In this age of ever-increasing trade complexity and of new business models, traders are looking for a fair, uniform and neutral system for the valuation of imported goods. Companies across the spectrum, from the smallest “micro” trader to the greatest multinational enterprise, depend on certainty and predictability as fundamental conditions for international trade. Those conditions are best met when there is a clear understanding of Customs valuation and other rules – which in turn is linked to the guidance and clarification provided by Technical Committee instruments.

ICC recognizes that the burden of effective implementation of the WTO Valuation Agreement falls not only on Customs administrations, but also on private sector traders, who share with Customs officials the responsibility for shaping evolving guidance on emerging commercial practices. The objectives of the Agreement and commercial practices are usually aligned. This is consistent with the Preamble to the Agreement and its pledge that the Customs value of imported goods should be based on simple and equitable criteria consistent with commercial practices. There has been much progress in the effective and harmonized implementation of the Agreement. Nevertheless, many challenges remain, and new ones are constantly emerging as a direct result of newly developed commercial practices.

For the past 15 years, there has been a concerted effort by the private sector, the OECD, the TCCV and the Customs authorities of many Member countries to address the link between transfer pricing for income tax purposes and related party Customs valuation. We are proud to have participated at the Technical Committee by offering the private sector perspective in these ongoing discussions. One outcome of such efforts has been the adoption of Commentary 23.1 and Case Studies 14.1 and 14.2.

This issue of WCO News includes a companion article which covers this important topic in more depth. Here, we may point to continuing challenges such as:

• Reconciling post-entry price adjustments arising under an Advance Pricing Agreement[1] or a transfer pricing study to correctly report transaction value, and processing any corresponding additional payment of duties or refund of duties.
• The difference in scope between transfer pricing analyses and the Customs valuation in an import transaction which is focused upon the price actually paid or payable (the PAPP) in a single sale for export.
• The extent to which transfer pricing studies should be useful in Customs valuation enquiries. For example, should the normal pricing practice in the industry Circumstances of Sale example be defined narrowly by product sector or reviewed on a functional similarity basis?

Accounting for adjustments to the PAPP which are permissible under Article 8 is an increasingly frequent task for traders and Customs authorities alike. One of the commercial trends that has emerged in the decades since the Valuation Agreement came into effect has been the increasing fragmentation of the different processes and functions involved in the development, production and sale of products. This trend has created circumstances far more likely to trigger complex questions relating to Article 8 adjustments.

Some companies continue to house all of these functions within one vertically integrated company structure. However, there is no denying the trend towards fragmentation into, and reliance upon, separate commercial entities to undertake one or more key “outsourced” functions as part of the process which culminates in the sale and importation of goods. These include:

• research and development;
• ownership of intellectual property, such as trademarks, trade names and patents;
• sourcing of materials and accompanying supervision of contract manufacturers;
• manufacturing;
• sales and marketing.

Some of these entities will be related companies, which can give rise to transfer pricing considerations. But outsourcing these specialized functions nearly always raises the potential for Article 8 concerns, even if third-party vendors are employed. For example, an intermediary party providing sourcing services could be a selling agent, a buying agent, or an independent trader acting on its own behalf – each of which will have a different Customs valuation consequence.

The issue of dutiable assists[2] invariably arises when a contract manufacturer is tasked with production. Simply put, the question must be asked: “Has the buyer directly or indirectly provided any of the potential elements defined as a dutiable assist to the manufacturer on a free or below-market-value basis?”

Finally, despite the publication of Advisory Opinion 4.15 and Commentary 25.1, one of the most vexing current issues is the lack of a consensus and, indeed, an emerging split among countries on the meaning to be given to the “condition of sale” criterion for the dutiability of a royalty or licence fee. These issues often arise in the context of “third-party licence agreements,” in which the licensor is not the seller of the imported goods.

There appear to be jurisdictions where the reviewing courts interpret this key criterion as a narrow, legally enforceable right (e.g. United States, Canada and South Africa). Other jurisdictions (such as a few EU Member States and New Zealand) interpret “condition of sale” in a broader manner, in which a condition of sale can be implied by factors such as the relationship of the parties. In the latter view, the possibility that non-payment of the royalty or licence fee could result in the inability to purchase the imported goods, or even to have the goods manufactured by the seller, can be considered a “condition of sale”.

A complicating factor is the extent to which the common commercial practice of “brand protection” measures has involved licensors in the selection, approval and continued status of manufacturers. Some jurisdictions see a link between the licence and sales agreements where there is a provision for such measures, even if there is no contractual tie-in. Another approach taken by some jurisdictions is to redefine the royalty or the licence fee as an assist which does not have to meet this “condition of sale” criterion. Reconciling these opposing views is a special challenge.

Given the expansion of business across borders, some business models are predicated on the notion that the importer may be dependent upon the seller or on another party for support and advice. The importer could, for example, be a limited risk distributor or be a franchisee. In either case, it might rely on the seller or a party related to the seller to provide management and other support services. If centralized, such an outsourced arrangement is referred to as a “shared services” model.

The importer’s compensatory payment of fees could easily lead to Customs valuation questions. Such fees might be considered to be an integral part of the PAPP, or they might be considered to be dutiable under Article 8, whether as royalties or as the proceeds of subsequent resales. It was helpful that the Technical Committee issued Advisory Opinion 4.17, determining that franchise fees in the nature of royalties are not dutiable. Nevertheless, questions on the dutiable status of separate fees for management advice and other services will continue to arise.

For over six years, ICC has had concerns about the extensive abuse of “Customs valuation databases”. These are external tables, ordinarily organized on a tariff classification basis, assigning a pre-fixed value to a given tariff provision. Customs authorities refer to that fixed value in appraising the imported goods. Under the TCCV Guidelines, valuation databases are meant to be used only in very limited circumstances as a risk assessment factor in examining imports for Customs fraud.

The reality is that these valuation databases are often used as the basis for reference or minimum prices, which is prohibited by the Valuation Agreement. Their use is not restricted to related party pricing, and applies to third-party sales, even though the latter are presumptively valid. Predictability and transparency of Customs procedures are vital for smooth cross-border trade flows and for investment. The inappropriate use of Customs valuation databases to set reference or minimum prices leads to delays in the clearance of goods, administratively burdensome procedures and unjustifiably higher trade costs.

The growth of digital trade and e-commerce has been the single most consequential change in international trade in the past thirty years. Advisory Opinion 23.1 on Flash Sales owes its adoption to a question arising from internet-originated sales. Many of the vendors relying on e-commerce platforms will plan on importing the goods to build local inventory stocks in local markets, and if there is no sale for export, alternative methods of Customs valuation must be employed. This is a challenge for the traders and the Customs authorities. In addition, the continued uncertainty about the WTO Moratorium on digital trade[3] is unsettling and adds to a lack of predictability.

ICC enthusiastically supports the availability of post-clearance audits and advance rulings on all Customs matters, including Customs valuation. The lag in adoption of these practices is challenging. The Trade Facilitation Agreement encourages the use of advance valuation rulings and ICC endorses their adoption. The availability of published rulings enriches the level of administrative guidance not only for the requesting importer, but for all traders whose imports raise a similar factual or legal profile.

Moreover, the rulings can be used internally within the Customs administration to disseminate a policy position. Suitable protection can be taken to ensure that confidential business information is effectively screened, in accordance with Article 10 of the Valuation Agreement, so that any publication of the ruling is not to the detriment of the requesting trader. ICC is concerned about the continuing lack of full transparency in some jurisdictions, where there is no publicly available and comprehensive body of statutes, regulations and judicial decisions. This is in contravention of Article 12 of the Valuation Agreement and militates against the enhanced certainty which is essential for the private sector.

Finally, a “trusted trader” or “fast pass lane” is not open in all jurisdictions. Instead, some jurisdictions apply the same compliance approach to all traders, regardless of the traders’ risk profile or willingness to participate in voluntary, collaborative programmes. This “one size fits all” philosophy is contrary to good risk management principles and flies in the face of the fact that some traders have made significant investments precisely so that they can meet any and all reasonable care reviews. In fact, it is a philosophy which often has unintended, negative consequences for the jurisdictions concerned: many traders see this as a non-tariff barrier and are reluctant to make direct investments or expand an existing presence in those jurisdictions.

The challenges posed by these and other complex valuation questions highlight the importance of having the Technical Committee study specific issues – particularly as they arise from new commercial practices – and provide guidance on uniform application of the Agreement. ICC highly values its role in the process, and looks forward to the ongoing success of the Technical Committee’s work at the 50^th and future Sessions.

More information
tom.voege@iccwbo.org

[1] An APA is an agreement between a taxpayer and tax authority, determining the transfer pricing methodology for pricing the taxpayer’s international transactions for future years.

[2] An assist is an item of value provided to the foreign seller directly or indirectly without cost or at a reduced value, which is used to produce imported articles. Assists are a dutiable addition to the value of the imported articles.

[3] https://iccwbo.org/publication/wto-moratorium-on-customs-duties-on-electronic-transmissions-a-primer-for-business/#:~:text=Since%201998%20World%20Trade%20Organization,customs%20duties%20on%20electronic%20transmissions.&text=The%20moratorium%20is%20not%20set,the%20biennial%20WTO%20Ministerial%20Conference.