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Non-tariff Trade Barriers: Customs Valuation and the WTO

Issue: December 2002/January 2003

Keywords (click to search): trade barriers non-tariff trade barriers WTO tariffs on imported goods imported goods dutiable value of imported goods minimum and reference pricing customs valuations transaction value in determining dutiable value

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Jones, Day, Reavis & Pogue

While China has cut tariffs on imported goods as per its WTO commitments, as is often the case, the devil is in the details. And, in the case of tariff assessments, one such key detail is whether non-tariff barriers continue to exist by virtue of how Chinese Customs officials determine dutiable product values at the time of import.

In the past, Chinese Customs officials enjoyed considerable discretion in determining the dutiable value of imported goods, typically relying on minimum and reference prices in value assessments. The dutiable value of imported goods was thus determined by comparing the declared value with values of the same or similar goods. The minimum or reference point for such comparisons could effectively be selected by the relevant Customs official based on his own experience or sometimes with reference to values found in a Customs database comprising pricing information declared by previous importers. If the declared value was lower than the minimum value maintained in the database or other reference price applied by the relevant official, the Customs official could generally reject the declaration and substitute an alternative, usually higher, valuation.

Rules of the Game

China's use of minimum and reference pricing in Customs valuations had long been criticized by the international community and was specifically flagged during negotiations for China's WTO entry. China must now comply with the Agreement on Implementation of Article VII of GATT 1994 (Customs Valuation Agreement), which requires, inter alia, that member states establish a fair, uniform and neutral system for carrying out Customs valuations.

Expressly acknowledging this commitment, a representative of China was cited in the Working Party Report as agreeing to apply all WTO Customs Valuation Committee decisions within two years after accession. The Assessment of the Dutiable Value of Imported and Exported Goods Procedures (the Procedures), which replaced legislation from 1992, appear to be a step toward fulfilling this commitment.

Transaction Value

Under the new Procedures, the "transaction value" serves as the primary basis for determining dutiable value, with the Procedures specifically requiring that Customs use the declared transaction value if the following requirements are met: (1) there are no restrictions as to the buyer's disposition or use of the goods (except for restrictions that (i) are imposed by domestic law, (ii) limit the geographical sales area, or (iii) do not substantially impact the price); (2) the product price is not subject to any condition or consideration that renders the transaction value undeterminable; (3) no part of the proceeds from the buyer's sale, disposal or use of the goods will accrue directly or indirectly to the seller unless an appropriate adjustment can be made; and (4) the buyer and seller are not related, or, if related, their relationship has not influenced the price.

Other Valuation Methods

If the dutiable value cannot be determined according to the transaction value, then pursuant to the new Procedures, Customs shall adopt other methods in the following order of priority: (i) transaction value of identical goods; (ii) transaction value of similar goods; (iii) deductive value; (iv) calculating value; or (v) reasonable value.

If more than one transaction value of identical or similar goods is available, Customs must use the lowest value to determine the dutiable value. The new Procedures also provide additional details in respect of the application of the "deductive value" and "calculating value" methods. At the request of the importer, Customs may agree to reverse the application sequence of items (iii) and (iv).

When applying the "reasonable value" methodology, Customs is specifically prohibited under the Procedures from using the following reference prices: the selling price in the domestic market of identical/similar domestically-produced products; the higher of two alternative values; the selling price of the relevant goods in the country of origin; and minimum values or arbitrary or fictitious values.

The new Procedures also permit Customs to assess the veracity of declared values by examining relevant contracts and invoices, inspecting the goods and the importer's place of operation, consulting with relevant banks and tax bureaus regarding remittances in respect of the imported goods, and requiring the importer to provide written explanations and supporting documentation.

Written Explanation and Appeal Procedures

In compliance with the WTO Customs Valuation Agreement, the new Procedures provide importers with a right to request a written explanation as to how Customs determined the dutiable value. Under the Procedures, the importer may also challenge determinations either through an administrative review by a higher Customs authority or through judicial review before the People's court. If there is a delay in determining the dutiable value, the importer may, after providing a guarantee to the relevant Customs office, withdraw the imported goods from Customs.

Conclusion

Many imported goods still attract Customs duties, with the dutiable value of any given product further serving as the basis for calculating value-added tax on the same. Accordingly, an objective and predictable system for determining dutiable value is critical for companies to rationally price their products for the China market. While the new Procedures seek to bring greater transparency to Customs valuation procedures, a subjective element of valuation necessarily remains. Importers should thus be prepared to justify declared values and consider the options under the Procedures for challenging what they deem to be arbitrary or unjustified determinations.

By Beth Bunnell and Alex Wang

Jones, Day, Reavis & Pogue,
Shanghai


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