Ask the Experts: Customs valuation

This week, we’re completing our experts’ tour through the ‘big three’ of cross-border trade, which began with classification and moved onto rules of origin. 

We’re today looking at customs valuation - a standardised, global system for valuing goods which determines tax revenues due when they’re imported. We spoke to Institute of Export & International Trade (IOE&IT) trade and custom specialist Lyn Dewsbury to learn more. 

The system for customs valuation comes from the 1994 WTO Valuation Agreement, following multilateral negotiations held in Uruguay. The agreement largely retains principles set out in the 1979 GATT Valuation Code, implemented to support the liberalisation of trade by reducing trade barriers worldwide.  

Having a fair and consistent method for determining how exported goods would be treated by countries worldwide was a cornerstone aim, ensuring a level playing field for traders and preventing distortions of pricing. 

Customs valuation determines the taxes due on imported goods. Customs duties can be calculated in relation to the goods’ value. These can be broken into three parts: ad valorem duties, specific duties and composite duties. 

Specific duties are based on key measurements of the goods, typically the cost per unit, weight or quantity. 

Ad valorem is Latin for "according to value”, and this tax functions as a percentage of the custom value. 

Composite duties are the combination of specific and ad valorem duties.  

The underlying principle of the system is that the value of goods is determined based on their transaction value when exported to the target country. Over 90% of transactions will be valued using method 1. However, if it’s not possible to verify the transaction value of the goods, five other valuation methods are available, so that the valuation process includes six methods: 

Traders should use the transaction value to try and value their goods. If it’s not possible to use the transaction value, they should attempt method two, and so on – working their way down the list until they’re able to apply a method. 

Methods 1–3 are based on the transactional value of the goods being traded, or comparable items.  

For example, if exporting a pair of shoes, method 1 would involve finding the transactional value of that make and model of shoe and applying that, method two would involve finding the value of a pair of shoes sharing almost the same physical attributes – possibly the same make but a different model – which were exported at almost the same time, in the same quantity and with the same economic origin as the previous.  

The slight difference between methods 2 and 3 would be that ‘similar goods’ might be further removed from the same physical specifications as the goods being exported, compared to those of ‘identical goods’. The shoes might be the same type and brands of similar standing and price point, rather than exactly the same. 

Within the agreement, there is an article which allows traders to reverse the order in which they apply methods 4 and 5, the deductive and computed methods, in instances where the deductive method is not feasible.  

This provision has been somewhat controversial, as some developing nations find that the computed method creates more problems for them. 

Where the first three methods are based on a transaction value, method 4 will be used when this is not possible. For the deductive method to be used, a sale of the goods will need to have taken place within the country of import, rather than them being sold for export. Essentially, the unit price of the goods sold serves as the basis for working out the customs value. You reverse-engineer by subtracting specific expenses and markup profit after the goods have been imported. 

Method 5, the computed method, takes the inverse approach. This involves starting from production costs and adding further costs, such as marketing and transportation costs. 

The final method to be considered, when all others aren’t applicable, is the fall-back method. It outlines a set of rules to be followed in the pretty exceptional circumstances that none of the other five can be used. 

Conditions include there being data available about the type of good within the country of importation. “Reasonable means” must be used to establish a customs value, and none of the “prohibited” methods (a-f) noted in Article 7 of the WTO Valuation Agreement are used. 

IOE&IT has recently created a new programme of practical workshops, designed to cover key customs topics in a more hands-on way, with more group tasks and practical life scenarios. 

Customs valuation is among the topics selected to be delivered in this way. The workshop also covers other variables affecting valuation, how valuation intersects with special procedures and other business calculations informed by customs valuation. 

Our Advanced Importing course also covers valuation in some depth, addressing classification and rules or origin, to cover the “big three” of customs.