Case Study And Analysis Of Used Car Valuation Accounting Essay

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The Ethiopian Revenue and Customs Authority (ERCA) conduct customs operations under the mandates given to it by proclamation Number 622/2009. A number of regulations and directives issued by the Council of Ministers and Ministry of Revenue also govern its operations. An examination of the Customs Proclamation and its supporting regulations and directives shows that except in the valuation of used goods and vehicles, it is consistent with the WTO Valuation Agreement. This is commendable if we take into consideration that it was issued before Ethiopia even became a member of the WTO.

Country Experiences on Used Car Valuation

Ethiopia

Directive No.6/1996 (E.C.), on Used Vehicles and Goods Valuation and calculation of duties and taxes was issued by the former Ministry of Revenues (MoR), a predecessor of the current Ethiopian Revenue and Customs Authority (ERCA), with the stated objective of making the valuation system of used vehicles and goods a transparent, equitable and accountable one. It provides that the customs value of used vehicles and goods is to be based on the C.I.F. price of the good or identical or similar goods when it was bought as new. A depreciation allowance of 10 percent per year, with a maximum allowance of 30 percent is then deducted to arrive at the customs value. This means that for all vehicles and goods which are more than 3 years old at the time of importation 70 percent of the original selling price is used as the customs value of such goods. ( Directive No.6/1996 E.C.) It is quite clear that the above discussed valuation method does not conform to the methods of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994).

Furthermore, it cannot be considered even under Article 7 of the Agreement which provides for a fall-back method of valuation because (i) the directive does not apply the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994) valuation methods sequentially but automatically uses an alternative method of depreciation allowance it devised, and (ii) it does not follow valuation methods laid down in Articles 1 through 6 of the Agreement , albeit with a reasonable flexibility, as stipulated under Annex I , Note to Article 7 , Paragraph 1 to 3 of the Interpretive Note of the Agreement. In addition, the 10 percent annual depreciation rate and the maximum allowed depreciation of 30 percent of the original price clearly do not reflect to prevailing market prices of used vehicles in the markets from which they are imported.

Canada

Memorandum D13-10-2 Used Automobiles, Motor Vehicles, Boats, and Other Vessels of Canada (2001, pp 2) outlines and explains the manner in which the value for duty of used automobiles and motor vehicles and boats and other vessels is to be determined. Where a vehicle or boat, new or used, is imported within 30 days of the date of delivery to the purchaser, it will be valued for customs purposes using the purchase price as the basis for establishing a transaction value. A valid sale for export to Canada is considered to have occurred, and any use of the vehicle or boat prior to importation will be regarded as being incidental to delivery of the vehicle or boat to Canada. If the requirements of section 48 of the Customs Act of Canada (1985), (which is the transaction value method, are not met the value for duty must be determined under one of the subsequent methods of valuation applied in the sequential order provided for in the sections 49 to 53 of the Act. (Canada Customs Act, 1985)

For imported used vehicles which are not "sold for export to Canada," (ibid) importers may declare a value for duty by referencing used vehicle valuation guides published in the country of export, which list retail sales values for vehicles in average condition. These values indicate the amount any purchaser can expect to pay for the vehicle, whether purchased for use in the country of export or for export to Canada. (Memorandum D13-10-2, 2001; pp. 3)

In cases where the importer is unable to provide a value from a neutral source in the country of exportation, customs will use, as its primary reference, the retail sales value listed in the Canadian Automobile Red Book - Official Used Car Valuations (Memorandum D13-10-2, 2001; pp. 4). An amount for Canadian duties and taxes, using the duty and tax rates applicable at the time of importation of the goods being appraised, will be deducted from the published listed value, in a flexible application under section 53, of the deductive value method of section 51. (Memorandum D13-10-2, 2001; pp.4)

The above discussed used car valuation experience of Canada fully conforms to the methods of valuation of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994). If the requirements of the transaction value method are not met, the value for duty must be determined under one of the subsequent methods of valuation applied in the sequential order which makes it fully consistent with Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994). Article 7 of the Agreement which provides for a fall-back method of valuation is considered when the other methods of valuation cannot be used. Under this method, used vehicle valuation guides are used which consistent with Article 7 of the Agreement.

2.3 Australia

The Transaction Value Method: According to the Australian Customs Notice (1998), the Customs value of new or second hand privately imported motor vehicles or motor cycles will ordinarily be calculated using the "transaction value" method. Under this method the Customs value is based on the "price actually paid or payable" for the vehicle or cycle in a bona fide sale where the price is not influenced by any other factors such as related party transaction. This method will be used where the importer can show that the vehicle or cycle was purchased to be exported to Australia. (Australian Customs Notice, 1998)

Similarly, as stipulated in the Notice (ibid), the transaction value method is not used when:

The road vehicle has been purchased overseas at only a token or nominal price

Between the date of purchase of the road vehicle and its subsequent exportation to Australia its value has altered due to the following occurring:

the addition of accessories, fittings or options, major restoration, modifications or any improvements to the road vehicle made after its purchase; or

the road vehicle has depreciated due to wear and tear caused by usage before exportation, an example of this that during the 12 month period of ownership and use required to obtain a permit to import the road vehicle was subject to normal usage which added additional mileage and depreciation to the vehicle;

Where any of the above situations have occurred, the Transaction value method cannot be used and an Alternate Methods of determining the customs value will be considered. Customs and Border Protection experience has shown that the majority of road vehicles imported cannot be valued using the Transaction value method because they were not purchased solely for export to Australia or the vehicle has depreciated since purchase due to use. (Australian Customs Notice, ibid ).

Alternate Methods of Valuation: When the "transaction value" method cannot be used to determine Customs Value, the alternate methods of valuation, as set out in Section 159 of the Australian Customs Act will be applied in sequential order. There are several alternate methods to determine the customs value of privately owned road vehicle. The Fall-Back Deductive method is the most appropriate method for establishing the customs value of privately imported road vehicles when it is unable to be determined using the previously mentioned methods. This method is based on the value of the road vehicle at the Australian wharf. The value is established by referring to an 'expert' appraisal. ( Australian Customs Notice, ibid ).

In this context, the 'expert' appraisal should provide a cost for the road vehicle as it has been appraised at the point of importation. The appraisal will include any modifications or accessories that have been made or added to the road vehicle prior to its importation to Australia but not any changes to the vehicle that will be required after importation. Once the Australian "landed cost" has been satisfactorily established, certain deductions will be made by Customs and Border Protection. The value so determined will be the customs value which will be used to determine the customs duty and GST payable. (Australian Customs, ibid ).

Another issue to consider is the circumstances where the application of the depreciation method is not appropriate. Certain models and makes of cars enjoy a particular status in the collector market. As an example, certain cars appreciate in value as they become valued as collector or classic and vintage cars. It is not unusual for such cars to be worth much more than the price when sold new. In these cases, it will be necessary to establish a value, where the declared transaction value is doubted, through the use of specialized publications or auctions results, in the country of export. (Australian Customs Notice, ibid ).

The used car valuation experience of Australia fully conforms to the methods of valuation of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994). The Customs value of new or second hand privately imported motor vehicles or motor cycles will be calculated using the transaction value method. This method will be used where the importer can show that the vehicle or cycle was purchased to be exported to Australia. When the transaction value method cannot be used to determine Customs Value, the alternate methods of valuation, will be applied in sequential order. Expert appraisal of used vehicles is used to assess the customs value. This method is consistent with Article 7 of the Agreement which provides for the Fall-Back method.

Analysis of the Case Study

An owner/ importer, a resident of Country I and a car collector, imported a vehicle from Country E. The owner / importer bought the car from a secondhand car dealership owned by the employer of his brother, which indicate the possibility of a related party transaction. According to Article 15 Paragraph 4 (h) of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994), persons are deemed to be related if they are members of the same family. Since the importer is a brother of the employee working at car dealership there is a relation. The question is whether this relation can affect the transaction value. Since the brother of the importer is only an employee and not an owner of the car dealership, there is no possibility for him to influence the price actually paid or payable.

The case study indicated that the make and model of the car bought by the importer was not previously imported into Country I. Therefore, no previous transaction values of identical or similar goods could be found. Where no transaction value could be determined under the transaction value method of Article 1 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994), for the goods being valued, it is necessary to consider a transaction value previously accepted by Customs for identical goods, as the goods being valued. If a customs value cannot be determined using the identical goods valuation method of Article 2 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994), then the next step is to seek a transaction value previously accepted by Customs for similar goods as the goods being valued. Since there is no previously accepted identical or similar goods value, the identical and similar goods valuation methods, which presuppose the prior importation of the same make and model of the vehicle being imported, cannot be used.

The transaction for Customs valuation purposes must be the sale for export to the country of importation. There must therefore have actually been a transfer of ownership resulting in the exportation of the goods to the country of importation. The case study shows that the importer had used the car in the Country of export prior to importation. Therefore the car is not purchased by the importer in the context of a sale for export to Country I. As shown in the experiences of other countries above, regarding the valuation of used goods and vehicles, if a vehicle after being purchased in the country of export is used in the country of export prior to importation, the transaction value method of valuation cannot be used because the value of the vehicle is altered. Therefore, this fact precludes the possibility of using the transaction value method of valuation.

Another fact which is indicated in the case study is that, prior to export; the car had been stored and transported in the country of export. According to Article 8 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994) there are costs which are added to the price actually paid or payable. The incorporation of Article 8 of Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 additions on the transaction value, presupposes that the method of valuation used is the transaction value method. If the transaction value method of valuation is not used, the cost associated with the storage and transportation of the car in the country of export cannot be added because alternative valuation methods are used.

The case study also shows that the importer presented to customs an appraised value of $ 40,000 assessed by an insurance company in the country of import. The Australian experience shows, the 'expert' appraisal should provide a value for the road vehicle as it has been appraised at the point of importation. Therefore, appraised values in the country of importation can be acceptable. What is doubtful in this case is, whether the appraised value by an expert from an insurance company can be considered an independent appraisal and therefore can be used by Customs. The appraisal by insurance company cannot be independent from the importer and cannot be acceptable by Customs. The other point is that, the appraised value for insurance purposes may differ from an appraised value for customs purposes, in which case the appraised value by an expert from an insurance company cannot be acceptable. Therefore, the rejection of the appraised value by customs is correct.

As indicated in the case study, during inspection by customs, a Country E car dealership receipt amounting to $ 80,000 made out to the importer was found in the glove-compartment of the car. Assuming the receipt is for the same make and model of the car purchased by the importer, the question to be asked is, whether the customs value of the vehicle can be based on the invoice. As indicated earlier, the vehicle had been used after purchase in the country of export. Therefore, the value of the vehicle had been altered which leads us to explore other valuation methods other than the transaction value method.

Chapter 5 under the General Annex of the revised Kyoto Convention states that, the amount of security to be deposited to be kept at reasonable levels and therefore, ensure that they are not used for punitive purposes. The Customs administrations determine how much security is needed. The amount of security has to be "as low as possible," and, in respect of payment of duties and taxes, is not to exceed the amount potentially chargeable. Therefore, according to the Revised Kyoto convention, the amount of security to be deposited to clear goods under protest is determined by Customs not by the importer. The information provided in the case study indicates the potential to be collected is $ 12,000 based on the receipt price of $80,000. Security amount of $ 12,000 does not exceed the amount potentially chargeable. Therefore, the action taken by Customs is consistent with the Revised Kyoto Convention.

Summary and Conclusion

4.1 Summary

The importer had used the car in the Country of export prior to importation. If a vehicle after being purchased in the country of export is used in the country of export, the transaction value method of valuation cannot be used because the value of the vehicle is altered. Therefore, this fact precludes the possibility of using the transaction value method of valuation.

The make and model of the car bought by the importer was not previously imported into Country I. Therefore, the value of the vehicle cannot be determined using the identical goods and the similar goods valuation methods as well as the deductive value method, which presuppose the prior importation of the same make and model of the vehicle being imported or the reselling of the imported car. The case study indicated that the car is imported by a collector which shows that it is not for reselling.

The information required to substantiate production costs will normally be held by the seller/manufacturer and therefore is unlikely to be immediately available to the buyer in the country of importation. Also, it is unlikely that the importer will be able to obtain this information unless he/she is related to the seller or has a long term trusting relationship/association. In addition it will not be possible to establish the cost of production of the imported vehicle in the condition in which it is imported. Therefore, it is not possible to establish the value of the used vehicle using the computed value method.

The importer presented to customs an appraised value of $ 40,000 assessed by an insurance company in the country of import which was rejected by customs. Appraised values in the country of importation can be acceptable. Since the appraised value was assessed for the purpose of insurance which may differ from an appraised value for customs purposes, the appraised value by an expert from an insurance company cannot be acceptable.

The invoice value of $80, 000 which was found by Customs inspectors in the glove compartment of the car could not be accepted as transaction value, because according to the Australian Custom experience, if the vehicle is used prior to exportation to Australia the initial transaction value of the vehicle will be altered due to wear and tear as a result of usage.

4.2 Conclusion

For the valuation of imported goods using the fallback method, three principles must be adhered to the customs value must be determined using reasonable means; these means it must be consistent with the principles and general provisions of the   Agreement; as much as possible the customs value must be determined on the basis of data available in the country of importation. However, this need not be taken as ruling out the use of information from other countries. Consequently, the origin of such information does not prevent its use for the purposes of Article 7 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, provided that the information is available in the country of importation and Customs is in a position to check that it is true and accurate. Therefore, one of the following two alternative ways can be used to determine the value of the vehicle with consultation between the Customs administration and the importer for exchange of information.

The Fall-Back method is the most appropriate method for establishing the customs value of privately imported road vehicles when it is unable to be determined using the other methods of valuation. In the case of Australia, the value is established by referring to an 'expert' appraisal. Therefore, using an appraised value conducted by an expert appraiser independent from the importer is appropriate.

The other Fall-Back method, to be used is the used vehicle valuation guides published in the country of export, which lists retail sales values for vehicles in average condition. These values indicate the amount any purchaser can expect to pay for the vehicle, whether purchased for use in the country of export or for export to other countries. This neutral source of information is another way of assessing the value consistent with CVA.

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