Evolution of custom valuation rules and risk areas

Amongst all the varied forms of taxes around the world, custom duty is perhaps the most ancient tax. Custom duties apparently originated as a voluntary offering by travelling merchants to sovereigns for considerate treatment inside the visiting countries. The voluntary offerings gradually became a written and official code of taxation.

The first ever customs tariff is commonly believed to have been developed in Palmyra (present day Syria) in A.D. 137 and was engraved in stone. The photographs of its remains are available on internet and I cherish to see them in person. Though not disputing the common belief, it is worth highlighting that during the Mauryan period (c. 350-283B.C.) in India, Chanakya's Arthasastra also laid down the customs tariff in detail.

In the early days, Palmyra imposed custom duties on a ‘per camel’ or ‘per donkey’ load basis. One would wonder if the idiom “the last straw that broke the camel’s back” has any relation with an attempt to save the custom duties by maximising the camel’s load.

Most of the custom duties in the present times are ‘ad valorem’, a Latin phrase which essentially means ‘according to the value’. ‘Ad valorem’ duties are calculated as a percentage of the value of the imported goods. Any undervaluation of the imported goods would axiomatically result in an underpayment of custom duties, a fiscal and punishable offence.

Evolution of Custom Valuation

The general principles for custom valuation are contained in Article VII of the General Agreement on Tariffs and Trade (GATT). Article VII provides that the valuation of the imported goods should be based on the actual value of the imported merchandise, or of like merchandise. The valuation could not be based on the country of origin of the goods. Similarly, the valuation could not be calculated on any arbitrary or fictitious values.

At the time of adopting GATTs in 1947, countries retained the right to use their existing national standards during the transitional periods. This resulted in the continuation of arbitrary and different regional practices in custom valuation.

Brussels Definition of Value

The first major landmark in custom valuation was the adoption of Brussels Definition of Value (BVD) during 1950s. Under BVD, a notional ‘normal market price’ was determined for each product to assess the custom duties. ‘Normal market price’ was defined as the price that a good would fetch in an open market between a buyer and seller independent of each other.

Only limited variations were allowed from such notional prices. Further, price changes and competitive advantages of the buyers/importers (say, for bulk ordering or credit periods) were not reflected in the notional prices which were adjusted only periodically. As a result, BVD caused a fair amount of dispute between custom officials and the traders across the world.

Tokyo Round Valuation Code and the WTO Agreement

The present concept of ‘transaction value’ for assessing the custom duties was first adopted in 1979 as the Tokyo Round Valuation Code. The custom value of the imported goods was based on the price ‘actually paid or payable’ for the imported goods by the importer. This was a clear departure and improvement over the ‘notional’ price concept established by BVD.

The World Trade Organisation (WTO), as we currently know, was created in 1994 as a result of the Uruguay Round i.e. multilateral trade negotiations, within the GATT framework, from 1986 to 1993. The Tokyo Round Valuation Code was formally replaced by the WTO agreement (on implementation of Article VII of the GATT) even though both are essentially same.

Transaction Value and 5 other methods of custom valuation

‘Transaction Value’ is now the bedrock of current custom valuation system. ‘Transaction value’ is the price actually paid or payable by the buyer for the imported goods.

Transaction value is not just the actual money amount paid to the supplier also includes all payments made as a ‘condition of sale’ of the imported goods and includes various costs, if not already included in the price. We often find businesses making errors in the correct determination of the transaction value.

Where there is no transaction value (e.g. import of own goods), or where the transaction value is not acceptable for valid reasons, the WTO agreement lays down five other methods of customs valuation.

UAE and Custom Valuation

The UAE has been a member of WTO since 10/04/1996 and a member of GATT since 8/03/1994. The UAE has also adopted the WTO principles of custom valuation.

As per the WTO, for importers, the process of custom valuation can be just as serious as the actual duty rate charged. The custom valuation rules are as much applicable on the import of goods from the free zones to the mainland as are applicable on the direct import of goods into the mainland UAE. UAE businesses must take a note of custom valuation compliance and avoid errors resulting in short payment and penalties.

Pankaj S. Jain is the managing director of AskPankaj Tax Advisors. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.

• Dubai