The Correct Valuation Methodology For Imported Used Cars Accounting Essay

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This case study and analysis is produced to determine the correct valuation methodology under the valuation agreement for the imported used car. An ad valorem duty depends on the value of a imported goods (Art. 15.1a). In this system, customs value is one of the essential factors to determine customs duty and other import taxes to be paid on the imported good. In this regards, undervaluation is the most prevalent form of customs value manipulation. Undervaluation is defined as an act of minimising of customs value declarations, either through error or deliberately, which results in the lowering of the importer's Customs duty/internal tax liability. Undervaluation is reflected through an ad valorem duty rate with the duty liability of the importer being minimised by the lowered value. The objective of this study is to test whether the declared value of the imported used car is undervalued or not and determined the customs value using the correct valuation methodology under the Valuation Agreement.

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This study paper is structured in five sections. Following introduction, sections 2 presents' related principles. Section 3 outlines facts of the case study. Section 4 dwells upon analysis of the study. Finally, Section 5 deals with the conclusion and recommendation remarks.

Related principles

According to the WTO customs valuation Agreement (CVA) Customs value is primarily based on the transaction value which is a price actually paid or payable for the goods when sold for export to the country of importation adjusted in accordance with the provisions of Art.8, provided that the preconditions described in Art.1.(a) -(d).

That is, The WTO Valuation Agreement recognises that Customs valuation should as far as possible be based on the actual price of the goods to be valued. This price is usually reflected in the commercial invoice but may be subject to certain adjustments.

As per provisions in Art 8 of the WTO-CVA, there are certain conditions that shall be added to the price actually paid or payable for the imported goods, which may transfer from the buyer to the seller in the form of specific goods or services rather than in the form of money, including materials, components, parts and similar items incorporated in the imported goods (Art 8.1 (b)).

If the customs value can not be determined based on the transaction value (Art 1), the agreement provides five alternative valuation methods that can be applied in sequential (Art 2-7).

Actually, the customs valuation of used goods, including the used car, is a difficult for the decision making and to apply the WTO-CVA in the practice. There is no universal rule stipulated for used goods in the agreement. This absence of universal rule for used goods in the agreement and the nature of trade of used goods lead to the several subjective, fictions or non-uniform valuation system among the customs administrations. As a result, WCO technical committee on customs valuation decided to be left to the discretion of each administration so as to be regarded as a separate matter (Treatment of used motor vehicles (1.1 ST.1.1/1)).

On the other hand, Decision 6.1 of WTO Customs valuation committee gives the customs administration right to ask the importer for further evidence of the transaction value where the customs administration has reasons to doubt the truth or accuracy of the declared value (Note to Art1 Page 2.3). As per the provisions of Art.17, the burden proof of the accuracy or the truth of any statement, document or declaration transferred to the importer.

Therefore, bearing in mind these conditions, the decision of the customs value of the imported used car is provided under the valuation agreement in this paper.

Facts of the case study 1

From the given case study 1, It can be understood that:

The owner/importer primarily bought the car not for direct export rather for the purpose of using it to visit family members and tourist sites found in exportation country E. The customs value of imported goods is the price actually paid or payable for the goods when sold for export to the country of exportation. (Art 1)

The buyer (importer) and seller (employee in second hand car dealership) are relative. Therefore, the transaction is held between related parties since they are members of the same family (Art.8.4 (h)).

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There is no previously imported used car which is identical or similar used car because the owner decided to buy the car since it was a make and model not available in the country of importation (I).

The cost of storage and transportation of the car to the country of importation is incurred by the buyer (importer) on the buyer's account.

The price (value) $40,000 presented by the importer (buyer) to the customs administration was based on the expert valuation certificate of a country of importation car insurance company.

On the other hand, rejecting the declared customs value ($40,000), the customs administration asked the importer to pay the payable duty with the value of $80.000 currency units based on the receipt made out to the importer in the glove-compartment which is found in the country of export car dealership. (Art8.1 (b))

However, using the importer's right stipulated in the Art.11 and Art 13 and the definition of "security" under the general Annex of the RKC Chapter5, the importer rejected to pay the whole amount of payable duty asked by the customs administration. Rather, the importer paid only half of the duty as a security to withdraw his car from the customs administration until the final determination is arrived.

Analysis to the study

As it is discussed in the previous section of this paper, the determination of customs value of used car under the provisions of WTO-CVA is difficult. Here, however, it is presented the analysis of the determination of the correct valuation methodology under the valuation agreement with its reasonable justifications. In considering the valuation agreement, based on the information provided the case analyzed as follows:

Transaction value method

The transaction value is the primary method of valuation and the majority of imported goods into signatory countries worldwide are valued using the transaction value method. As such, it is the most important method of valuation under the Agreement.

First of all, Customs has to ensure whether the imported good is subject to a sale for export to the country of importation. If the imported goods are subject to a sale, then, Customs must identify any condition that precludes the use of transaction value method for determining the customs value (Method 1).

In this case study, since there is an information that the importer were initially bought the car not for direct exportation, rather, he used the vehicle to visit family members and tourist sites in the exporting country, in accordance with the article 1 of the valuation agreement, the transaction value method cannot be applicable to determine the customs value of the imported used car.

In addition to this, the importer presents export valuation certificate of importing country amount of $40,000 as evidence, for customs valuation purpose. This document can not be accepted as invoice/transaction value which reflects the price actually paid or payable for the goods when sold for export. Therefore, in this case the transaction value can not applicable.

Five alternate methods are also provided in the Agreement when the transaction value cannot be applied. This may be due to a number of factors, for example, a restriction may apply to the imported goods which make it ineligible under the transaction value. However, the six methods of valuation must be considered in sequential order.

These must be used in the order specified by the Agreement, i.e., only if Article 2 ( Identical Methods) is found to be inappropriate can consideration be given to Article 3, and so on. Only the deductive and computed value methods can be considered in reverse order if the importer makes such a request under Article 4.

Thus, as a senior customs valuation review officer, I can ask the importer to bring adequate evidence that can show the true or accuracy of the transaction value whether identical or similar car is imported which is mot immediately available to the customs administration at the port of importation. (Art 17 and decision 6.1)

In this regard, the importer and anyone directly or indirectly involved in the importation concerned, whether they relate to the goods being valued or, to identical or similar goods, must provide Customs with all the necessary supporting documents and information.

Identical goods method

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Where no transaction value cannot be determined under Article 1 for the goods being valued, it is necessary to consider a transaction value previously accepted by Customs for identical goods (Article 2), sold for export at about the same time, at the same commercial level and, in the same quantity as the goods being valued.

However, from the case study 1, identical goods method cannot be a solution to determine customs value of imported used car, because there was no identical car bought available in its make or model in the country of importation. This implies that it is difficult to value the imported used car based on identical valuation method. Since there was no prior importation of identical car (Art 2).

Similar goods method

If a customs value cannot be determined using Article 2, then the next step is to seek a transaction value previously accepted by Customs for similar goods sold for export to the same country of importation and exported at or about the same time, at the same commercial level (where possible) and in substantially the same quantity (where possible) as the goods being valued. (Art. 3)

However, from the case study 1, in the same manner to identical goods methods, Similar Goods methods (Art. 3) cannot be apply to determine customs value of imported used car because there was no similar car bought available in its make or model in the country of importation. This implies that it is difficult to value the imported used car based on similar valuation method. Since there was no prior importation of similar car (Art 3).

Deduction Valuation Method

The first three methods of valuation under the Agreement are based on the determination of a transaction value. Since the customs value of imported used car cannot be determined using Articles 1, 2 or 3, then Article 5, the deductive method is considered. Prior to apply Article 5 (deductive method), it has considered the right of the importer to decide the order of application of Article 5 and 6 stipulated in Article 4. Considering that no reservation in national law of the importing country to do so.

According to Article 5 of the Agreement (Deductive Valuation Methods), the value will be determined on the basis of the price at which the imported (or identical or similar) goods are sold to unrelated buyers in the country of importation.

The deductive method can be applied to determine the customs value of imported goods, provided that; a sale of the goods being valued (or identical or similar goods) must have occurred, the imported goods must be imported for resold and not used by the importer, not resold for export, and not sold too far into the future.

In this case, the third alternative valuation method, Deductive customs valuation method can also not be applied, because the car is imported NOT to be resale in the country of importation, rather to be used for personal purpose by the importer. As the provisions of Art.5, deductive value method can not be used if there are no sales in the country of importation.

The Computed Valuation Method

In this specific case, the computed value method (Art.6) is considered next to deducted value method to determine the customs value of imported used car. The computed method is based on the cost of production and the price is built up to determine a customs value to the point of importation (CIF) or exportation (FOB). According to Article 6.1 of valuation Agreement Computed value consists of the sum of:

The cost or value of materials and fabrication (Art 6.1 (a))

The amount of profit and general expenses (Art 6.1 (b))

The cost or value of all other expenses as defined in Art 8.2 (Art 6.1 (c))

can also be examined to value the customs value of imported used car.

However, it is not possible to value the used car using the computed value method because the imported car is used or second hand car. It is difficult to obtain the costs of material and fabrication, profits and expenses described in Art 6.

Fallback Method

Fallback method of customs valuation apply sometimes, however, when in cases where there has not been a sale; where there have been no importations of identical or similar goods; when the goods are not resold in the country of importation, and when no data is available on their production costs.

Since the customs value of the imported used car could not be determined under the provisions of Art. 1 through 6, it can be determined using Art.7 (Fallback method). Unlike the previous five valuation methods, Fallback method could not be considered as a specific method of valuation. It would be better described as a set of principles to be adhered to when determining the customs value of goods using the fallback method. For the valuation of imported goods using this method, the following three principles and general provisions of this agreement Art VII of GATT 1994 must be adhered to:

the customs value must be determined using reasonable means;

the customs value must be determined on the basis of data available in the country of

importation

Customs values determined under the provisions of Article 7 should, to the greatest extent possible, be based on previously determined customs values

The value, arrived at should be the result of a more flexible application of Articles 1 to 6, and that as far as possible; this flexible application should be achieved by respecting the sequential order of those methods. It has considered that the seven pricing mechanisms which listed in Article 7.2 cannot be used in the application of this method to determine the customs value of the imported used car.

Accordingly, if we see the case in the Ethiopian context, even though the customs proclamation No. 622/2009 is being compliant to the WTO Valuation Agreement, the existing situation does not allow applying the provisions set in the Agreement to determine the customs value of the imported used car. Considering this, I have tried to see other countries experiences on used car customs valuation method as follow:

Canada

There are different used car valuation methods such as transaction value method (where a vehicle or boat, new or used, is imported within 30 days of delivery to the purchaser), Application of Identical and Similar Goods Methods ( in accordance with section 48, 49 &50), the Deductive value method ( the value for duty of imported goods on the resale price in Canada of the goods being appraised, or identical or similar imported goods), The Computed Value Method (the value for duty on the cost of production of the imported goods), Residual Basis of Appraisal Method ( under section 53, usually be applied in non-commercial situation), Neutral Sources- Country of Exportation (for importer used vehicles which are not "sold for export to Canada") , The Canadian Automobile Red Book- Official Used car valuations Method (in case where the importer is unable to provide a value from a neutral in the country of exportation) and Depreciation Method (there will be situations where book values do not address particular and unique circumstances) (Memorandum D13-10-2, Used Automobiles, Motor Vehicles, Boats, and Other Vessels, Ottawa, March 30, 2001;pp.2-4).

Australia

There are two customs valuation methods (i.e. Transaction Value Method and Alternative Methods of valuation) used to determine the customs value of imported private motor vehicles and motor cycle (whether new or used). Transaction value method uses for the price actually paid or payable for the road vehicle to determine the customs value. The transaction value method is not used when the importer cannot demonstrate that the purchase took place for the sole purpose of exporting the road vehicle to Australia. In such case, the Full-Back Deductive method will be the most appropriate method to determine the customs value of privately imported road vehicles. This method is based on the value of the road vehicle at the Australian wharf (i.e. the "landed cost"). The value is established by referring to an 'expert' appraisal. In this context, the 'expert' appraisal should provide a value for the motor vehicle or motorcycle that is the appraisal value as inspected at the point of importation (Australian Customs and Border Protection Service, Guide to the Valuation of Imported Road Vehicle).

5. Conclusion and Recommendation

Therefore, Bearing in mind that:

The importer were initially bought the car not for direct exportation,

Export valuation certificate of importing country cannot be accepted as invoice/transaction value which reflects the price actually paid or payable for the goods when sold for export.

There is no identical or similar car imported previously.

The car is imported NOT for resale in the country of importation; rather it is for personal use of importer.

It is difficult to value based on computed value method since it is second hand car.

The importer could not provide adequate evidence that can reveal his declared imported value is accurate or true transaction value.

Considering these facts, Fallback method is found appropriate to determine the customs value of imported used personal vehicle. Accordingly, assuming that Australia is being an importing country of the personal used vehicle under study, it is recommended that both $ 80,000 and $40,000 has to be rejected and the custom value has to be determined based on the value established by an 'expert' appraisal as the vehicle inspected at the point of importation. However, this has to be done with the consent of the importer. In this case, the importer can be made the payment 'Under protest'.

Finally, I would also like to recommend that as per the provisions of Art7.3, after the customs decided the customs value based on the available information, the customs administration should inform in writing of the customs value determined and farther the importer has to be advised according to Art.11 of the agreement that he has right to appeal to the appropriate person within the Customs administration or, to an independent body (e.g. relevant Tribunal) and that he also has the right to submit a direct appeal to a judicial authority, in case of he has any grievance on the customs decision. In addition to this, the importer has also be informed that he has the right to request a written explanation as to how the customs value of his good was determined by customs (Art.16).