Photo: Japan Customs


Dossier: Customs Valuation, shedding light on a technical but critical topic for Customs

By Kunio Mikuriya, WCO Secretary General

Adam Smith, author of “The Wealth of Nations”, wrote that Customs duties have been “in use for time immemorial”. To a large extent, this assertion is correct. The practice of taxing commerce is as old as commerce itself. And where a tax must be collected, there will be disputes over rates and methods.

Imported products were easier to tax than domestic output, and so import duties were among the earliest taxes. The two most prominent types of duties that developed over the course of world history were the “specific” Customs duty and the “ad valorem” Customs duty. With the former, the state levied a tax per unit of goods – something which was relatively easy to apply. With the latter, the state levied a tax based on the value of the goods, and this required the establishment and enforcement of rules governing their valuation. In other words, Customs valuation becomes an issue where duties are calculated on an “ad valorem” basis.

Today, the rules for valuing imports for the purposes of assessing these Customs duties are defined in the WTO Customs Valuation Agreement (known formally as the Agreement on Implementation of Article VII of the GATT). The Agreement is a result of the 1986-1994 Uruguay Round negotiations, but its terms largely repeat the 1979 GATT Valuation Code. Pre-1979, WTO Members were concerned that non-tariff measures could potentially offset the gains that had been made over the years by the GATT tariff reductions. Customs valuation practices figured prominently in their inventory of non-tariff barriers and they believed it was important to review existing valuations systems and establish more harmonized and comprehensive rules for the valuation of imported goods.

The Agreement aims to provide a single international system that is fair, uniform and neutral for the valuation of imported goods for Customs purposes, and prohibits the use of arbitrary or fictitious Customs values. It provides a Customs valuation system that primarily bases the Customs value on the transaction value of the imported goods, i.e. the price actually paid or payable for the goods when sold for export to the country of importation (with certain adjustments).

Although today’s import duties have been reduced to trivial levels in many developed countries, or have even disappeared altogether, the rules that are used for their calculation are still relevant. Indeed, a number of countries use value added tax (VAT), excise, or sales taxes on imported products, and Customs authorities commonly apply the Customs valuation rules to calculate these kinds of taxes on imports. Moreover, the rules are used by Customs authorities to administer non-revenue measures, such as import quotas based on Customs value, rules of origin and the collection of trade statistics.  Meanwhile, valuation still represents one of the most important issues for Customs and the private sector in developing countries where contribution of Customs duties and taxes to government revenue is significant.

Technical Committee

A Technical Committee on Customs Valuation (TCCV) was established under the auspices of the WCO to ensure uniform interpretation and application of the Agreement at the technical level. Its role is to examine specific technical problems arising in the day-to-day administration of the Customs valuation system of WTO Members and to give advisory opinions based upon the facts presented.

It is worth noting that, since its creation, the WCO has been closely linked to the various multilateral systems for valuing imported goods. Indeed, the Customs Co-operation Council (now the WCO) was given responsibility for administering the 1950 Convention on the Valuation of Goods for Customs Purposes, commonly known as the Brussels Definition of Value (BDV). The latter was drafted by the European Customs Union Study Group, and as many as one hundred countries applied the BDV.

Adoption of the GATT Valuation Code, negotiated in the 1979 Tokyo Round, saw the establishment of a GATT Committee on Customs Valuation and a Technical Committee on Customs Valuation. The Code mandated the WCO to assist the Technical Committee in its activities and to help it achieve its objectives. When the WTO Customs Valuation Agreement which replaced the Code was adopted, that arrangement was maintained.

Evolution of the questions addressed at the TCCV

Technically, we speak of two Technical Committees on Customs Valuation (TCCV) : the Tokyo Round Technical Committee (1981-1995) and the Uruguay Round Technical Committee (1995-present). During the first Session of the Uruguay Round TCCV, delegates agreed to adopt all the instruments which had been adopted by the Tokyo Round TCCV.

From 1981 to 1995, 74 instruments were adopted to assist Members in the uniform interpretation and application of the Agreement. Of these instruments, 36 took the form of Advisory Opinions, 20 the form of Commentaries, and the remainder the form of Explanatory Notes, Case Studies and Studies. Under the Uruguay Round Technical Committee, 21 instruments have been adopted to date, and 59 specific technical questions examined. A total of 24 Questions have been put in Part III of the Conspectus of Technical Valuation Questions, pending provision of new information.

The fact that a high number of questions was addressed when the Customs Valuation Code came into effect is not surprising: this was a new valuation system, based on the transaction value, and very different from the BDV. The latter was based on the use of a “normal” price[1], as determined by Customs administrations, and had been in operation for nearly 28 years. New terms introduced in the Valuation Code had to be explained. There also had to be a change in mindset. In particular, Customs had to accept the fact that the importer’s declared transaction price could be lower than the prevailing market price.

The type of questions submitted by Customs administrations to the TCCV changed over time, as international trade practices evolved, and trade in goods and services between and among multinationals grew.

The fact that the Tokyo Round Technical Committee adopted 13 Advisory Opinions and one Commentary related to Article 8.1(c) (Royalties and Licence Fees) is testimony to the difficulty Customs faced in interpreting this part of the GATT Valuation Code. The issue continued to be a major concern for administrations after 1995, and further instruments were adopted thereafter, dealing with complex scenarios involving third party royalties in situations where the seller is related to the licensor, or the buyer is related to the licensor. It took the Technical Committee seven years (from April 2004 to April 2011) over 13 sessions (from the 20th  Session to the 32nd Session) to adopt one of the major guidance instrument (Commentary 25.1) .

Other aspects presenting a tremendous challenge include the Agreement’s provisions on related party transactions, in particular, transfer pricing, as well as special discounts given to sole agents and distributors. In fact, this edition of the magazine includes a very detailed article on the transfer pricing, which I encourage you to read.

The TCCV recently issued instruments relating to Customs valuation and transfer pricing in the context of Article 1.2 (a) (examination of the circumstances surrounding the sale in related party transactions). The founding instrument is Commentary 23.1, which highlights that transfer pricing documentation may be used when examining the circumstances surrounding the sale on a case-by-case basis. Two case studies, based on the OECD Transactional Net Margin and Resale Price methods, were used by way of illustration

It is clear from the agenda for the 50th and 51st Sessions of the TCCV, which started on 31 August 2020, that the number of technical questions is still quite substantial. The work of TCCV delegates to ensure uniformity in the application of the Agreement at the technical level is still significant. I would urge all Customs administrations to participate in, or at least follow, the TCCV discussions to keep abreast of the latest issues on Customs valuation and benefit from the exchange of views taking place at the meeting.

Technical assistance

In contrast to the GATT Code, the WTO Valuation Agreement is compulsory, and a clear priority from the start has been to support new signatories with its implementation. On 1 January 1995, when the Agreement entered into force, about 65 developing countries undertook to apply it, but almost all of them entered a specific reservation to postpone application for a period of five years. During this period, they were required to make preparations, and this was identified as a key activity in the WCO’s Strategic Plan for the years 1997 to 1999.

In order to monitor progress, the TCCV instituted a reporting mechanism aimed at collecting information from Customs administrations. This allowed the sharing of experience and work methods regarding implementation, as well as made it possible to quickly identify any special requirements for technical assistance which could arise.

Today, nearly 40 years since the Agreement came into existence, some administrations in developing countries still need capacity building to develop an effective valuation control programme and implement the valuation system put in place by the Code and the Agreement. There are many reasons why implementation can be a challenge. The WTO, in the article which follows this one, explains them in detail.

Some of these challenges are related to a lack of capacity and resources within an administration. Some are related to the environments in which some countries operate, which are very different to those that the Agreement presupposes.

In addition, some governments in developing countries believe that they have to make a choice between revenue collection and trade facilitation. Although there has been no empirical evidence to indicate loss of revenue as a direct result of implementing the Agreement, concerns persist among many developing countries and have been expressed in the WCO. Such concerns are understandable, as developing countries often significantly depend on Customs revenues to finance their public expenditure. Furthermore, since their Customs duties are relatively high, there are strong incentives for fraud.

In one of the articles in this Dossier, Leonardo Macedo, who works for the Brazilian Government and worked in the WCO Valuation team some years ago, reminds us of the differences between “specific” and “ad valorem” tariffs in terms of function and benefits. He also highlights the need to examine the type of tariff that should be used, depending on a country’s level of development, administrative capacities, and objectives.

Recent Secretariat activities

While several countries point to the fiscal neutrality of the effects of implementation, it is widely acknowledged that successful application of the Agreement requires effective valuation control systems, including intelligence-based risk management and post-clearance audit (PCA). This necessitates a holistic approach to reform and modernization of Customs procedures and management, involving changes in thinking, both at the Customs management and Customs operational level.

During the past three years alone, the WCO Secretariat has delivered 36 missions in the field of Customs valuation, including considerable training and diagnostics. Over the years, it has developed guidance material, such as the Practical Guidelines for Valuation Control, and helped administrations develop and implement appropriate training programmes.

In recent years, the tools related to PCA have all been updated, and capacity building activities have focused on hands-on training regarding system-based audits. An advanced PCA Package has been developed for auditors who already have a basic knowledge of the PCA concept. The Package contains exercises on audit planning, analysis of Customs data, review of business information, the use of audit templates (such as a systems questionnaire), audit reports and other exercises. The Package also includes case studies on irregularities, such as undervaluation, misclassification, origin fraud, and industry-specific issues. Officers not acquainted with auditing practices can refer to the e-learning modules available on the CLiKC! Platform, look through the WCO PCA guidelines, or attend an introductory workshop on PCA.

Data analysis and technology

The WCO is also closely following developments in data analytical tools which support Customs in analysing datasets in order to identify trade transactions involving abnormal unit prices or relationships between trading parties.

It is widely accepted that the two most effective methods of valuation involve comparing the shipment in question (if the transaction value is in dispute) to the transaction value of identical or similar goods entering the same economy. The traditional way to ascertain a declared item’s likely valuation compared to the average declared value of identical or similar goods has been to construct a database. Most Customs automated clearance systems incorporate a valuation database functionality which allows for the automatic and post-clearance control of values during declaration processing.

There are numerous administrative and technical complexities with respect to administering and applying a valuation database, and this issue was addressed in WCO News 79. Both the ICC and the WCO have developed guidance on this topic. The first point of reference for an administration considering the development of a valuation database should be the WCO Guidelines on the Development and Use of a National Valuation Database as a Risk Assessment Tool. In addition, the WCO Revenue Package’s Practical Guidelines for Valuation Control also offer examples of WCO Members’ best practices.

Very sophisticated tools are now on the market, using machine learning, i.e. the process of teaching a computer system how to make accurate predictions when fed data (see WCO News 91). The WCO has also undertaken various initiatives to help Customs administrations embrace analytical tools and methodologies. Under the WCO BACUDA project, experts have developed basic methods and algorithms, as well as a neural network model to help Customs detect potential fraudulent transactions. The “DATE model” is an open source programming language and is based on the concept of predictive analytics, a statistical method aimed at making predictions about Customs fraud and undervaluation by importers. The process involves screening a series of historical data extracted from the IT Customs Management System, and using cutting-edge analytics techniques, such as statistical modelling and machine learning.

Private databases and analytical tools can also be used to identify company relationships and transactions between related parties disguised as non-related exporters and importers. Some technology providers are also looking at how to combine valuation controls with scanned image detection algorithms to determine if the relative volumes of the commodities declared approximate those shown in the scanned image.


I would also like to say a few words about cooperation, which is at the heart of the resolution of many issues, and not just in the valuation area. Business should be the driving force behind the political will in realigning the resources necessary to pursue modernization of Customs. However, the reality is often different. The major constraint identified in implementing the Agreement for developing countries is the lack of necessary information for valuation purposes. In many countries, the level of record keeping by importers is not appropriate. We need both good governance of Customs, and corporate governance of business, to properly apply the Agreement. Dialogue between Customs and business is therefore necessary for greater cooperation and the building of mutual trust.

This Dossier includes an article by the International Chamber of Commerce (ICC), an Observer in the meetings of the TCCV since 1979, in which it shares its views on the challenges which persist and on the new ones which are constantly emerging as a direct result of newly developed commercial practices.

The challenges faced by the private sector must be acknowledged and addressed. These include disparate levels of knowledge and technical capacities on the part of Customs authorities; disparate levels of cooperation between Customs and the private sector; the refusal by Customs to use valid data provided by economic operators; misuse of valuation databases; the need for adaptation of rules to better match the evolving patterns of e-commerce; a lack of relevant mechanisms for dispute resolution in the field of Customs law; and a lack of enhanced and regular communication between Customs and the private sector before the importation process.

A related matter is the need for information exchange on valuation to fill the gap between the requirement of the Agreement and the unavailability of information from importers. The TCCV has produced a Guide for the Exchange of Valuation Information, the structure and content of which were also referred to during the negotiations of Article 12 on Custom Cooperation of the WTO Trade Facilitation Agreement. However, many administrations continue to struggle in this area because of the administrative burden and cost implications, lack of electronic data transmission, and lack of appropriate domestic laws (among other reasons).

Facilitation tools

This Dossier also includes two articles which set out mechanisms aimed at providing traders with clarity on how to assess the value of their goods. In the first article, U.S. Customs and Border Protection describes its advance rulings system in the field of Customs valuation and explains that such rulings do not determine or confirm the actual Customs value of a particular consignment, but indicate the treatment to apply to certain elements of the Customs value. In the second article, the European Commission’s Directorate-General for Taxation and Customs Union explains the simplification in place to enable economic operators to determine elements of the Customs value which are not quantifiable at the time of importation, on the basis of appropriate and specific criteria. Such simplifications are becoming increasingly relevant, given the growing number of value elements, such as royalties or commissions, which cannot be quantified at the time of importation.


Let me conclude by reiterating that, whilst technical assistance plays an important role in developing a strong valuation system, it should be viewed in the wider context of a sustainable developmental approach to modern Customs procedures and administration. The involvement of local stakeholders, including the private sector, and the realignment of resources, including appropriate equipment, will be necessary to continue and improve the reform process that technical assistance has helped to initiate. In many countries, addressing issues related to integrity and corruption, as well as the practices of the informal sector, will also be an important part of the comprehensive package which needs to be developed to find a solution.

[1] The price which the imported goods would fetch at the time when the duty becomes payable on a sale in the open market between a buyer and seller independent of each other.