the transaction value.⁽³²⁾ The Panel emphasized, “upon receiving information and data from [the importer], Thai Customs was required to inquire into, investigate and critically consider such information and data and communicate its grounds and explain the final determination.”⁽³³⁾ The Panel further explained that:

“In the light of the nature of the obligation to ‘examine’ under Article 1.2(a), as clarified … above, upon receiving information and data from PM Thailand, Thai Customs was required to inquire into, investigate and critically consider such information and data and communicate its grounds and explain the final determination. In this regard, we wish to emphasize that this question should be distinguished from the question of whether the content of the information provided by PM Thailand did not establish the validity of the transaction value as explained by Thailand [before the Panel]. Addressing the latter would amount to acting outside our mandate to make an objective assessment of the matter at issue.

 

Turning back to the question before us, we recognize that it may well be that Thai Customs critically considered the information and data submitted based on the reasons it has provided to the Panel in this proceeding. However, we would not be in the position to find that Thai Customs did in fact examine such information unless such reasoning is provided in its communication of grounds and its explanations to the importer in accordance with the obligations under the Customs Valuation Agreement. In its explanation given in the 12 April 2007 letter, Thai Customs does not elucidate the reason why it reached the conclusion that the relationship influenced the price with respect to the entries at issue. We therefore do not have the evidence confirming that Thai Customs did in fact examine the circumstances of the sale by critically considering all information and data before it at the time of determination, as it claims in this proceeding.⁽³⁴⁾ We do not find any other explanation in the subject letter than that the importer and the exporter are related and that the importer failed to meet the burden of proof. As explicitly stipulated in Article 1.2(a), however, the mere fact that an importer is related to an exporter is not sufficient in itself for a customs administration to reject the transaction value. Article 1.2(a) requires the customs administration to examine the circumstances of the sale in a related-party transaction. Consequently, it follows that Thai Customs was under an obligation to explain why it decided to reject the transaction value, including the basis for considering that the relationship influenced the price, after it had examined the circumstances of the sale.

 

Thailand further submits that the grounds for Thai Customs not using the transaction value as the customs value were communicated in its letter of 19 December 2006, namely that PM Thailand failed to establish that the relationship did not influence the transfer price. Other than this statement, the concerned letter does not include any of the other explanations that Thailand provided in this proceeding, as noted in the previous paragraph. 

 

Without informing the importer of the basis for its consideration that the information provided up until that stage of the process did not establish the validity of the transaction value, the importer would not have been able to effectively, if at all, respond to the authority’s consideration. This would further hinder the ability of the customs authorities to properly examine the circumstances of sale under Article 1.2(a).

 

Furthermore, Thai Customs’ explanation for the final determination of the final customs value for the entries at issue is contained in its letter dated 12 April 2007 and the minutes of the 6 March 2007 meeting. … Thai Customs indicates in the letter as the reason for its decision to reject the transaction value the following statement: ‘[t]he company and the overseas seller are related parties, and it cannot be proven whether the relationship has an influence on the determination of customs values or not’. However, none of the explanations provided by Thailand in this Panel proceeding were set out in the Thai Customs’ letter of 12 April 2007. In response to the Panel question of whether Thai Customs ever communicated the same explanations that were given in this Panel proceeding to PM Thailand during the domestic proceedings, Thailand submits that although its explanations before the Panel are much more detailed, they are fully consistent with the grounds on which Thai Customs acted and the explanations provided to PM Thailand at the time. As already addressed above, however, in the light of the nature of the obligation to ‘examine’ the circumstances of the sale, considered in the due process objective of Article 1.2(a) as well as the Customs Valuation Agreement in its entirety, the absence of any explanations on why the information provided was considered insufficient and consequently led Thai Customs to reject the transaction value renders Thai Customs’ examination inconsistent with Article 1.2(a).

 

We address next the minutes of the 6 March 2007 meeting. The minutes include the description of Thai Customs’ examination of the circumstances of the sale; its determination to reject the transaction value; and the alternative valuation methods considered to be used for valuation of the cigarettes at issue. … we will assess whether the minutes explain the basis for Thai Customs’ determination to reject the transaction value in the light of the information and evidence provided by PM Thailand… . This therefore shows that Thai Customs considered it unnecessary to examine the circumstances of the sale in respect of the cigarettes at issue imported in August 2006 based on its examination and consequent determination in 2003 that the relationship between PM Thailand and PM Philippines influenced the price of the cigarettes imported at that time. As the Philippines points out, we do not consider that the requirement to examine the circumstances of the sale under Article 1.2(a) can be satisfied by simply referring back to the examination conducted and determination reached in respect of the transaction that took place three years before the current transaction at issue. There may indeed be a situation where despite the gap in time, the circumstances of both transactions between the same parties turn out to be the same. Even in such a case, however, in our view, the customs authorities are obliged under Article 1.2(a) to explain the basis for finding the current transaction to be the same as the previous transaction which it had already examined.”⁽³⁵⁾

(b) Obligation to communicate grounds for rejecting declared transaction values

20.   Regarding the nature of the obligations to communicate grounds for rejecting declared transaction values under Article 1.2(a), the Panel in Thailand — Cigarettes (Philippines) explained that:

“The term ‘ground[s]’ can be defined as ‘noun. … 6 The basis of an opinion or argument, the reason or motive for an action, (now freq. in pl.). In pl. also, sufficient reason or reasons for, that. ME’.⁽³⁶⁾ When used in plural, as in Article 1.2(a), ‘grounds’ thus means ‘sufficient reason or reasons’ for an opinion or an action. Under Article 1.2(a), the grounds to be provided to the importer are the customs authorities’ reasons for considering, in the light of the information provided by the importer or otherwise, that the relationship influenced the price. In this regard, we recall our discussion above regarding the procedural steps to be taken by customs authorities as well as importers under Article 1.2(a). The importer is responsible for providing information relevant to the acceptability of the transaction value once it has been notified by the customs authority of the need to examine the circumstances of the sale in related-party situations. Subsequently, the customs authority must assess the information initially provided by the importer and communicate its grounds for considering that the relationship influenced the price based on the evidence provided if that is the preliminary conclusion reached at that point in the process.

 

In this context, the obligation to communicate the grounds under Article 1.2(a) can be temporarily distinguished from the obligation to provide an explanation under Article 16 for how the final customs value of the importer’s goods was determined. As the parties have also clarified, the obligation to provide ‘grounds’ under Article 1.2(a) arises during the valuation process. The obligation to ‘explain’ the determination of the customs value, on the other hand, does not arise until after the customs authority has made a final assessment of the customs value of the concerned goods. This temporal difference in the process, in our view, thus affects the substantive nature of the content of ‘grounds’ under Article 1.2(a) and an ‘explanation’ under Article 16. Given that under Article 1.2(a), the importer shall be given a reasonable opportunity to further respond to the customs authority’s ‘grounds’ for considering that the relationship influenced the price, the ‘explanation’ to be provided after the valuation process is completed must therefore include the assessment of all relevant information, including that provided by the importer as a response to the customs authority’s communication of its grounds regarding its consideration.

 

Moreover, we consider that the right of the importer to have a reasonable opportunity to respond to the customs authority’s grounds for its consideration under Article 1.2(a) provides contextual basis for the term ‘grounds’. As the Philippines suggests, in order for the importer to have a reasonable opportunity to respond to the customs authorities’ consideration, particularly if the customs authority considers that there is insufficient information, the importer must not be left to guess the reasons for the customs authorities’ consideration. The right of the importer to have ‘a reasonable opportunity to respond’ under Article 1.2(a) would lose its meaning unless the importer is informed of at least the reason(s) why the customs authority continues to question the acceptability of the transaction value despite the evidence and information presented or otherwise in the possession of the customs authority until that point. In this regard, we do not find it necessary or useful for us to define the exact extent and scope of ‘grounds’ to be provided under Article 1.2(a) as they may vary depending on the factual circumstances presented in each case. We do agree, however, with the Philippines that without knowing the reasons for the authority’s consideration in relation to the specific evidence before it, the importer would not be in the position to effectively ‘respond’, for example, by further elaborating on the relevance of the evidence it has already submitted and presenting additional information. It would be desirable if a customs authority could, to the extent possible, inform the importer of the kind(s) of additional factual information that it considers may prove useful in further assessing the acceptability of the transaction value. It is difficult to conceive any other way in which the importer can have a reasonable opportunity to respond to the customs authorities’ consideration that the relationship did influence the price.”⁽³⁷⁾

21.   In Thailand — Cigarettes (Philippines), the importer provided Thai Customs with certain information and data to establish the acceptability of the transaction value. Given these factual circumstances, the Panel in Thailand — Cigarettes (Philippines) found that Thai Customs’ grounds as provided to the importer (that the importer and the seller are related parties … and the importer has yet to prove if the said relationship influences the customs value determination or not) did not satisfy the obligation under Article 1.2(a) to communicate the grounds for its consideration.⁽³⁸⁾ The Panel considered that “to the extent that Thai Customs was presented with certain evidence, the grounds for its consideration that the relationship between the buyer and the seller influenced the price must be linked to that concerned evidence so as to assist the importer in understanding the authority’s consideration.”⁽³⁹⁾

 

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IV. Article 2  

A. Text of Article 2

Article 2

1.   (a)   If the customs value of the imported goods cannot be determined under the provisions of Article 1, the customs value shall be the transaction value of identical goods sold for export to the same country of importation and exported at or about the same time as the goods being valued.

 

(b)  In applying this Article, the transaction value of identical goods in a sale at the same commercial level and in substantially the same quantity as the goods being valued shall be used to determine the customs value. Where no such sale is found, the transaction value of identical goods sold at a different commercial level and/or in different quantities, adjusted to take account of differences attributable to commercial level and/or to quantity, shall be used, provided that such adjustments can be made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustment, whether the adjustment leads to an increase or a decrease in the value.

 

2.  Where the costs and charges referred to in paragraph 2 of Article 8 are included in the transaction value, an adjustment shall be made to take account of significant differences in such costs and charges between the imported goods and the identical goods in question arising from differences in distances and modes of transport. 

 

3.   If, in applying this Article, more than one transaction value of identical goods is found, the lowest such value shall be used to determine the customs value of the imported goods.

 
B. Text of Interpretative Note to Article 2

Note to Article 2

1.   In applying Article 2, the customs administration shall, wherever possible, use a sale of identical goods at the same commercial level and in substantially the same quantities as the goods being valued. Where no such sale is found, a sale of identical goods that takes place under any one of the following three conditions may be used:

 

(a)   a sale at the same commercial level but in different quantities;

 

(b)   a sale at a different commercial level but in substantially the same quantities; or

 

(c)   a sale at a different commercial level and in different quantities.

 

2.   Having found a sale under any one of these three conditions adjustments will then be made, as the case may be, for:

 

(a)   quantity factors only;

 

(b)   commercial level factors only; or

 

(c)   both commercial level and quantity factors.

 

3.   The expression “and/or” allows the flexibility to use the sales and make the necessary adjustments in any one of the three conditions described above.

 

4.   For the purposes of Article 2, the transaction value of identical imported goods means a customs value, adjusted as provided for in paragraphs 1(b) and 2, which has already been accepted under Article 1.

 

5.   A condition for adjustment because of different commercial levels or different quantities is that such adjustment, whether it leads to an increase or a decrease in the value, be made only on the basis of demonstrated evidence that clearly establishes the reasonableness and accuracy of the adjustments, e.g. valid price lists containing prices referring to different levels or different quantities. As an example of this, if the imported goods being valued consist of a shipment of 10 units and the only identical imported goods for which a transaction value exists involved a sale of 500 units, and it is recognized that the seller grants quantity discounts, the required adjustment may be accomplished by resorting to the seller’s price list and using that price applicable to a sale of 10 units. This does not require that a sale had to have been made in quantities of 10 as long as the price list has been established as being bona .de through sales at other quantities. In the absence of such an objective measure, however, the determination of a customs value under the provisions of Article 2 is not appropriate.

 
C. Interpretation and Application of Article 2

22.   At its meeting of 12 May 1995, the Committee on Customs Valuation adopted the decision of the Tokyo Round Committee on Customs Valuation relating to the rectification of the French text of paragraph 1 of the Note to Articles 2 and 3.⁽⁴⁰⁾

 

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V. Article 3  

A. Text of Article 3

Article 3

1.   (a)   If the customs value of the imported goods cannot be determined under the provisions of Articles 1 and 2, the customs value shall be the transaction value of similar goods sold for export to the same country of importation and exported at or about the same time as the goods being valued.

 

(b)   In applying this Article, the transaction value of similar goods in a sale at the same commercial level and in substantially the same quantity as the goods being valued shall be used to determine the customs value. Where no such sale is found, the transaction value of similar goods sold at a different commercial level and/or in different quantities, adjusted to take account of differences attributable to commercial level and/or to quantity, shall be used, provided that such adjustments can be made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustment, whether the adjustment leads to an increase or a decrease in the value.

 

2.   Where the costs and charges referred to in paragraph 2 of Article 8 are included in the transaction value, an adjustment shall be made to take account of significant differences in such costs and charges between the imported goods and the similar goods in question arising from differences in distances and modes of transport.

 

3.   If, in applying this Article, more than one transaction value of similar goods is found, the lowest such value shall be used to determine the customs value of the imported goods.

 
B. Text of Interpretative Note to Article 3

Note to Article 3

1.   In applying Article 3, the customs administration shall, wherever possible, use a sale of similar goods at the same commercial level and in substantially the same quantities as the goods being valued. Where no such sale is found, a sale of similar goods that takes place under any one of the following three conditions may be used:

 

(a)   a sale at the same commercial level but in different quantities;

 

(b)   a sale at a different commercial level but in substantially the same quantities; or

 

(c)   a sale at a different commercial level and in different quantities.

 

2.   Having found a sale under any one of these three conditions adjustments will then be made, as the case may be, for:

 

(a)   quantity factors only;

 

(b)   commercial level factors only; or

 

(c)   both commercial level and quantity factors.

 

3.   The expression “and/or” allows the flexibility to use the sales and make the necessary adjustments in any one of the three conditions described above.

 

4.   For the purpose of Article 3, the transaction value of similar imported goods means a customs value, adjusted as provided for in paragraphs 1(b) and 2, which has already been accepted under Article 1.

 

5.   A condition for adjustment because of different commercial levels or different quantities is that such adjustment, whether it leads to an increase or a decrease in the value, be made only on the basis of demonstrated evidence that clearly establishes the reasonableness and accuracy of the adjustment, e.g. valid price lists containing prices referring to different levels or different quantities. As an example of this, if the imported goods being valued consist of a shipment of 10 units and the only similar imported goods for which a transaction value exists involved a sale of 500 units, and it is recognized that the seller grants quantity discounts, the required adjustment may be accomplished by resorting to the seller’s price list and using that price applicable to a sale of 10 units. This does not require that a sale had to have been made in quantities of 10 as long as the price list has been established as being bona .de through sales at other quantities. In the absence of such an objective measure, however, the determination of a customs value under the provisions of Article 3 is not appropriate.

 
C. Interpretation and Application of Article 3

23.   With respect to the rectification of the French text of paragraph 1 of the Note to Article 3, see paragraph 22 above.

 

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VI. Article 4  

A. Text of Article 4

Article 4

If the customs value of the imported goods cannot be determined under the provisions of Articles 1, 2 and 3, the customs value shall be determined under the provisions of Article 5 or, when the customs value cannot be determined under that Article, under the provisions of Article 6 except that, at the request of the importer, the order of application of Articles 5 and 6 shall be reversed.

 
B. Interpretation and Application of Article 4

24.  Paragraph 3 of Annex III allows developing countries to make a reservation that would allow customs administrations the right to deny an importer’s request to reverse the sequential order of the Articles 5 and 6. See interpretation and application of paragraph 3 of Annex III paragraph 83 below.

 

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VII. Article 5  

A. Text of Article 5

Article 5

1.   (a)   If the imported goods or identical or similar imported goods are sold in the country of importation in the condition as imported, the customs value of the imported goods under the provisions of this Article shall be based on the unit price at which the imported goods or identical or similar imported goods are so sold in the greatest aggregate quantity, at or about the time of the importation of the goods being valued, to persons who are not related to the persons from whom they buy such goods, subject to deductions for the following:

 

(i)   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 country of imported goods of the same class or kind;

 

(ii)   the usual costs of transport and insurance and associated costs incurred within the country of importation;

 

(iii)   where appropriate, the costs and charges referred to in paragraph 2 of Article 8; and

 

(iv)  the customs duties and other national taxes payable in the country of importation by reason of the importation or sale of the goods.

 

(b)   If neither the imported goods nor identical nor similar imported goods are sold at or about the time of importation of the goods being valued, the customs value shall, subject otherwise to the provisions of paragraph 1(a), be based on the unit price at which the imported goods or identical or similar imported goods are sold in the country of importation in the condition as imported at the earliest date after the importation of the goods being valued but before the expiration of 90 days after such importation.

 

2.   If neither the imported goods nor identical nor similar imported goods are sold in the country of importation in the condition as imported, then, if the importer so requests, the customs value shall be based on the unit price at which the imported goods, after further processing, are sold in the greatest aggregate quantity to persons in the country of importation who are not related to the persons from whom they buy such goods, due allowance being made for the value added by such processing and the deductions provided for in paragraph 1(a).

 
B. Text of Interpretative Note to Article 5

Note to Article 5

1.   The term “unit price at which … goods are sold in the greatest aggregate quantity” means the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place.

 

2.   As an example of this, goods are sold from a price list which grants favourable unit prices for purchases made in larger quantities.

 

 

The greatest number of units sold at a price is 80; therefore, the unit price in the greatest aggregate quantity is 90.

 

3.   As another example of this, two sales occur. In the first sale 500 units are sold at a price of 95 currency units each. In the second sale 400 units are sold at a price of 90 currency units each. In this example, the greatest number of units sold at a particular price is 500; therefore, the unit price in the greatest aggregate quantity is 95.

 

4.   A third example would be the following situation where various quantities are sold at various prices.

 

 

 

   In this example, the greatest number of units sold at a particular price is 65; therefore, the unit price in the greatest aggregate quantity is 90.

 

5.   Any sale in the importing country, as described in paragraph 1 above, to a person who supplies directly or indirectly free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods any of the elements specified in paragraph 1(b) of Article 8, should not be taken into account in establishing the unit price for the purposes of Article 5.

 

6.   It should be noted that “profit and general expenses” referred to in paragraph 1 of Article 5 should be taken as a whole. The figure for the purposes of this deduction should be determined on the basis of information supplied by or on behalf of the importer unless the importer’s figures are inconsistent with those obtained in sales in the country of importation of imported goods of the same class or kind. Where the importer’s figures are inconsistent with such figures, the amount for profit and general expenses may be based upon relevant information other than that supplied by or on behalf of the importer.

 

7.   The “general expenses” include the direct and indirect costs of marketing the goods in question.

 

8.   Local taxes payable by reason of the sale of the goods for which a deduction is not made under the provisions of paragraph 1(a)(iv) of Article 5 shall be deducted under the provisions of paragraph 1(a)(i) of Article 5.

 

9.   In determining either the commissions or the usual profits and general expenses under the provisions of paragraph 1 of Article 5, the question whether certain goods are “of the same class or kind” as other goods must be determined on a case-by-case basis by reference to the circumstances involved. Sales in the country of importation of the narrowest group or range of imported goods of the same class or kind, which includes the goods being valued, for which the necessary information can be provided, should be examined. For the purposes of Article 5, “goods of the same class or kind” includes goods imported from the same country as the goods being valued as well as goods imported from other countries.

 

10.   For the purposes of paragraph 1(b) of Article 5, the “earliest date” shall be the date by which sales of the imported goods or of identical or similar imported goods are made in sufficient quantity to establish the unit price.

 

11.   Where the method in paragraph 2 of Article 5 is used, deductions made for the value added by further processing shall be based on objective and quantifiable data relating to the cost of such work. Accepted industry formulas, recipes, methods of construction, and other industry practices would form the basis of the calculations.

 

12.   It is recognized that the method of valuation provided for in paragraph 2 of Article 5 would normally not be applicable when, as a result of the further processing, the imported goods lose their identity. However, there can be instances where, although the identity of the imported goods is lost, the value added by the processing can be determined accurately without unreasonable difficulty. On the other hand, there can also be instances where the imported goods maintain their identity but form such a minor element in the goods sold in the country of importation that the use of this valuation method would be unjustified. In view of the above, each situation of this type must be considered on a case-by-case basis.

 
C. Interpretation and Application of Article 5

1. Article 5.1

25.   In Thailand — Cigarettes (Philippines), the Philippines claimed that Thailand violated Article 5 by declining to use that provision for impermissible reasons such as a lack of contemporaneous financial information. The Panel stated that:

“We do not find in the text of Article 5 any specific obligation according to which Members must use the method under that provision rather than the subsequent valuation methods. In other words, the provisions of Article 5 do not provide for the criteria to be used in deciding whether the decision not to use the valuation method under Article 5 is consistent or not with the obligations under Article 5. Rather, Article 5 prescribes the principles to be applied in using the deductive valuation method once the customs authority has decided to use the deductive valuation method under Article 5. In our view, declining to use Article 5 for impermissible reasons, namely, a lack of contemporaneous financial information, would, for example, lead to a finding that the condition for resorting to a method under Article 7.1 is not satisfied in the light of the text of the provisions under Article 7.1. … We therefore find that the Philippines failed to establish a prima facie case for its claim under Article 5.”

26.   For the application of the deductive valuation method using the principles under Article 5.1, see the section on Article 7.1.

2. Article 5.2

27.   Paragraph 4 of Annex III allows developing countries to make a reservation with respect to the application of paragraph 2. See interpretation and application of paragraph 4 of Annex III, paragraph 84 below.

 

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VIII. Article 6  

A. Text of Article 6

Article 6

1.  The customs value of imported goods under the provisions of this Article shall be based on a computed value. Computed value shall consist of the sum of:

 

(a)   the cost or value of materials and fabrication or other processing employed in producing the imported goods;

 

(b)   an amount for profit and general expenses equal to that usually reflected in sales 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 country of importation;

 

(c)   the cost or value of all other expenses necessary to reflect the valuation option chosen by the Member under paragraph 2 of Article 8.

 

2.  No Member may require or compel any person not resident in its own territory to produce for examination, or to allow access to, any account or other record for the purposes of determining a computed value. However, information supplied by the producer of the goods for the purposes of determining the customs value under the provisions of this Article may be verified in another country by the authorities of the country of importation with the agreement of the producer and provided they give sufficient advance notice to the government of the country in question and the latter does not object to the investigation.

 
B. Text of Interpretative Note to Article 6

Note to Article 6

1.   As a general rule, customs value is determined under this Agreement on the basis of information readily available in the country of importation. In order to determine a computed value, however, it may be necessary to examine the costs of producing the goods being valued and other information which has to be obtained from outside the country of importation. Furthermore, in most cases the producer of the goods will be outside the jurisdiction of the authorities of the country of importation. The use of the computed value method will generally be limited to those cases where the buyer and 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.

 

2.   The “cost or value” referred to in paragraph 1(a) of Article 6 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. It is to be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced.

 

3.   The “cost or value” shall include the cost of elements specified in paragraphs 1(a)(ii) and (iii) of Article 8. It shall also include the value, apportioned as appropriate under the provisions of the relevant note to Article 8, of any element specified in paragraph 1(b) of Article 8 which has been supplied directly or indirectly by the buyer for use in connection with the production of the imported goods. The value of the elements specified in paragraph 1(b)(iv) of Article 8 which are undertaken in the country of importation shall be included only to the extent that such elements are charged to the producer. It is to be understood that no cost or value of the elements referred to in this paragraph shall be counted twice in determining the computed value.

 

4.   The “amount for profit and general expenses” referred to in paragraph 1(b) of Article 6 is to be determined on the basis of information supplied by or on behalf of the producer unless the producer’s figures are inconsistent with those usually reflected in sales 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 country of importation.

 

5.   It should be noted in this context that the “amount for profit and general expenses” has to be taken as a whole. It follows that if, in any particular case, the producer’s profit figure is low and the producer’s general expenses are high, the producer’s profit and general expenses taken together may nevertheless be consistent with that usually reflected in sales of goods of the same class or kind. Such a situation might occur, for example, if a product were being launched in the country of importation and the producer accepted a nil or low profit to offset high general expenses associated with the launch. Where the producer can demonstrate a low profit on sales of the imported goods because of particular commercial circumstances, the producer’s actual profit figures should be taken into account provided that the producer has valid commercial reasons to justify them and the producer’s pricing policy reflects usual pricing policies in the branch of industry concerned. Such a situation might occur, for example, where producers have been forced to lower prices temporarily because of an unforeseeable drop in demand, or where they sell goods to complement a range of goods being produced in the country of importation and accept a low profit to maintain competitivity. Where the producer’s own figures for profit and general expenses are not consistent with those usually reflected in sales 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 country of importation, the amount for profit and general expenses may be based upon relevant information other than that supplied by or on behalf of the producer of the goods.

 

6.   Where information other than that supplied by or on behalf of the producer is used for the purposes of determining a computed value, the authorities of the importing country shall inform the importer, if the latter so requests, of the source of such information, the data used and the calculations based upon such data, subject to the provisions of Article 10.

 

7.   The “general expenses” referred to in paragraph 1(b) of Article 6 covers the direct and indirect costs of producing and selling the goods for export which are not included under paragraph 1(a) of Article 6.

 

8.   Whether certain goods are “of the same class or kind” as other goods must be determined on a case-by-case basis with reference to the circumstances involved. In determining the usual profits and general expenses under the provisions of Article 6, sales for export to the country of importation of the narrowest group or range of goods, which includes the goods being valued, for which the necessary information can be provided, should be examined. For the purposes of Article 6, “goods of the same class or kind” must be from the same country as the goods being valued.

 
C. Interpretation and Application of Article 6

No jurisprudence or decision of a competent WTO body.

 

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IX. Article 7  

A. Text of Article 7

Article 7

1.   If the customs value of the imported goods cannot be determined under the provisions of Articles 1 through 6, inclusive, the customs value shall be determined using reasonable means consistent with the principles and general provisions of this Agreement and of Article VII of GATT 1994 and on the basis of data available in the country of importation.

 

2.   No customs value shall be determined under the provisions of this Article on the basis of:

 

(a)   the selling price in the country of importation of goods produced in such country;

 

(b)   a system which provides for the acceptance for customs purposes of the higher of two alternative values;

 

(c)   the price of goods on the domestic market of the country of exportation;

 

(d)   the cost of production other than computed values which have been determined for identical or similar goods in accordance with the provisions of Article 6;

 

(e)   the price of the goods for export to a country other than the country of importation;

 

(f)   minimum customs values; or

 

(g)   arbitrary or fictitious values.

 

3.   If the importer so requests, the importer shall be informed in writing of the customs value determined under the provisions of this Article and the method used to determine such value.

 
B. Text of Interpretative Note to Article 7

Note to Article 7

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 through 6 but a reasonable flexibility in the application of such methods would be in conformity with the aims and provisions of Article 7.

 

3.   Some examples of reasonable flexibility are as follows:

 

(a)   Identical goods — the requirement that the identical goods should be exported at or about the same time as the goods being valued could be flexibly interpreted; identical imported goods produced in a country other than the country of exportation of the goods being valued could be the basis for customs valuation; customs values of identical imported goods already determined under the provisions of Articles 5 and 6 could be used.

 

(b)   Similar goods — the requirement that the similar goods should be exported at or about the same time as the goods being valued could be flexibly interpreted; similar imported goods produced in a country other than the country of exportation of the goods being valued could be the basis for customs valuation; customs values of similar imported goods already determined under the provisions of Articles 5 and 6 could be used.

 

(c)   Deductive method — the requirement that the goods shall have been sold in the “condition as imported” in paragraph 1(a) of Article 5 could be flexibly interpreted; the “90 days” requirement could be administered flexibly.

C. Interpretation and Application of Article 7

1. Article 7.1

(a) Condition for using a valuation method under Article 7

28.   In Thailand — Cigarettes (Philippines), the Philippines argued that Thailand violated the sequencing obligation contained in Article 7.1. The Panel did not consider that Article 7.1 can form the basis for an independent sequencing claim under the Customs Valuation Agreement.

“Next, we address the Philippines’ claim under Article 7.1 in respect of Thailand’s alleged violation of the sequencing obligation. The text of Article 7.1 stipulates that resort to Article 7.1 for customs valuation is conditioned on the situation where ‘the customs value of the imported goods cannot be determined under the provisions of Articles 1 through 6’. As such, Article 7 may only be applied if the customs value of the imported goods cannot be determined under the provisions of Articles 1 through 6. We understand that the Philippines’ sequencing claim under Article 7.1 stems from this part of Article 7.1. In our view, this phrase in Article 7.1 lays down a condition or requirement that needs to be met before a customs authority can use the valuation principles under Article 7.1. As such, we do not consider that Article 7.1 can form the basis for an independent sequencing claim under the Customs Valuation Agreement. We consider that the Philippines’ claim pertaining to this part of Article 7.1 rather falls within the Philippines’ claim that Thailand improperly applied the deductive valuation method under Article 7.1 …”⁽⁴¹⁾

29.   The Panel in Thailand — Cigarettes (Philippines) found that the condition for using a valuation method under Article 7 was not met in the factual circumstances of that case because Thai Customs had necessary financial data (i.e. financial data from prior years) to use the valuation method under Article 5.⁽⁴²⁾ The Panel noted in this connection that financial data from prior years, even if not the most current data, could be used for valuation under Article 5.⁽⁴³⁾

(b) Application of the deductive valuation method under Article 7.1

30.   In Thailand — Cigarettes (Philippines), the Philippines claimed that Thai Customs valued the entries at issue inconsistently with Article 7.1 because it failed to make deductions for sales allowances, provincial taxes and internal transportation costs. Thailand argued that the importer did not provide sufficient evidence before Thai Customs at the time of determination to justify the requested deductions. In evaluating the proper application of the deductive valuation method within the meaning of Article 7.1, the Panel in Thailand — Cigarettes (Philippines) made the following observation:

“The text of Article 7.1, read together with paragraph 2 of the Interpretative Note to Article 7, provides that when using a deductive valuation method under Article 7.1, a customs authority is required to apply the same principles that would be applied under Article 5, with allowance for a reasonable flexibility where Article 5 cannot be applied strictly. The parties’ arguments concerning Thai Customs’ valuation of the entries at issue are therefore based on the specific principles to be applied in using the deductive valuation method as prescribed in Article 5.”⁽⁴⁴⁾

31.  In light of the relationship between Article 5 and Article 7.1, the Panel in Thailand — Cigarettes (Philippines) analysed the deductibility of sales allowances, provincial taxes and internal transportation costs under the principles of Article 5, particularly Article 5.1(a) in order to assess the consistency of Thai Customs’ decision not to deduct these items with Article 7.1. Furthermore, the Panel addressed the procedural aspect of Thai Customs’ decision not to deduct the items at issue under Article 7.1.

(i) Procedural aspects

32.  The parties in Thailand — Cigarettes (Philippines) disputed the obligations imposed on both the importer and the customs authority in the process of applying the deductive valuation method. Referring to, inter alia, the general principle contained in paragraph 2 of the General Introductory Commentary to the Customs Valuation Agreement, the Panel emphasized that the process of determining a customs value under the principles of Article 5 should be a “process of consultation”. The Panel explained that:

“Although the first sentence of paragraph 2 refers to ‘value under the provisions of Article 2 or 3’, we consider that the spirit of the Customs Valuation Agreement envisaged under this paragraph, namely the determination of customs value through a process of consultation between the customs administration and importer, equally applies to other valuation methods. The phrase ‘using reasonable means consistent with the principles and general provisions of this Agreement’ in Article 7.1 also supports this view. As the Philippines submits, while the importer is the party that typically possesses relevant information for a deductive calculation, it is the customs authority that knows the specific information necessary to accept the requested deductions. Viewed in this light, it is difficult to conceive that the drafters of the Agreement would have intended a process of consultation between the customs administration and importer to be limited solely to the valuation process under Article 2 or 3. …” ⁽⁴⁵⁾

33.  In light of the above and under the factual circumstances of the dispute, the Panel in Thailand — Cigarettes (Philippines) concluded that Thai Customs’ failure to properly consult the importer on the information necessary for the requested deductions renders its decision not to deduct the concerned items inconsistent with Article 7.1 of the Customs Valuation Agreement.

(ii) Substantive aspects — deductions in general and deductibility of sales allowances, provincial taxes and transportation costs under the principles of Article 5.1

34.   Regarding the deductions for sales allowances, provincial taxes and transportation costs, the parties in Thailand — Cigarettes (Philippines) did not dispute that these items were, in principle, deductible under Article 5.1(a). The disagreement between the parties was on the type of evidence required from the importer for the deduction of these items. Specifically, the question at issue was whether, as a general matter, the importer is required to prove that these expenses are actually tied to the GAQ⁽⁴⁶⁾ sales based on which the unit price was decided.⁽⁴⁷⁾

35.   First, the Panel addressed whether there was a general requirement under Article 5.1 that deductions must be made only to the extent that they reflect documented expenses that are actually tied to the GAQ sale. The Panel did not find such a requirement:

“The Interpretative Note to Article 5 in paragraph 1 defines the term ‘unit price at which … goods are sold in the greatest aggregate quantity’ as ‘the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place’.

 

In this regard, we note that the terms ‘usually’ and ‘usual’ can be found in Article 5.1(a)(i) and (ii), which states, for example, ‘the commissions usually paid or agreed to be paid’, ‘the additions usually made for profit and general expenses’ and ‘the usual costs of transport and insurance and associated costs’. A plain reading of these phrases therefore suggests that the deductions of the commissions or the additions or the costs of transport as set out in Article 5.1(a)(i) and (ii) need not necessarily be tied to a particular unit price for the GAQ sale that is being used in the deductive value calculation.

 

A treatise cited to by the parties also supports this view: ‘It should be pointed out initially that the deductions will in general not relate to the same resale(s) from which the price has just been derived’. At the same time, we note the phrase ‘in general’ in this statement, which appears to imply that there may be exceptional situations. We also observe the Technical Committee’s commentary on Article 5.1 that ‘in general, the application of the deductive valuation method under Article 5 of the Customs Valuation Agreement may differ on a set of circumstances from another and thus the practical application of Article 5 requires a flexible approach, having regard to the circumstances in each case’.

 

Considered overall, therefore, we do not find a general requirement under Article 5.1, which can be applied to every situation, that deductions must be made only to the extent that they reflect documented expenses that are actually tied to the GAQ sale. Particularly, items that fall within the categories of (i), (ii) and (iv) of Article 5.1(a) do not appear to require such a requirement in the light of the terms used in the text of the provisions such as ‘usual’ and ‘payable’ and the statements in reference sources. Further, as the Philippines submits, we do not see a logical reason to require that deductions be tied to the particular GAQ sale, because the customs value to be determined using the deductive valuation method under Article 5 is not the customs value for that specific GAQ sale. It is rather the customs value for a particular import subject to the customs’ valuation.”⁽⁴⁸⁾

36.   Regarding sales allowances, the parties debated on whether the deductions of sales allowances can be made only if there is information and data showing that such allowances are tied to a particular unit price for the GAQ sale that is being used in the deductive value calculation. Thailand argued that, as items such as sales allowances, rebates and sales allowances are not expenses, but instead form part of the unit price itself, it is reasonable for the customs authority to accept deductions of these items only for discounts that are tied to the particular unit price for the GAQ sale used in the deductive value calculation. The Philippines submitted that where the importer offers an allowance or discount on the GAQ price, that allowance reduces the unit price at which the goods are sold, and must therefore be deducted under Article 5 to provide a proper starting point for a deductive calculation. The Panel agreed with Thailand’s view:

“We note that sales allowances, discounts and rebates are not one of the items listed in Article 5.1(a)(i)–(iv). Nor do the interpretative notes to Article 5 provide any guidance on the deductibility of these expenses under Article 5.1(a). We also observe a statement in the above-mentioned treatise cited to by the parties that ‘[price] means all direct and indirect net payments … excluding all rebates, discounts and similar reductions in the price payable’. We can infer from this statement that sales allowances are an item that must be deducted from the sales price in order to arrive at the unit price (GAQ price) within the meaning of Article 5. Therefore, to the extent that sales allowances are included in the sales price, they must be excluded from that sales price before deducting the items falling within the categories under Article 5. We do not consider that the Philippines is necessarily putting forward a different view on this either… . the Philippines submits that, as sales allowances reduce the unit price at which the goods are sold, they must be deducted under Article 5.1(a), without specifying a specific category under Article 5.1(a), to provide a proper starting point for a deductive calculation.

 

We therefore agree with Thailand that it is reasonable for the customs administration to accept deductions only for sales allowances that are tied to the particular unit price for the GAQ sale that is being used in the deductive value calculation. Although the Philippines asserts that the grant of sales allowances, and their amount, is a function of factors including events in the marketplace; the evolution of the business and marketing strategy; and, considerations relating to particular customers (e.g. sales volumes), we do not see how this assertion can disprove of Thailand’s position that deductions of sales allowances (e.g. discounts, rebates and sales allowances) must be tied to a particular unit price for the GAQ sale that is being used in the deductive value calculation.⁽⁴⁹⁾

…

In assessing the parties’ arguments in respect of the deduction of sales allowances, we are not presented with any evidence that clarifies whether the amount of sales allowances that a company declares for deduction to the customs authorities must exactly match the amount of sales allowances actually provided by the company in the period under evaluation… . What is contested by Thailand is that the amounts of sales allowances shown on the spreadsheet provided by PM Thailand are less than the amounts requested for the deduction for Marlboro and L&M. In the light of these circumstances, we do not see how the Thai Customs’ decision not to deduct sales allowances at all, as opposed to adjusting the deductible amount for the sales allowances of the imported cigarettes at issue, can be justified. Even if Thailand’s position concerning the determination of the deductible amount for sales allowances were correct, this does not render the Thai Customs’ decision not to deduct sales allowances consistent with Article 5.1 of the Customs Valuation Agreement.”⁽⁵⁰⁾

37.   As for provincial taxes, Thailand argued that unlike national taxes, which are deductible if they are payable under Article 5.1(a)(iv), provincial taxes are deductible if included in the unit price on which the deductive value is based. The Philippines asserted that Article 5.1(iv) requires the deduction of the national taxes payable, not the taxes paid on the GAQ sales. The Panel concluded that provincial taxes payable must be deducted if the information shows usual payments made for local taxes even if they are not included in the sales price based on which the deductive valuation method will be applied under Article 5:

“Article 5.1(a)(iv) refers to ‘the customs duties and other national taxes payable in the country of importation by reason of the importation or sale of the goods’, but not to provincial taxes. ‘Local taxes’ are however mentioned in the interpretative note to Article 5, in paragraph 8, where it states, ‘local taxes payable by reason of the sale of the goods for which a deduction is not made under the provisions of paragraph 1(a)(iv) of Article 5 shall be deducted under the provisions of paragraph 1(a)(i) of Article 5’. The phrase in the Interpretative Note to Article 5 ‘local taxes payable by reason of the sale of the goods’ mirrors the phrase in Article 1(a)(iv).

 

The term ‘payable’ can be defined as ‘adj. (Of a sum of money or a negotiable instrument) that is to be paid. An amount may be payable without being due. Debts are commonly payable long before they fall due’. It can also be defined as ‘adjective. 1 Of a sum of money, a bill, etc: that is to be paid; falling due (usu. at or on a specified date or to a specified person). 2 Able to be paid’. Therefore, the ordinary meaning of the term ‘payable’ refers to both ‘a sum of money that is to be paid without being due’ and ‘that is due to be paid’. This suggests that national taxes and provincial taxes subject to the deduction under Article 5 need not be related to the GAQ sale. The phrase ‘by reason of the importation or sale of the goods’ also supports the view that these taxes refer to those usually to be paid upon importation and upon sale in the market.

 

Furthermore, paragraph 8 of the Interpretative Note to Article 5 states that ‘local taxes payable … for which a deduction is not made under the provisions of paragraph 1(a)(iv) of Article 5 shall be deducted under the provisions of paragraph 1(a)(i) of Article 5’. Article 5.1(a)(i) refers to ‘either the commission usually paid or agreed to be paid or the addition usually made for profit and general expenses …’. Therefore, we consider that provincial taxes payable must be deducted if the information shows usual payments made for local taxes even if they are not included in the sales price based on which the deductive valuation method will be applied under Article 5.

 

Further, we note the statement in the above-mentioned treatise, as Thailand points out, that ‘state and local taxes … are deductible if included in the resale price upon which the [deductive value] is based’. This statement, in our view, supports our view as it stipulates that while state and local taxes are deductible if they are included in the resale price, it does not necessarily imply that that is the only situation in which state and local taxes can be deducted.”⁽⁵¹⁾

38.   Regarding transportation costs, the Panel considered that transportation costs need not be specifically linked to the GAQ sale for a deduction to be made under Article 5:

“Article 5.1(a)(ii) refers to ‘the usual costs of transport and insurance and associated costs occurred within the country of importation’. As noted in paragraph 0 above, we consider that the term usual in the provision indicates that the costs to be deducted may not be specifically linked to the GAQ sale at issue. Thailand refers to a statement in the treatise that the usual cost of transportation should be, as far as possible in practice, the actual average inland cost incurred in the resale of the imported goods. The statement cannot however be understood as requiring transportation costs to be specifically linked to the GAQ sale at issue. Furthermore, it is not clear whether using the actual average inland cost incurred in the resale of the imported goods was ‘possible’ in practice in the situation at issue in this dispute. This is particularly so given that Thai Customs did not seek any further information from PMT hailand in this regard. We therefore do not agree with Thailand’s argument that transportation costs need to be specifically linked to the GAQ sale for a deduction to be made under Article 5.⁽⁵²⁾

…

…Thai Customs understood and discussed at the 6 March 2007 meeting that transportation costs in the country of importation, as one of the items that are subject to deductions under Article 5, had to be deducted in calculating the customs value of the cigarettes at issue. As we explained above, a valuation process must be that of consultation between an importer and a customs administration. To the extent that transportation costs usually are incurred in the resale of goods in the country of importation, Thai Customs had to rely on the available evidence or, if not, consult PM Thailand as regards this item if it had queries on the available evidence.”⁽⁵³⁾

2. Article 7.2

(a) General

39.  In Colombia — Ports of Entry, the Panel explained that Article 7.2 provides that reasonable means of valuation, permitted under Article 7.1, cannot be determined using a series of prohibited customs valuation methods.

(b)  Paragraph (b)

40.  In Colombia — Ports of Entry, with respect to Article 7.2(b), Panama contended that because the Colombian measure requires the use of an indicative price for customs valuation purposes whenever the transaction value is lower than the indicative price, it is tantamount to the acceptance of the higher of two alternative values.⁽⁵⁴⁾ The Panel found that:

“[ ] … as well as the various resolutions establishing indicative prices, impose ‘the acceptance for customs purposes of the higher of two alternative values’… . for products subject to indicative prices, customs duties and sales taxes are levied at the time of inspection on the basis of the higher of two values: the declared value or the indicative price. The Panel therefore finds that … [ ] as well as the various resolutions establishing indicative prices, which mandate the use of indicative prices for customs valuation purposes are inconsistent with Article 7.2(b) of the Customs Valuation Agreement.”⁽⁵⁵⁾

(c) Paragraph (f)

41.  Developing countries can suspend the application of this paragraph making a reservation to established minimum values, in accordance with paragraph 2 of Annex III. See interpretation and application of paragraph 2 of Annex III, paragraphs 81–82 below.

42.  In Colombia — Ports of Entry, Panama argued in relation to Article 7.2(f) that the indicative prices are minimum customs values because importation of products subject to indicative prices will not be permitted unless this minimum value is declared by the importer.⁽⁵⁶⁾ The Panel found that:

“[I]n cases in which the declared value is lower than the indicative price, an importer has to ‘correct’ the import declaration and pay custom duties and sales tax based on the indicative price. If the importer refuses to do so, the importer has no choice but to re-ship the goods or abandon them. As a result, only two possible scenarios exist when subject goods are submitted for customs clearance: either customs duties and sales tax are collected on the basis of a value equal to or higher than the indicative price; or the goods are not imported into Colombian customs territory at all. In practice, this results in a system in which customs duties and sales tax are never levied on the basis of a value lower than the one provided by the indicative price. For this reason, the Panel concludes that indicative prices amount to ‘minimum prices’ and, therefore, finds that [ ] … as well as the various resolutions establishing indicative prices which mandate the use of indicative prices for customs valuation purposes are also inconsistent with Article 7.2(f) of the Customs Valuation Agreement.”⁽⁵⁷⁾

3. Article 7.3

43.  Based on the text of Article 7.3, the Panel in Thailand — Cigarettes (Philippines) observed that the customs authority must inform the importer of the customs value determined and the method used under Article 7 to determine such value when there is a request from an importer. The Panel further clarified that the content of the information to be provided under Article 7.3 needs to be specific and elaborative on the method chosen as well as the application of that method to derive at the final customs value. The Panel stated that:

“We observe that the obligation to inform the customs value determined under the provisions of Article 7.3 and the method used to determine such value can be compared to the obligation under Article 16 to provide an explanation as to how the customs value was determined. We clarified above that the explanation to be provided under Article 16 must be sufficient to make clear and give details of how the customs value of the importer’s goods was determined, including the basis for rejecting the transaction value, the identification of the method used and the illustration of how the method was applied in reaching the final customs value. The information to be provided under Article 7.3 on the other hand may be different from the explanation to be given under Article 16, inter alia, in its scope, as the Philippines submits. In other words, as Article 7 is a provision addressing how to determine the customs value when it cannot be determined under the provisions of Articles 1 through 6, the information to be delivered to an importer under Article 7.3 may be confined to the specific valuation method used within the meaning of Article 7 and may not include, for example, the basis for rejecting the transaction value.

 

We also consider that the request for information under Article 7.3 would become possible only if the importer was already aware at the time of requesting that the customs authority had relied on a valuation method under Article 7. Given the particular nature of Article 7, i.e. allowing the customs authority to use any of the valuation methods under Articles 2 through 6 with a reasonable flexibility, we can envisage a situation where the importer wishes to clarify the exact method used under Article 7 once it is known that the customs authority used one of the methods falling within the scope of Article 7.

 

To the extent that the information to be provided under Article 7.3 is linked to a particular method used under Article 7, the content of the information, in our view, needs to be specific and elaborative on the method chosen as well as the application of that method to derive at the final customs value. The term ‘method’ in Article 7.3 is defined as ‘noun. I. Procedure for attaining an object. 2. A mode of procedure; a (defined or systematic) way of doing a thing, esp. (with specifying word or words) in accordance with a particular theory or as associated with a particular person’. The ordinary meaning of the word ‘method’ therefore indicates that more than a mere identification of the type of valuation method used must be provided, including how a given method was applied to calculate the customs value of the imported goods concerned.”⁽⁵⁸⁾

 

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X. Article 8  

A. Text of Article 8

Article 8

1.  In determining the customs value under the provisions of Article 1, there shall be added to the price actually paid or payable for the imported goods:

 

(a)   the following, to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the goods:

 

(i)   commissions and brokerage, except buying commissions;

 

(ii)   the cost of containers which are treated as being one for customs purposes with the goods in question;

 

(iii)   the cost of packing whether for labour or materials;

 

(b)   the value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable⁽⁵⁹⁾:

 

(i)   materials, components, parts and similar items incorporated in the imported goods;

 

(ii)   tools, dies, moulds and similar items used in the production of the imported goods;

 

(iii)   materials consumed in the production of the imported goods;

 

(iv)   engineering, development, artwork, design work, and plans and sketches undertaken elsewhere than in the country of importation and necessary for the production of the imported goods;

 

(c)   royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;

 

(d)   the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller.

 

2.   In framing its legislation, each Member shall provide for the inclusion in or the exclusion from the customs value, in whole or in part, of the following:

 

(a)   the cost of transport of the imported goods to the port or place of importation;

 

(b)   loading, unloading and handling charges associated with the transport of the imported goods to the port or place of importation; and

 

(c)   the cost of insurance.

 

3.   Additions to the price actually paid or payable shall be made under this Article only on the basis of objective and quantifiable data.

 

4.   No additions shall be made to the price actually paid or payable in determining the customs value except as provided in this Article.

 
B. Text of Interpretative Note to Article 8

Note to Article 8: Paragraph 1(a)(i)

 The term “buying commissions” means fees paid by an importer to the importer’s agent for the service of representing the importer abroad in the purchase of the goods being valued.

Paragraph 1(b)(ii)

1.   There are two factors involved in the apportionment of the elements specified in paragraph 1(b)(ii) of Article 8 to the imported goods — the value of the element itself and the way in which that value is to be apportioned to the imported goods. The apportionment of these elements should be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles.

 

2.   Concerning the value of the element, if the importer acquires the element from a seller not related to the importer at a given cost, the value of the element is that cost. If the element was produced by the importer or by a person related to the importer, its value would be the cost of producing it. If the element had been previously used by the importer, regardless of whether it had been acquired or produced by such importer, the original cost of acquisition or production would have to be adjusted downward to reflect its use in order to arrive at the value of the element.

 

3.   Once a value has been determined for the element, it is necessary to apportion that value to the imported goods. Various possibilities exist. For example, the value might be apportioned to the first shipment if the importer wishes to pay duty on the entire value at one time. As another example, the importer may request that the value be apportioned over the number of units produced up to the time of the first shipment. As a further example, the importer may request that the value be apportioned over the entire anticipated production where contracts or firm commitments exist for that production. The method of apportionment used will depend upon the documentation provided by the importer.

 

4.   As an illustration of the above, an importer provides the producer with a mould to be used in the production of the imported goods and contracts with the producer to buy 10,000 units. By the time of arrival of the first shipment of 1,000 units, the producer has already produced 4,000 units. The importer may request the customs administration to apportion the value of the mould over 1,000 units, 4,000 units or 10,000 units.

Paragraph 1(b)(iv)

1.   Additions for the elements specified in paragraph 1 (b)(iv) of Article 8 should be based on objective and quantifiable data. In order to minimize the burden for both the importer and customs administration in determining the values to be added, data readily available in the buyer’s commercial record system should be used in so far as possible.

 

2.   For those elements supplied by the buyer which were purchased or leased by the buyer, the addition would be the cost of the purchase or the lease. No addition shall be made for those elements available in the public domain, other than the cost of obtaining copies of them.

 

3.   The ease with which it may be possible to calculate the values to be added will depend on a particular firm’s structure and management practice, as well as its accounting methods.

 

4.   For example, it is possible that a firm which imports a variety of products from several countries maintains the records of its design centre outside the country of importation in such a way as to show accurately the costs attributable to a given product. In such cases, a direct adjustment may appropriately be made under the provisions of Article 8.

 

5.   In another case, a firm may carry the cost of the design centre outside the country of importation as a general overhead expense without allocation to specific products. In this instance, an appropriate adjustment could be made under the provisions of Article 8 with respect to the imported goods by apportioning total design centre costs over total production benefiting from the design centre and adding such apportioned cost on a unit basis to imports.

 

6.   Variations in the above circumstances will, of course, require different factors to be considered in determining the proper method of allocation.

 

7.   In cases where the production of the element in question involves a number of countries and over a period of time, the adjustment should be limited to the value actually added to that element outside the country of importation.

Paragraph 1(c)

1.   The royalties and licence fees referred to in paragraph 1(c) of Article 8 may include, among other things, payments in respect to patents, trade marks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value.

 

2.   Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods.

Paragraph 3

Where objective and quantifiable data do not exist with regard to the additions required to be made under the provisions of Article 8, the transaction value cannot be determined under the provisions of Article 1. As an illustration of this, a royalty is paid on the basis of the price in a sale in the importing country of a litre of a particular product that was imported by the kilogram and made up into a solution after importation. If the royalty is based partially on the imported goods and partially on other factors which have nothing to do with the imported goods (such as when the imported goods are mixed with domestic ingredients and are no longer separately identifiable, or when the royalty cannot be distinguished from special financial arrangements between the buyer and the seller), it would be inappropriate to attempt to make an addition for the royalty. However, if the amount of this royalty is based only on the imported goods and can be readily quantified, an addition to the price actually paid or payable can be made.

 
C. Interpretation and Application of Article 8

1. Treatment of interest charges in the customs value of imported goods

44.   At its meeting of 12 May 1995, the Committee on Customs Valuation adopted the decision of the Tokyo Round Committee on Customs Valuation relating to the treatment of interest charges in the customs value of imported goods.⁽⁶⁰⁾

2. Article 8.1(b)(iv)

45.  At its meeting of 12 May 1995, the Committee on Customs Valuation adopted the decision of the Tokyo Round Committee on Customs Valuation relating to the interpretation of the term “undertaken” used in Article 8.1(b)(iv).⁽⁶¹⁾

46.  At the same meeting, the Committee on Customs Valuation adopted the decision of the Tokyo Round Committee on Customs Valuation relating to the linguistic consistency of the item “development” in Article 8.1(b)(iv).⁽⁶²⁾