CHAPTER 6. Customs Valuation

Michael Keen
Published Date:
October 2003
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James T. Walsh

Evasion of duty through undervaluation or misdescription of imports is an acute problem for administrations in developing countries. This chapter considers how they can be addressed.

A. The Valuation Problem

The World Trade Organization (WTO) agreement establishes rules for the valuation of imported goods that must be applied by all member countries. These are described in Box 6.1. Countries that are signatories to the WTO are required to adhere to this valuation agreement,85 but coming to terms with its provisions of the agreement has often proved problematic, since they include the introduction of modern principles of tax and customs administration, such as self-assessment.86

Box 6.1.WTO Valuation Agreement

One of the results of the Tokyo round of GATT trade negotiations was the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade. It officially came into force on January 1, 1981 and was adopted by various signatories from the mid-1980s onward. With the WTO having now become the successor organization to the GATT, we refer to this as the WTO valuation agreement.

Many of the countries that participated in the negotiations believed it important to establish rules for the valuation of imported goods as customs valuation is a major feature of tariff systems. It is also an important element in a variety of other aspects of international trade, including statistics, quota and licensing arrangements, taxes and other charges levied on imports, and the application of preference systems. The Tokyo round had as one of its major goals the reduction and eventual elimination of non-tariff barriers, and it was recognized that certain valuation practices could have restrictive effects on international trade.

The agreement is intended to provide a fair, uniform, and neutral system for the valuation of goods for customs purposes, which conforms to commercial realities and prohibits the use of arbitrary or fictitious customs values. It provides, as its basis, the use of transaction value (selling price) between buyer and seller. At the same time, it specifies alternative methods to be used in sequential order for determining value when the transaction value cannot be used. These methods are summarized, as follows.

Transaction value (Articles 1 and 8). This method focuses on the value that a purchaser and vendor attach to goods in an open market. For the most part, value is based on the selling price in the export transaction.

Transaction value of identical goods (Article 2). Where the transaction value cannot be used, as for instance with transactions within companies, this method provides for the determination of value based on the transaction value of identical goods exported at or about the same time, in the same quantities, and at the same level of trade (retail, wholesale, and so on) as the goods being valued.

Transaction value of similar goods (Article 3). Where neither of the first two methods can be used, the transaction value of similar goods produced by the same producer is used. The conditions respecting quality, level of trade, etc. are the same as in the second method.

Deductive method (Article 5). If the imported goods cannot be valued using the first three methods, value may be determined based on the sale price in the country of importation from which certain costs (e.g., expenses and profits) are deducted.

Computed method (Article 6). This method provides for the determination of value based on the costs of material and production in the country of export plus certain other costs (e.g., packing, engineering, and development work). In addition, amounts for profit, general expenses, and insurance are also included in the value.

Fall-back method (Article 7). Value can be determined based on any of the previous methods as adjusted in a flexible manner to account for special circumstances (e.g., it may be necessary to provide an alternative method to value used automobiles).

On the one hand, most governments in developing countries have recognized the benefits to be derived from reducing trade barriers. On the other hand, customs administrations are frequently striving to bring systems and employees up to the level of skill required to counter valuation fraud in a more relaxed regulatory environment. Valuation fraud is a serious problem in most countries, in particular, in developing countries that have relatively high rates of duties and other ad valorem taxes on imported goods. It is often exacerbated by a generally poor level of tax compliance throughout the country, a tendency for many importers to deliberately maintain poor records, and the existence of “special relationships” with suppliers.87 An opinion expressed by officials in many developing countries is that the WTO valuation rules require an administration to accept the declared-transaction value (even when clearly unreasonable), unless the authenticity of the supporting invoice can be unequivocally disproved by the authorities. This is not so, as will soon be seen.

B. The WTO Customs Valuation Agreement88

Like many important innovations, the WTO Customs Valuation Agreement is based on a very simple idea: that it is in the interests of both customs administrations and traders that trade in goods be taxed based on the realities of the commercial transactions taking place. This is what is known as the “transaction value method,” which is the primary method of customs valuation in the agreement.

The agreement has four main components:

  • a set of methods to determine the customs value, with their interpretative notes;
  • provisions to balance the interests of importers and customs administrations;
  • a number of supporting provisions including definitions of particular terms; and
  • an institutional framework: Part II of the Valuation Agreement provides for Administration, Consultation, and Dispute Settlement, including creation of a GATT Committee on Customs Valuation and a Technical Committee on Customs Valuation (whose operation has been delegated to the World Customs Organization (WCO)).

There are also three annexes to the agreement dealing with the special role of the WTO valuation technical committee and a number of special clauses for developing countries that are dealt with in detail below. The essentials of the agreement are contained in Articles 1, 7, and 8, and the interpretative notes to these Articles, plus the General Note. The WCO estimates that, based on the experiences of countries that have implemented the agreement, these provisions provide the legal basis and the tools to carry out at least 90 percent of the valuation transactions based on method 1 (i.e., transaction value). This leaves about 10 percent of trade that requires a more complex approach based on one of the other methods.

Thus a central implication of this primary rule of valuation is that it is the information relevant to the particular commercial transaction that is important for customs valuation purposes. Other factors external to the transaction taking place between the buyer and seller should not normally be taken into account in determining the customs value.


Implementation of the agreement must be founded on a secure base, covering not only its actual content but also the associated administrative tools, powers, and mechanisms to allow it to function successfully. An adequate administrative and legal structure is vital to its successful implementation. The legislative and regulatory framework adopted will be influenced by a country’s existing legislative practice; however, it has been found that comprehensive legislation covering all aspects of valuation is the preferred option. Apart from the obligation to generally ensure that the content of the agreement appears in national law, implementation requires members to make specific provision in their national legislation for the following:

Rates of exchange. Article 9.1 requires members to publish the rates of exchange to be used for currency conversion. It is necessary to determine how and when rates of exchange will be published. In some countries, such as Argentina and Canada, the exchange rates are adjusted daily and made available to the importing public through the customs computer systems.

Time of currency conversion. Payments for imported goods are often expressed in a currency other than that of the country of importation. The payments need to be converted to the equivalent amount in the currency of the country of importation by the use of rates of exchange. Article 9.2 of the agreement allows members to choose between the time of exportation or importation as the basis for converting currencies.

Right of appeal. Article 11 requires that the legislation of each member provide a right of appeal, without penalty, to the importer or any other person liable for the payment of customs duty in connection with the determination of customs value. Article 11.2 provides that a final right of appeal to a judicial authority must also be available. Therefore, countries should establish a fair and independent review mechanism within the customs administration as a first point of redress for importers. For example, an importer not satisfied with the determination of customs value by a regional office should have the right to have the determination reviewed at headquarters. If the importer is not satisfied with the results of that review, the importer should then have the right of appeal to a judicial authority. A system that provides for the first level of appeal within the administration usually results in a quick and reasonably inexpensive solution for resolving disputes. It also fosters uniform and consistent valuation practices and ensures that appeals to a judicial authority occur only in cases where there is a genuine dispute between the importer and the administration about the determination of the customs value.

Release of goods before final determination of customs value. Article 13 requires members to make provision in their legislation to allow an importer to withdraw their goods from customs control in situations where the final determination of customs value is delayed. Where necessary, a guarantee in the form of a surety or a deposit could be taken to cover the potential liability for customs duty as determined by the customs administration.89

Transport and insurance costs. Under Article 8.2, countries must include in their legislation a provision to either include or exclude costs of transport, insurance, and so on in the customs value (so-called CIF or FOB basis for valuation). The vast majority of countries value goods on the CIF basis, with the notable exceptions of Australia, Canada, and the United States.

Delay in application by developing countries

Under the WTO agreement, developing countries were given the right to delay implementation of the valuation provisions for a period not exceeding five years from the date of entry into force of the agreement establishing WTO membership for that country.90 Developing countries who elected to delay application of the agreement were required to notify the Director General of the WTO accordingly. Most developing countries requested such a delay, but their five-year grace period ended in 2000.

There are other accommodations made in the agreement that developing countries can use, if they so choose. They include the following:

Retention of a minimum values system. Under Annex III, paragraph 2, developing countries that value goods on the basis of officially established minimum values may enter a reservation to retain such values, on a limited and transitional basis, under such terms and conditions as may be agreed to by the members of the WTO valuation committee.

Delay in application of computed value method. Article 20.2 permits delays in its application because the costing and accounting information necessary to determine the value under the computed value method would generally be held by a manufacturer outside the country of importation. Therefore, verification of the information provided by the importer, particularly in the early years of implementation of the agreement, would often be difficult.

Reservation of the right of an importer to reverse the order of Articles 5 and 6. The hierarchy established by the agreement requires that the alternative methods of valuation be applied in sequential order. Article 4 provides an exception to this principle. Under Article 4 the importer may elect, in certain circumstances, to have the order of Articles 5 and 6 reversed so that value may be determined under the computed method (Article 6), before the deductive method (Article 5). In recognition of the difficulties that can occur with the verification of information provided by an importer under the computed method (see Article 20.2 above), a developing country that considers that the reversal of the sequential order may give rise to real difficulties may make a reservation in respect of Article 4 (i.e., a reversal of the application in the order of Articles 5 and 6 will occur only when the customs administration agrees).

Reservation related to valuing goods for further processing. A developing country may reserve the right to value imported goods subjected to further processing in the country of importation, in accordance with the provisions of Article 5.2 (the deductive method), whether or not the importer requests use of that method. This would allow a developing country to exhaust all the possibilities for determining value under the deductive method before attempting the computed method.

As can be appreciated, many of these provisions are complex. Therefore, it is important for a developing country to study them closely and to make an assessment of the capacity of the customs administration to administer these provisions of the valuation agreement. Based on this review, a decision can be made whether or not to request a delay in any or all of the provisions that are provided for.

C. Valuation Control

It is recognized that difficulties can arise in establishing the value of goods, when faced with an importer determined to mislead the authorities. However, customs administrations need not accept the situation. The rights of customs administrations to challenge importers’ values was reaffirmed by a decision taken by ministers during the Uruguay round of trade negotiations (shown in Box 6.2), now incorporated into WTO rules.

Box 6.2.Decision Regarding Cases Where Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value

Ministers invite the Committee on Customs Valuation to take the following decision:

Reaffirming that the transaction value is the primary basis of valuation under the Agreement on Implementation of Article VII of the GATT 1994 (the Agreement); recognizing that the customs administration may have to address cases where it has reason to doubt the truth or accuracy of the particulars or of documents produced by traders in support of a declared value; emphasizing that in so doing, the customs administration should not prejudice the legitimate commercial interests of traders; and taking into account Article 17 of the Agreement, paragraph 6 of Annex III to the Agreement, and the relevant decisions of the Technical Committee on Customs Valuation, the Committee on Customs Valuation decides as follows:

  • When a declaration has been presented and where the customs administration has reason to doubt the truth or accuracy of the particulars or of documents produced in support of this declaration, the customs administration may ask the importer to provide further explanation, including documents or other evidence, that the declared value represents the total amount actually paid or payable for the imported goods, adjusted in accordance with the provisions of Article 8. If, after receiving further information, or in the absence of a response, customs still has reasonable doubts about the truth or accuracy of the declared value, it may, bearing in mind the provisions of Article 11,1 be deemed that the customs value of the imported goods cannot be determined under the provision of Article 1. Before taking a final decision, the customs administration shall communicate to the importer, in writing if requested, its grounds for doubting the truth or accuracy of the particulars or documents produced, and the importer shall be given a reasonable opportunity to respond. When a final decision is made, the customs administration shall communicate to the importer in writing its decision and the grounds therefore.
  • It is entirely appropriate in applying the agreement for one member to assist another member on mutually agreed terms.
1 Article 11 provides for the right of the importer to appeal against a valuation decision.

The lengths to which the administration should go in challenging declared values is dependent on a number of factors, such as the amount of revenue at risk, importer’s previous history, estimated percentage undervaluation, etc. But where the administration decides to adopt a firm stance against malpractice, the following represent some of the countermeasures that may be taken to protect the revenue:

  • Adopt, as a matter of national policy, a low-tolerance approach and a firm attitude toward tackling blatant undervaluation.
  • Reinspect selected shipments using special regional or headquarters teams.
  • Insist that the importer furnish additional supporting evidence and carefully scrutinize it in terms of credibility, wherever possible matching it against price reference data (establishing and maintaining, for instance, a pricing database that includes information from declarations, suppliers catalogs, and other sources).
  • Especially where there are several problems of underinvoicing, give priority to those items that generate the bulk of customs revenue.91
  • Write to the importer setting out reasons for not accepting the declared value and their rights to appeal the decision.
  • Conduct issue-orientated audits using officers with sound experience in valuing goods, supported by effective intelligence gathering.
  • Collaborate with the tax administration in examining the overall business activities of troublesome importers. For example, a low import value when compared with the price of goods on sale locally suggests a high profit margin. Therefore, it is reasonable to check if this is reflected in the income declared by the company for corporate tax purposes.
  • Obtain information from customs attachés in exporting countries.
  • Develop collaborative arrangements, possibly supported by memoranda of understanding with the customs services in trading partner countries.
  • Improve the administrations’ commercial fraud intelligence capability and develop investigators with specialized valuation expertise.
  • Prosecute cases of serious undervaluation that stand a good chance of success, and seek media publicity on successful completion of the case.

Post-release verification, including the auditing of importers, is now generally viewed as the key aspect of customs valuation control. This involves the audit of records and, in particular, of the international trade operations in which importers have been involved. For the best results, in terms of both revenue protection and minimizing obstacles to trade, such controls should be performed on the basis of selective targeting and risk analysis. As discussed in the previous chapter, customs administrations are increasingly accepting that it is no longer necessary or effective to concentrate all their controls at frontiers. This change in approach, often resisted by customs traditionalists, is of particular benefit for valuation control. Valuation work has always been ideally suited to post-release controls, because the complete picture that provides the basis for valuation is only fully available from an importer’s records.

During an audit, particular attention would normally be paid to

  • checking for special relationships between buyer and seller;
  • credibility of transaction value and false invoicing;
  • ensuring that the importer has not represented an advanced payment or final payment as the full dutiable cost;
  • checking that the importer has not claimed an unjustified discount (e.g., price reduction for demonstration goods);
  • ensuring that the importer has not failed to declare onward sale arrangements through which a separate payment accrues to the seller, selling commission, profit-sharing arrangements that benefit the seller, royalties, etc. (these are usually to be included in the value for duty); and
  • looking for evidence of overseas bank transactions, because an importer may have paid part of the true selling price from foreign bank sources.

To facilitate their adaptation to this new environment, many customs administrations have found it useful to rely on preshipment inspection (PSI) services or some variant on this theme. PSI companies provide up-to-date price comparison data and physical inspection in the country of export, for customs administrations faced with unscrupulous importers and unreliable officials. PSI is recognized under the WTO. However, the services are expensive (around 1percent of the value of the goods inspected) and the results have been mixed in the countries that have used the services. Therefore, there should be a careful study of the costs and benefits of PSI before a country decides to use the service. Chapter 12 considers PSI and other forms of private sector assistance in customs administration in more detail.

Organizational structure

Developing an organizational structure to support effective valuation control requires a balance between the need to provide information and service (at the local level) and the need for trained specialists who can interpret the law and detect problem areas. The WTO valuation agreement is a factual-based system92 and, as it may take some time to determine the facts for a particular transaction, it may not be practical nor appropriate to deny release of the shipments until all of the facts are known. In addition, the agreement is complex, so that it is necessary to develop expertise in its interpretation and application. It has been found that the best way of implementing the measures necessary to verify value is to organize the control function with clearly defined roles for the local, regional, and headquarters offices.93

Local offices. At the time of declaration presentation and processing at the local office, a decision must be made regarding the level of verification that is required for customs valuation. As the information from the declaration is processed (ideally, in an automated environment), certain data are compared with information in the selectivity system to determine, for example, if the importer has a past history of undervaluation, the type of goods that are often undervalued, and for exporters in certain countries that are known for false invoicing, etc. If any or all of these factors are met, it may be necessary for additional verification activities to be conducted. This may include physically inspecting the goods to ensure that the description on the invoice matches the goods and is detailed enough to support verification after the goods have been released. For example, it may be necessary to ensure that the brand name, model, and serial numbers are recorded so that the later verification activity can be targeted to a specific good. However, detailed enquiries should not be carried out at the local office level, especially if the goods are to be kept under customs control pending an answer.94

Regional offices. Typically, regional offices are responsible for conducting post-release valuation reviews. Declarations are selected based on criteria that have been developed to identify high-risk transactions (e.g., when the importer has self-declared a high rate of duty the goods may be undervalued). In other cases, based on information that has been developed over time from previous cases, it may be known that goods from certain countries are suspected of undervaluation. Selections could also be based on known exporters who have violated the law in the past. Once the declarations have been selected, reviews are conducted that may involve comparing the supporting documentation to other information that may be available (such as importations of the same goods by other importers, previous importations by the same importer, prices of the goods in the export market, and prices of the goods in the domestic market). Once this information has been developed, it may be necessary to write to the importer to ask for an explanation of the circumstances surrounding the transaction (e.g., what type of discounts have been applied, are there any royalties that will be paid later, etc.).95 Depending upon the answers received from the importer, it may decided that an audit is warranted. However, before this decision is finalized, a search of the previous importations by the importer should be conducted to determine how many identical or similar transactions occurred in the preceding 6 or 12 months. Audits can have salutary effects on compliance even if they raise little additional revenue; indeed, in an ideal world the threat of auditing and punishment would ensure that all declarations are truthful. In practice, however, this is unlikely to be the case. And it then makes most sense—both in itself and for its deterrent effect—to focus audit activities on cases in which there is the greatest potential revenue at stake. If there is evidence to suggest undervaluation but no other similar transactions have recently occurred, for instance, then it will normally be best to issue a reassessment without audit. Even in this case, however, the occasional audit is needed to ensure credibility of the post-release process.

Headquarters. The valuation unit at headquarters would be responsible for developing valuation policy, procedures, and monitoring compliance among the regional and local offices. The monitoring may include reviews of selected transactions to determine if the policies are being applied correctly. The audit would also monitor international developments, particularly the actions of the WTO and WCO respecting the valuation agreement.

Another key element in the development of effective valuation verification and audit is the recruitment of staff and their training. Valuation legislation is complex and the methodology required to effectively apply the legislation is difficult. Therefore, well educated personnel must be recruited and training programs must be developed to ensure that the staff is able to apply the legislation. However, it is not simply enough to be well trained in the legislation. Effective verification and audit requires the ability to identify suspect transactions, to analyze information, and to audit the books and records of selected importers. These skills are not always present in a typical customs administration.

D. Conclusion

The obligation on developing countries to implement the WTO valuation agreement in 2000 has caused considerable concerns. Many countries have not prepared well to administer complex valuation provisions that place much of the onus on the customs administration to show that a declared value is not correct. Therefore, it is incumbent upon the customs administrations to develop the systems and procedures necessary to effectively control undervaluation. This is done by taking an aggressive approach to detecting undervaluation by establishing specialist staff who are well educated and well trained, and organizing them in post-release verification and control units. These units will review selected transactions, undertake audits, and issue reassessments where undervaluation is detected.


Under the GATT, countries could opt not to use the valuation agreement and many developing countries chose not to.


Importers or their agents complete the customs declaration, including the value and tariff classification of the goods, and calculate the duties and taxes owing. The customs administration verifies the information to the extent necessary (i.e., selective verification based on risk-assessment techniques).


Many importers have links with suppliers/traders in exporting countries who are willing to participate in the falsification of documentation.


Without this provision, customs administrations could hold goods under customs control until the valuation issues have been settled. This can be time-consuming and costly to the importer. As the disputes usually relate to the terms and conditions of the transaction and not to the goods themselves, it is not necessary to hold the goods until these issues have been resolved.


Developing countries that had already accepted Article VII of the GATT Valuation Agreement were not entitled to delay application when the WTO became operational.


In small and medium-sized countries, 60 percent or more of revenue may come from only 100–150 of the 5,000 or so import categories identified in the harmonized system.


Previously, many developing countries used the Brussels Definition of Value to determine the value for customs purposes. This was based on a “notional” concept, whereby the normal value that the goods would fetch on the open market under certain conditions was used. Many customs administrations developed minimum values for goods to be used as the normal market value.


Most customs administrations are organized along these lines. In geographically small countries, however, or in countries where most of the commercial activity is concentrated in one or two locations, there may be no need for regional offices.


Goods will be kept under customs control in cases where smuggling is discovered or if there are requirements that must be met before the goods are released (e.g., certificates may be required for health or safety reasons).


The customs legislation normally provides the administration with the authority to request any information that may be relevant to the determination of the value of the importation.

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