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Ch2 Transaction Value Method

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Ch2 Transaction Value Method

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2

TRANSACTION VALUE METHOD

2.1 DEFINITION

Article 1 of the WTO Customs Valuation Agreement deines transaction value

as: “the price actually paid or payable for the goods when sold for export to the
country of importation adjusted in accordance with the provisions of Article 8”
(see Figure 4). We will examine the elements of this important deinition in
some detail in the following sections.

for the goods

Price actually paid or
payable

when sold for adjusted in

export accordance with
Article 8

Figure 4 Transaction value deinition: elements

2.1.1 “ The price actually paid or payable …”

Transaction value is whatever amount the buyer agrees to pay the seller to
obtain the goods – subject to some important qualiications. In other words, the
buyer and seller themselves determine the customs value of imported goods.
Given this deinition, customs cannot reject an importer’s declared price on the
grounds that:
• it is lower than prevailing market prices
• it is lower than prices for identical goods in other transactions
• it is a sale at a discount.

Downloaded from https://www.cambridge.org/core. Boston University Theology Library, on 30 Nov 2019 at 05:48:23, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/CBO9780511733161.004
A Handbook on WTO Customs Valuation Agreement

The customs value for exactly the same kinds of goods can vary in transactions
between different buyers and sellers, or even between the same parties in dif-
ferent transactions over time.

C om m on d is c o u nt s
Cash discount: the seller may sell at a lower price because the buyer agrees to
pay cash for the goods instead of credit.
Volume discount: the seller may sell at a lower price if the buyer purchases a
large quantity.
Trade discount: the buyer may be a regular or large customer whose continued
business the seller wants to encourage.
Purchase discount: the seller offers a 1 percent reduction of the price if the buyer
pays earlier than the due date.
Because transaction value is the price the buyer “actually paid” for the imported
goods (no more, no less), the discounted price is the price used for customs value.

The treatment of discounts illustrates a fundamental difference between the

WTO Valuation Agreement and a “notional” concept of value, such as the
Brussels Deinition of Value. New users of the Agreement (particularly those
who come from former BDV countries) often expect that there should be some
“acceptable discount” or a maximum discount of a price that can be allowed,
or that a discount that a seller gives to just one or a limited number of buyers
cannot be valid. While justiied under the BDV’s concept of a “normal price”
for imported goods;1 such ideas are inapposite under the WTO Agreement.
Under the Agreement, the size of the discount or limitations on its availability
to other buyers is not in itself a basis to reject the transaction value: the price
paid or payable, net of any such discount, can be used for customs valuation
purposes. (For a real-life illustration of this principle, see Case study: India
customs bearing case, below.)
This statement about discounts is subject to an important qualiication. As
will be seen in section 2.3.4, customs can reject a transaction value between
certain related buyers and sellers if the price is found to have been inluenced
by that relationship. In the related-party context, an “abnormal” discount given
by the seller (compared to discounts the seller allows to unrelated buyers), or
given exclusively to the related buyer, may be grounds for customs to question
whether the parties’ relationship inluenced the price.

1
The BDV required customs to adjust an invoice price if it included a discount that was not freely
available to any buyer in the open market. BDV, December 15, 1970, 171 U.N.T.S. 307, Annex II,
Addendum to Article I, Note 5 (“Adjustments … may in particular be required with reference discounts
or other reductions in price granted in favour of sole agents or sole concessionaires, or to any abnormal
discount or any reduction from the ordinary competitive price.”).

Case st udy
India customs bearings case
Facts:
The importer is a company that manufactures tractors and tractor engines in India.
For over thirty years, this company had imported bearings of a speciic size from
a supplier in Japan. However, in 1989, this relationship was “snapped” when the
Indian importer discovered that it could obtain the bearings at a lower price from a
local manufacturer. The Japanese company was left with a large inventory of bear-
ings which it had already manufactured speciically for the Indian importer antici-
pating its continued business.
The Japanese company could not ind any buyers for this particular size of bear-
ing. Thus, in February 1993, the Japanese company contacted the Indian manu-
facturer and offered to sell the remaining inventory, which consisted of 3,579
bearings, for a price of Japanese Yen 826 per piece. The Indian company agreed
to the offer and placed an order on the Japanese manufacturer in April 1993. The
goods were subsequently exported to India in December 1993 and declared to
customs.
Valuation by India customs:
India customs selected the declaration for review due to the large difference between
the declared price and prices of similar imported bearings.
India customs called the importer’s customs broker for an explanation. The bro-
ker contacted the importer who provided documents supporting his claimed price
including the price list showing the normal sales price of the bearings and the letter
offering the “super-discount” price.
The customs oficers were still not satisied with the value of the bearings as
declared by the importer. Customs objection was based on the fact that the declared
price was just 23 percent of the value shown on the price list. This is a discount of 77
percent where the normal discount offered on the price list is only 30 percent.
Customs notiied the importer that it still doubted the value, and gave the importer
an opportunity to respond. Customs reviewed the importer’s submission but deter-
mined to reject the declared value. Customs valued the goods using the fall-back
method at Japanese Yen 2,507. They arrived at the value by taking the list price and
allowing a 30 percent discount.
Administrative appeal:
The importer appealed the case to the Customs Appellate Tribunal. The Tribunal
upheld the customs decision and held that “the specially quoted price was not
acceptable in preference to the ordinary price of the bearings in question as was
mentioned in the vendor’s price list.”
Judicial appeal:
The issue was appealed to the Supreme Court of India. The importer argued that the
merchandise should have been valued under transaction value and customs should
not have used the fall-back method. The importer stated that offering discounts is a
normal incidence in commerce and, given the particular circumstances of the case, a
discount of 77 percent was justiied. According to the importer, the reason given by

the customs for not accepting the actual price paid for the bearings as the true value
for the transaction was erroneous particularly when there was no allegation of fraud
or false valuation.
Judicial decision:
The court observed that there was no allegation that the importer had misdeclared
the price actually paid, or that there had been a misdescription of the goods. No
reason was given by the customs for rejecting the transaction value except the price
list of the vendor. In doing so, the customs not only ignored the value provisions
but also acted on the basis for the vendor’s list price as if a price list is proof of the
transaction value. This was erroneous and can not be a reason by itself to reject the
transaction value. The court observed:
“A discount is a commercially acceptable measure, which may be resorted to by
a vendor for a variety of reasons including stock clearance. A price list is really no
more than a general quotation. It does not preclude discounts on the listed price. In
fact the offered discount was calculated with reference to the price list. Admittedly
in this case a discount up to 30% was allowable in ordinary circumstances [but]
there was the additional factor that the stock in question was old and it was a one
time sale of 5-year old stock.”

Source: adapted from Eicher Tractors Ltd, Haryana v. Commissioner of Customs, Mumbai, (2000) 4
Suppl. S.C.R. 597 (November 14, 2000).

(a) Deriving a “price”

In most transactions, the “price actually paid or payable” for the imported
goods is clear – it is the monetary amount speciied in the invoice or contract
between the buyer and seller.
In other transactions, however, the buyer and seller may not ix a inal
price for the goods prior to the importation. The price term might be left open
because, for example, the goods are contracted for sale long in advance of
delivery, or the seller’s costs cannot be known at the time of contracting, or the
market price of the commodity purchased is volatile, etc.
Nevertheless, the fact that a price is not established prior to importation
does not necessarily preclude the use of transaction value. A transaction value
can exist if the buyer and seller have ixed a formula or method in their agree-
ment by which the price for the goods can be derived.
For example, the buyer might agree to pay a unit price for imported goods
based on the price in effect as of the export date at an international commodity
exchange (such as the London Commodity Market). Or, the buyer might agree
to pay the seller’s costs to manufacture the imported goods plus a speciied
markup. Or, in the speciic case of imported iron ore, the buyer might agree
to pay a price based on the amount of actual iron content found in the ore, on
delivery. In such cases a “price paid or payable” can be found in the parties’
agreement, and transaction value should be used.

Test yo ur k n ow le dg e – ca n tr a n sact ion

va lue b e use d
d??

• PRICING FORMULAE
Q
Question 1: Goods are purchased under a “cost-plus” formula and the costs are not
known at the time of importation. The importer declares the formula to customs
when the goods arrive, but the costs will not be known until sometime after the
importation. How do you assess the value of the shipment? Can transaction value
be used in this case?
• PACKAGE DEALS (one price for several items)
Q
Question 2: A shipment consists of ive different types of goods. They are classii-
able under different tariff categories. The goods were not sold separately but were
purchased for one price. How do you assess the value of the shipment?
• BARTER DEALS
Q
Question 3: The seller ships to the buyer a container of wheat. In exchange, the
buyer ships to the seller a container of fertilizer. How do you assess the value of the
imported wheat shipment?
For the answers, see p. 87.

(b) Direct and indirect payments

Transaction value is the total amount the buyer actually pays for the goods.
All payments the buyer makes to obtain the imported goods must be taken
into account to ind the total price, whether those payments are made in the
past or future, or directly to the seller or to someone else for the beneit of
the seller.

L ega l d efi ni ti o ns
“The price actually paid or payable is the total payment made or to be made by the
buyer to or for the beneit of the seller” (Note to Article 1, Interpretative Notes.)
“The price actually paid or payable includes all payments actually made or to be
made as a condition of sale of the imported goods, by the buyer to the seller, or by
the buyer to a third party to satisfy an obligation of the seller.” (Annex III.7, WTO
Customs Valuation Agreement.)

In many cases, the full payment amount for the goods will be relected in
the invoice that the importer presents to customs with the imported goods.
However, in other cases – and often for legitimate commercial purposes –
the invoice price may not relect all payments made or owed. For example, the
buyer may have already paid some portion of the purchase price before the

goods arrived, or will pay in installments. Other “indirect” payments might

include:
• The buyer agrees to cancel the seller’s debt in exchange for the
goods. This might also involve a payment by the buyer: for
example, the seller agrees to a lowered price for the imported goods
to compensate the buyer for a prior shipment that was delivered
damaged.
• The price may include payments the buyer may make to a third party
to satisfy an obligation of the seller (i.e. a debt).
Any such “indirect” payments the buyer makes to the seller as a condition of
sale of the goods should be taken into account when determining transaction
value.

2.1.2 “… for the goods …”

As just discussed, the “price actually paid or payable” is the total payment a
buyer makes for the goods to or for the beneit of the seller, whether directly
or indirectly, and it includes all payments required as condition of the sale of
the imported goods.
In some transactions, however, the buyer may make payments to the seller
for services or other consideration that are in addition to and apart from the
price “for the goods” themselves, such as payments to the seller for training the
buyer’s employees in use of imported machinery.
Where the buyer’s payments can be shown to be for these kinds of separate,
ancillary services or other consideration provided by the seller, rather than pay-
ments made for, or as a condition of the sale of, the imported goods, they may
be excluded from transaction value.
Note, however, Article 8 of the Agreement lists certain types of pay-
ments that must always be included in the customs value, even if not “for
the goods” per se. See discussion under section 2.2, Required additions to
price, below.
The Interpretative Notes and WTO Valuation Committee decisions have
identiied the following speciic categories of payments that may be excluded
from customs value:

(a) Interest payments

A buyer might purchase the goods on credit from the seller and agree to pay
the seller both the purchase price of the goods plus a inancing charge. Or the
buyer might obtain a loan for the purchase price from a bank or third party and
pay that entity the inance charge.

The inancing charge the buyer pays might be considered interest for use of
money – a loan – rather than payment for the goods themselves. Should such
payments be included in transaction value?
In the early days of the Tokyo Round Valuation Code, there was some dis-
parity among countries in their treatment of interest charges paid by the buyer.
Some countries did not include the inancing charge in customs value if the
charge was separately identiied from the invoice price of the goods or could
be ascertained. Other countries considered the charge, if paid to the seller, to
be part of the price paid or payable for the goods.2 If interest charges were
excluded from customs value, some countries worried that an opening would
be created for the unscrupulous importer to reduce value for duty by overstat-
ing interest charges.3
To resolve these discrepancies and concerns, the GATT Valuation Committee
adopted a decision, proposed by the European Economic Community, to allow
inancing charges paid by the buyer to be excluded from customs value under
the following conditions:

1. the interest payment is distinguished from the price paid or payable

for the goods (for example, the interest charge is set out separately in
the invoice or is billed separately),
2. the inancing arrangement in question is in writing and
3. where required, the buyer can demonstrate:
(a) the imported goods are actually sold at the declared price, and
(b) the interest charge does not exceed the level for such transactions
prevailing in the country where, and at the time when, inancing
was provided.4

The full text of this decision, which was adopted by the WTO Valuation
Committee without change in 1995, can be found in Appendix 3.

(b) Dividend payments

Dividends that a buyer pays to a seller are not included in transaction value. A
dividend is a return on investment in an enterprise, and is not related to a spe-
ciic sale of goods. (See Interpretative Note to Article 1 “Price actually paid
or payable.”)

2
GATT Committee on Customs Valuation, Treatment of Interest for Deferred Payment, Report by the
Technical Committee on Customs Valuation on National Practices, VAL/W/10 (October 7, 1982).
3
GATT Committee on Customs Valuation, Minutes of the Meeting Held on 3 March 1983, VAL/M/6
(April 19, 1983) (paragraphs 28, 33).
4
GATT Committee on Customs Valuation, Decision on the Treatment of Interest Charges in the Customs
Value of Imported Goods, VAL/6/Rev.1 (October 1, 1984).

(c) Payments for post-importation services and costs

A buyer might contract and pay the seller for services performed after import-
ation of the goods, such as construction, erection, assembly, maintenance or
technical assistance. For example, a seller might install imported industrial
plant, machinery or equipment under a “turn-key” type contract. These are
payments for the seller’s services, rather than consideration for the imported
goods themselves; they are therefore not properly part of transaction value.
Of course, to exclude any of these payments from transaction value, they
must be distinguished from the purchase price of the goods; for example, sep-
arately billed or invoiced.
Charges for transport of the goods after importation are likewise excluded
from customs value, as are import duties and other taxes imposed by the country
of importation, if distinguished from the price paid or payable for the goods.5
(See Interpretative Note to Article 1 “Price actually paid or payable.”)

(d) Advertizing and marketing costs

To promote sales of the imported product in his own market, a buyer might
incur costs for marketing studies, advertizing, or market testing. The buyer
might even be required by the seller, under the parties’ sales agreement, to
undertake these kinds of activities at his own cost.

A dver ti zing co st s
An importer enters into a sales agreement with the Squeaky Shoes Company. The
sales agreement requires the buyer to spend a minimum amount on advertizing in
his country. Although this may beneit the seller indirectly, the advertizing costs are
not part of the price actually paid or payable.

Under the Valuation Agreement, the buyer’s expenses related to selling or dis-
tribution of the imported goods are excluded from customs value. When such an
exclusion was irst proposed by the European Communities during the GATT
Tokyo Round Code negotiations, the rationale given was the following:
[W]e have excluded the costs of advertising in the country of importation.
We have done this partly because in many cases the advertising costs are

5
Terms of sale that require the seller to pay the import duty – such as “delivered duty paid” – should be
suficient alone to “distinguish” duties and taxes from the price paid or payable for the goods. In these
cases, since the import duty rate is known (and therefore customs can determine the amount of duty in
the price), and the terms of sale deine the price as inclusive of any duty amounts, the importer should
not be required to claim the deduction or set out the amount separately on the invoice. See Technical
Committee Advisory Opinion 3.1, reprinted in WCO Compendium.

borne either directly or indirectly by the seller and the transaction can
reasonably be viewed as an invisible export, and partly in the interests of
simpliication.6
Although the EC proposal was resisted by some countries (who, in fact,
counter-proposed that the agreement speciically include such costs), in the
end an Interpretative Note to Article 1 was added that generally relects the
European Communities’ view:7
[I]f the buyer undertakes on the buyer’s own account, even though by
agreement with the seller, activities relating to marketing of the imported
goods, the value of these activities is not part of the customs value nor
shall such activities result in rejection of the transaction value.

(e) Software
As a result of a 1984 decision by the GATT Valuation Committee, WTO
Members can choose to apply a unique valuation treatment – different than the
transaction value method – to certain computer programs or data imported on
discs, tape, or other kinds of “carrier medium.”
Under the BDV, the valuation system that was widely used prior to the
GATT Valuation Code, valuation of imported software or data was based only
on the value of the disc or tape that contained the data, plus the cost of record-
ing the information on the disc or tape, plus proit. The value for duty purposes
did not include the value of the software content.8
However, under the Valuation Agreement, transaction value is the price
paid or payable for the imported goods. In the case of imported software on
a disc, the imported goods consist of the software content – the recorded
data or instructions – and the disc or other physical medium on which the
software is recorded. Normally, the cost or value of the medium is trivial
relative to the software content, which is what the buyer is interested in
obtaining. Strictly applied, therefore, the WTO Valuation Agreement would
require customs to value the imported disc inclusive of the software content,
a change that might have dramatic duty impacts from the previous BDV
practice.

6
GATT Multilateral Trade Negotiations Group “Non-Tariff Measures” Sub-Group “Customs Matters,”
Statement Made by the Commission of the European Communities at the Meeting of the Sub-Group of
November 15, 1977, MTN/NTM/W/126 (November 21, 1977).
7
Under the BDV, expenses incurred by the buyer for “inding, establishing and maintaining a market for
the goods in the country of importation” were included in customs value, on the theory that in an open
market sale, these would be normally borne by the supplier. World Customs Organization, The Brussels
Deinition of Value and the GATT Valuation Agreement: A Comparison (1985), 10. The change from
BDV practice may also be a reason an Interpretative Note was considered necessary on this point.
8
GATT Committee on Customs Valuation, Minutes of the Meeting Held on 4–5 May 1982, VAL/M/4
(July 19, 1982).

Soon after the entry into force of the GATT Valuation Code, when the
impact of this change in practice became apparent, proposals were made to
allow the continuation of the BDV valuation treatment of imported software.9
A number of countries, however, opposed the proposals because of the incon-
sistency with the transaction value deinition as well as the negative impact the
proposals might have on revenue from import duty.10
In the end, to reach a consensus on valuation of imported software, the
GATT Parties agreed to allow both practices to continue under the Valuation
Agreement – the transaction value method (valuation includes software con-
tent) and the former BDV method (valuation excludes software content).11
The GATT Decision on the Valuation of Carrier Media Bearing Software
for Data Processing Equipment, which was adopted by WTO Valuation
Committee on May 12, 1995,12 states that it would be consistent with the
Agreement to value the imported software on the basis of either
1. the cost or value of the software content and the carrier medium, or
2. the cost or value of the carrier medium alone, excluding the cost or
value of the software content, provided that this is distinguished from
the cost or the value of the carrier medium.
The scope of this decision is limited. It applies only to data or instructions on
an imported disc or other similar carrier medium. It does not apply to imports
of integrated circuits, semiconductors and similar devices or articles incorpor-
ating such circuits or devices, such as imported calculators, computers or tele-
com equipment, which may contain some software. It does not include “sound,
cinematic or video recordings.” The normal “transaction value” method would
apply to valuation of goods of these kinds.
The decision requires those WTO members that choose to value imported
software on the basis of the cost or value of the carrier medium alone (i.e.
without the value of the software content) to notify the Valuation Committee.
As of April 2008, twenty-ive WTO Member countries have submitted this
notiication.13
9
GATT Committee on Customs Valuation, Possible Amendments to the Agreement: Communication
from the United States Concerning the Valuation of Computer Software, VAL/W/7 (April 23, 1982);
GATT Committee on Customs Valuation, Valuation of Computer Software: Proposal by the United
States, VAL/W/14 (November 4, 1982).
10
GATT Committee on Customs Valuation, Minutes of the Meeting Held on 3 March 1983, VAL/M/6
(April 19, 1983) (paragraphs 19–32); GATT Committee on Customs Valuation, Minutes of the Meeting
Held on 10 May 1983, VAL/M/7 (July 7, 1983) (paragraphs 22–38).
11
See GATT Committee on Customs Valuation, Minutes of the Meeting Held on 10–11 November 1983,
VAL/M/8 (January 18, 1984) (paragraph 66).
12
WTO, Committee on Customs Valuation, Decisions Concerning the Interpretation and Administration
of the Agreement on Implementation of Article VII of the GATT 1994 (Customs Valuation), G/VAL/5
(October 13, 1995).
13
WTO, Committee on Customs Valuation, Information on the Application of the Decisions on the
Treatment of Interest Charges in the Customs Value of Imported Goods and on the Valuation of Carrier

The complete text of this decision can be found in Appendix 3.

(f) Payments for damaged goods/goods not in accordance

with contract
A buyer agrees to pay the foreign manufacturer a price for goods of a speciied
standard or quality. On occasion, the buyer may ind that the imported goods
are damaged, defective, or that they otherwise do not meet the contract speci-
ications. Is there a price “for the goods” as imported, or was the price agreed
only for those goods that meet contract speciications?
If some or all of a consignment is discovered prior to customs clearance
to have been completely destroyed – without commercial value – or lost at
the time of importation, national customs rules often treat the damaged goods
as if they had never arrived – a “non-importation.” In that case, because the
destroyed or lost goods are not imported, the question of their customs value
does not arise.

Me rch an dis e co mp l et e ly wo r th l es s
at tim e o f i mp o r tati o n nat i o na l ru les
(a) Nonperishable merchandise. When a shipment of nonperishable merchandise,
or any portion thereof which shall have been segregated from the remainder of
the shipment under customs supervision at the expense of the importer, is found
by the port director to be entirely without commercial value at the time of import-
ation by reason of damage or deterioration, an allowance in duties on such mer-
chandise on the ground of nonimportation shall be made in the liquidation of the
entry.

US Customs Regulation 19 C.F.R. 158.11 (2007).

On the other hand, where the goods are partially damaged or defective, the
importer may choose to take delivery. If so, is there a price paid or payable for
the imported damaged or defective goods?
A note by the Technical Committee proposes one, common-sense response
to this question:14
• If the imported goods are damaged, they cannot be considered the
same goods as those the buyer agreed to purchase from the seller.
Therefore transaction value – the price paid for the goods sold for
export – cannot be used. The transaction value method must be

Medium Bearing Software for Data Processing Equipment: Note by the Secretariat, G/VAL/W/5/
Rev.19 (April 25, 2008).
14
WCO, Explanatory Note 3.1: Goods Not in Accordance with Contract, in WCO Compendium.

rejected, and the remaining methods of value must be considered

in order.
• The Technical Committee notes that the fall-back valuation method
under Article 7 of the Agreement likely would be used in the major-
ity of these cases. Under that method, customs might consider as
the customs value the renegotiated price between the buyer and
seller, or consider the original price paid or payable paid for the
goods, reduced by the cost of repair, by an insurance settlement, or
the estimate of an independent surveyor.
• If the wrong goods are shipped (the buyer ordered apples; the seller
sent oranges), transaction value cannot be used, for the same reason.
• If the imported goods are not the wrong goods, and are not damaged,
but simply do not comply with contract speciications (such as perform-
ance or other technical speciications), transaction value can be used.
Finally, it must be noted that the question of valuation of damaged goods is
often obviated by alternative customs procedures. In particular, the Kyoto
Convention generally requires the repayment of duty where the goods are found
to be defective or not in accordance with contract and are returned, destroyed
or abandoned within a reasonable time.15

Te st you r k now
n owl le
e dg
d g e – sh
shou
ulldd t thes
hes e paym e
ennts
ts b
bee
i nclu de d in t ra
r a ns ac ti o n val u e ?

1. Under a contract for purchase of electrical equipment, the buyer agrees to pay
the seller to send engineers to inspect the equipment for compliance with spe-
ciications after the equipment has been imported and installed at the buyer’s
factory, as well as to train the buyer’s employees in handling, operation and

15
Kyoto Convention Standard 4.19:
Repayment shall be granted in respect of imported or exported goods which are found to
have been defective or otherwise not in accordance with the agreed speciications at the
time of importation or exportation and are returned either to the supplier or to another
person designated by the supplier, subject to the following conditions:
• the goods have not been worked, repaired or used in the country of importation, and are
re-exported within a reasonable time;
• the goods have not been worked, repaired or used in the country to which they were
exported, and are re-imported within a reasonable time.
Use of the goods shall, however, not hinder the repayment if such use was indispens-
able to discover the defects or other circumstances which caused the re-exportation or
re-importation of the goods.
As an alternative to re-exportation or re-importation, the goods may be abandoned to
the Revenue or destroyed or rendered commercially valueless under Customs control, as
the Customs may decide. Such abandonment or destruction shall not entail any cost to the
Revenue.

maintenance. Should these costs be included in determining the transaction

value of the imported equipment?
2. The buyer agrees to import a minimum 10,000 units of product over a one-
year period, and to pay the seller a “penalty” if he fails to do so. Should this
“penalty” be included in the transaction value of the goods imported by the
buyer?
3. The seller submits two invoices to the buyer: one for the goods, and the other for
a warranty. The warranty guarantees that the seller will repair or replace the goods
if defects are found after importation. Should the invoiced warranty payments be
included in the transaction value of the imported goods? Or, is the warranty pay-
ment forr replacement goods the seller will ship in the future, if ever?
For the answers, see p. 88.

2.1.3 “… when sold for export …”

Transaction value requires a sale, and the sale must be one for export to the coun-
try of importation. In most cases, it is not dificult to identify the sale for export.

Sal e fo r e x p or t
Company A in Korea sells and delivers its washing machines to Company B in
Kenya. This is the sale for export, and the price Company B agrees to pay is the basis
for the customs value of the merchandise.
Company B may intend to re-sell the machines to its customers in Kenya. These
subsequent sales do not affect the customs value because they are not sales for export
which triggered the export of the goods from Korea. The sale from Company B to its
Kenyan customers is a domestic sale.

Transaction value does not require that the sale take place in the country of
exportation. The seller can be located in any country – even the same country
as the buyer. What is required is that the sale involve an international transfer
of goods. Thus, the seller may ship the goods to the country of importation
from a third country or from no country at all (i.e. a ishing vessel on the high
seas, or an oil rig outside territorial waters)!

qu
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Here are two real cases where the sale for export may not be so obvious. How would
you decide these cases?
“Successive sales”
An importer places an order for goods with a foreign middleman. The middleman
in turn contracts with a foreign factory to ill the order and to ship the goods direct
to the importer.

Which sale may be considered the sale for export? Is it the sale between the
importer and the middleman? Or is it the sale between the middleman and the
foreign factory? Or can both sales be considered “sale[s] for export”?
The tourist trader
Here, the importer – who may be a tourist or a “shuttle trader” – travels to another
country, where he anonymously purchases and takes delivery of goods on the foreign
market (a used car, for example). He then returns home with the goods, or perhaps
he has them shipped to himself.
Is the importer’s purchase of the goods in the foreign market a “sale for export”?
Or was that foreign purchase a purely domestic sale, and not proper basis for trans-
action value?
For the answers, see p. 88.

If transaction value must be based on the price paid or payable “when sold for
export,” will the customs value be affected if the buyer and seller renegotiate
the price after the goods are exported? For example:
• to compensate for failure to ship the goods to the buyer by the date
speciied in the sales contract, the seller rebates a portion of the pur-
chase price to buyer;
• the goods are found on importation not to conform to contract specii-
cations, so the seller reduces the price charged to the buyer;
• the seller reduces the price for the imported goods because the buyer
subsequently made large purchases of the same goods (a “retroactive
volume discount”).
Generally, the price paid or payable for the goods “when sold for export” estab-
lishes the transaction value of the goods; therefore, a renegotiation of that price
subsequent to exportation would not be taken into account. But it is important to
distinguish a post-exportation renegotiation from a price determined after export-
ation by means of a previously agreed price formula. For example, if the buyer
and seller included in their contract a means to calculate price based upon date of
actual delivery (e.g. “the contract price shall be reduced for every week of delay
by an amount equal to 0.5 percent of the total value of the goods whose delivery
has been delayed …”), that price formula might be used to derive a transaction
value, as we have seen in our discussion of “deriving a price” above.

2.1.4 “… adjusted in accordance with the

provisions of Article 8”

Normally the full transaction value of the goods is relected in the seller’s
invoice, which the importer is usually required by national legislation to pre-
sent to Customs.

Why A rt ic le 8 ? ( i n t he wor d s o f th e n eg ot iato rs )

“We start in Article 1 by stating that the price paid or payable for the imported goods
shall be accepted as the basis for determining the customs value provided that the
buyer and seller are not related. Here we make an assumption that if the buyer and
seller are not related then the price made between them is one which is determined
by the market forces and is an acceptable one for valuation purposes. We recognize,
of course, that buyers and sellers may be tempted to arrange the transaction
so that the price itself relects only a small element of the value of the goods
and that the remainder is transferred between them by some indirect method.
We have, therefore, provided, in [Article 8 of the Agreement] of our draft, for
certain additions to be made to the price paid or payable if these have not been
included in the basic price. But the basic concept is that provided the price paid or
payable fully relects everything which the buyer has to pay to get the goods then
that is accepted as the basis for the customs value.”

Statement made by the Commission of the European Communities (MTN/NTM/W/126 (November

21, 1977)).

In more complex transactions, however, the invoice price may not include
all payments the buyer made or costs he incurred to acquire the goods. For
example, the invoice may not disclose that the buyer is required to pay a roy-
alty to a third party in order to import goods manufactured under a patent, or
that the buyer supplied the seller with free manufacturing inputs or services
needed for production, or that the buyer will make additional payments to the
seller when he resells the goods after importation.
Article 8 of the Agreement is designed to ensure that certain speciic kinds
of costs of producing and delivering the imported goods to a buyer are relected
in customs value, regardless of how the parties may have structured their par-
ticular transaction.

2.2 REQUIRED ADDITIONS TO PRICE

2.2.1 General considerations

Article 8 lays out speciic rules to deine the kinds of additional payments and
costs that must be included in transaction value, and under what conditions
(see Figure 5 for an example).
Each Article 8 adjustment has its own peculiarities which customs and
traders should understand, and which are discussed below. There are, however,
two restrictions that apply to Article 8 generally.
First, and perhaps obviously, customs should not add an amount to the
invoice price (and charge duty again) if the seller already included the charge
for the Article 8 element in the price of the goods. For example, a seller may

SR MEMORY CARD PRODUCTION INC. INVOICE

555 Forget -Me-Not Road
Geneva, Switzerland
Phone 555-777-555 Fax 555-777-557 INVOICE #MMMC55553
DATE: MAY 12, 2007
To: SHIP To:
WTO Workshop Inc. Same Address
First Street
Geneva, Switzerland

COMMENTS OR SPECIAL INSTRUCTIONS:

How to Calculate Transaction Value – ARTICLE 8 ADDITIONS TO PRICE

UNIT
QUANTITY DESCRIPTION TOTAL
PRICE
PRICE PAID OR PAYABLE ⫻ ⫻⫻,⫻⫻
Plus
COMMISSIONS AND BROKERAGE,
+ OTHER THAN BUYING ⫻ ⫻⫻,⫻⫻
COMMISSIONS
COST OF CONTAINERS IN WHICH
+ THE IMPORTED GOODS ARE ⫻ ⫻⫻,⫻⫻
SHIPPED
+ COST OR VALUE OF ANY “ASSISTS” ⫻ ⫻⫻,⫻⫻
+ ROYALTIES AND LICENSE FEES ⫻ ⫻⫻,⫻⫻
+ VALUE OF ANY “PROCEEDS” ⫻ ⫻⫻,⫻⫻
COST OF INTERNATIONAL
+ TRANSPORT OF IMPORTED GOODS ⫻ ⫻⫻,⫻⫻
(IF MEMBER COUNTRY CHOOSES)
minus
– POST IMPORTATION CHARGES ⫻ ⫻⫻,⫻⫻

= TRANSACTION
Total
VALUE

Thank you for your business!

Figure 5 Article 8 assists

have bundled into one sales invoice amount both the commission owed to his
agent and the price of the imported goods themselves. Whether the declared
price includes the Article 8 element or not is largely a problem of proof: if
customs has doubts, the importer may be required to demonstrate that the sale
price was inclusive of these charges.
Second, any addition to price under Article 8 must be based on “objective
and quantiiable data.”

Article 8(3)
3. Additions to the price actually paid or payable shall be made under
this Article only on the basis of objective and quantiiable data.
If customs is not able to obtain suficient information to quantify these costs
accurately, whether from the importer or otherwise, then the adjustment cannot
be made. In that case, transaction value cannot be used, and the next method of
valuation must be considered.
The Interpretative Note to Article 8(3) provides one example where it
may not be possible to establish accurately the value of an Article 8 element:
[A] royalty is paid on the basis of the price in a sale in the importing
country of a litre of a particular product that was imported by the kilo-
gram and made up into a solution after importation. If the royalty is
based partially on the imported goods and partially on other factors
which have nothing to do with the imported goods (such as when the
imported goods are mixed with domestic ingredients and are no longer
separately identiiable, or when the royalty cannot be distinguished
from special inancial arrangements between the buyer and the seller),
it would be inappropriate to attempt to make an addition for the royalty.
However, if the amount of this royalty is based only on the imported
goods and can be readily quantiied, an addition to the price actually
paid or payable can be made.
The Article 8 condition that adjustments be made only “on the basis of
objective and quantiiable data” can also be read as a limitation on customs
discretion. That is, if the importer provides documentation that establishes
the amount he actually paid for packing, for example, that number should be
used, regardless of how much customs may think the packing is worth.

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What happens if the buyer makes a royalty payment to the seller, but is unable to tell
customs the amount of the royalty payment?
Example: Buyer agrees to pay “the usual royalty” but customs has no infor-
mation about how much a “usual” royalty is for that industry, or how it might be
calculated.
Should customs make an estimate of the royalty to calculate customs value?
For the answers, see p. 90.

2.2.2 Commissions and Brokerage

Article 8(1)(a)(i)
1. In determining the customs value under the provisions of Article 1, there
shall be added to the price actually paid or payable for the imported goods:
(a) the following, to the extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the goods:
(i) commissions and brokerage, except buying commissions;

International sales transactions can involve one or more intermediaries who

assist the buyer or seller in the purchase of the goods. These intermediar-
ies – known variously as “agents,” “middlemen,” or “brokers” – can provide
any number of services to the buyer or seller to facilitate sales, such as con-
tacting customers, marketing products, or supporting sales negotiations.

(a) Buyer’s agent – typical duties

• inds goods for the buyer
• communicates buyer’s needs to the seller
• obtains samples of the goods for the buyer to inspect
• inspects goods/factory to ensure production quality
• assists buyer in negotiating best price
• assists buyer in arranging transport of goods
• consolidates shipments from different sellers
• prepares invoices for all goods purchased

(b) Seller’s agent – typical duties

• looks for customers for seller
• solicits and transmits orders to potential buyers for seller
• keeps and shows samples of seller’s goods
• arranges transport, insurance, storage of goods for seller
• assists seller prepare export documents
• assists seller prepare export invoices
As a general rule, if the buyer pays a commission or brokerage fee to an inter-
mediary in connection with the purchase of the imported goods, that amount
must be added to the price of the goods. There is, however, an important excep-
tion to this rule: the fee or buying commission that a buyer pays to his own
agent to assist in the sale is excluded.
Why should the Agreement exclude buying commissions from customs
value? When the buyer pays a fee to the seller’s agent, it might be thought
of as a kind of indirect payment to the seller: by making the payment, the

buyer relieves the seller of a debt that the seller would otherwise have to
pay. For that reason, the buyer’s payment of selling commissions is consid-
ered part of the transaction value of the imported goods. On the other hand,
when the buyer pays his own agent (or concludes the sale entirely “in-house,”
through his own employees), the seller receives no direct or indirect monet-
ary beneit.
A second rationale that has been offered is that the exclusion of buying
commissions from dutiable value serves to equalize costs between small or
medium-size companies and larger enterprises. That is, a larger trader may
have the resources to establish its own ofice in exporting countries for pur-
chasing purposes, whereas a small company may be required to employ a
local buying agent. By excluding buying commissions paid to such agents, the
Agreement does not penalize the smaller enterprise for that choice of business
operation.16
How to distinguish a buyer’s agent from a seller’s agent? Whether the agent
is one or the other may not be apparent from import documentation. Often it
will require examination of the actual role the intermediary played in the trans-
action. In order to prove the agent’s role in a transaction, customs administra-
tions may require the importer to present the contract or agency agreement
between the buyer and his representative which spells out the functions and
responsibility of the agent.

Sig ns you a r e NOT t h e buy er ’ s age nt

1. The buyer does not control your activities
2. You are related to the seller (typically, a company related to the seller would be
acting as the seller’s agent)
3. You take title and bear risk of loss to the imported goods (you may be an inde-
pendent buyer/re-seller, rather than anyone’s agent)
4. You don’t need approval from the buyer to conclude a sales contract with the
seller (you are probably an independent buyer/re-seller)
5. You invoice the seller for your commission (you are probably a seller’s agent)

A buyer’s agent acts on behalf of and primarily for the beneit of the buyer rather
than the seller or independently, on his own behalf. Thus, the Interpretative
Note to Article 8 deines a buying commission as “fees paid by an importer to
the importer’s agent for the service of representing the importer abroad in the

16
WTO, Committee on Customs Valuation, Minutes of the Meeting of 27 March 2002, at 18, G/VAL/
M/26 (May 21, 2002) (Statement of Japan). The US representative observed that, in her country’s
experience, approximately 90 percent of cases involving buying agents pertained to textile exports,
and the vast majority of these exporters were small and medium size enterprises. Ibid.

purchase of the goods being valued.” The main factor distinguishing a buying
agent is the right of the buyer to control the activities of the agent, particularly
in the negotiation and purchasing process.
Finally, the Agreement provides that the addition for the commission
paid to the seller’s agent should be included in the transaction value only
“to the extent incurred by the buyer.” In other words, a commission paid
to the seller’s agent is included in the transaction value only if the buyer
makes that payment. It may happen that, for example, a seller agrees to
cover part or all of that cost (which might otherwise be shifted to the buyer)
in order to make the sale. In such cases, if the buyer does not reimburse
the seller for the payment, that amount should not be included in customs
value.

2.2.3 Containers and packing

Article 8(1)(a)(ii) and (iii)

1. In determining the customs value under the provisions of Article 1, there
shall be added to the price actually paid or payable for the imported goods:
(a) the following, to the extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the goods: …
(ii) the cost of containers which are treated as being one for customs pur-
poses with the goods in question;
(iii) the cost of packing whether for labour or materials;

Normally, the cost of packaging is included in the invoice price for imported
goods, just as when you buy goods at the market you pay one price for the
goods, as packaged. It is possible, however, that a seller might separately
invoice the buyer for the costs of containers in which the imported goods are
shipped, or for the costs of packing the goods.
Article 8 requires an addition to the declared price of any cost incurred by
the buyer for “containers which are treated as being one for customs purposes
with the goods in question,” as well as “the cost of packing the goods, whether
for labour or for materials” (see Figure 6).
The customs treatment of containers mentioned in Article 8 is a rule of tariff
classiication that is found in another international instrument, the Harmonized
Commodity Description and Coding System. The Harmonized System pro-
vides that normal, non-reusable packaging should be classiied under the same
tariff category as the imported goods they contain.

COSTS of PACKING

Materials Labor

• bags • sealing boxes

• blister packs • vacuum packing
• boxes – retail and export • put on racks
• crates • environmental
conditioning
• pallets
• bubble wrap
• straw
• Styrofoam chips

Figure 6 Packing costs

HARMONIZED SYSTEM CONTAINER

CLASSIFICATION RULE
“In addition to the foregoing provisions, the following Rules shall apply in
respect of the goods referred to therein:
… packing materials and packing containers presented with the goods therein
shall be classiied with the goods if they are of a kind normally used for packing
such goods. However, this provision is not binding when such packing materials
or packing containers are clearly suitable for repetitive use.”
Source: General Rules for the Interpretation of the Harmonized System (GRI)
5(b).

Thus, if Harmonized System rules require packaging to be classiied under the

same tariff provision as the goods, then any separate payment the buyer makes
for the cost of the packaging should be added to the price of the goods to obtain
the customs value. Conversely, if the container is one of the reusable types that
is required to be separately classiied (reusable metal cylinders for transporting
gas, for example), its cost is not added to the price of the goods (but it may be
subject to valuation and duty assessment in its own right, depending upon the
rules of the particular country).
Of course, if the cost of containers or packing is already included in the
price, or the buyer did not incur this cost, it is not to be added, for the reasons
previously discussed.

2.2.4 Assists

Article 8(1)(b)
1. In determining the customs value under the provisions of Article 1, there
shall be added to the price actually paid or payable for the imported goods:
…
(b) the value, apportioned as appropriate, of the following goods and services
where supplied directly or indirectly by the buyer free of charge or at
reduced cost for use in connection with the production and sale for export
of the imported goods, to the extent that such value has not been included
in the price actually paid or payable:
(i) materials, components, parts and similar items incorporated in the
imported goods;
(ii) tools, dies, moulds and similar items used in the production of the
imported goods;
(iii) materials consumed in the production of the imported goods;
(iv) engineering, development, artwork, design work, and plans and
sketches undertaken elsewhere than in the country of importation and
necessary for the production of the imported goods;

(a) General principles

Where a seller receives free-of-charge the materials, tools or “know-how” that
he requires to produce exported goods, the seller will naturally be in a position
to accept a lower price (and pay a lower duty) for the inished product than if
he had to purchase or produce these inputs himself.
Article 8 of the Agreement thus provides that if the buyer has provided
certain production inputs – generally known in customs parlance as “assists” –
free or at a reduced cost, then the value of the assist should be factored into
customs value.
There can be any number of legitimate business reasons why a buyer would
provide these assists free to the seller:
• Example: The buyer supplies the foreign manufacturer with parts
or components to ensure that the inished product meets the buyer’s
quality standards.
• Example: The buyer provides the foreign manufacturer with parts or
components, as he is able to acquire these parts/components on better
terms.
• Example: The buyer supplies the foreign manufacturer with the design
that he wants the manufacturer to use in producing dresses or other
clothing items.

• Example: The buyer supplies the foreign manufacturer with a propri-

etary item (a computer chip, for example) that is incorporated in the
inished product (a computer).
Assists might be thought of as a kind of indirect payment which a buyer
makes to a seller. That is, a buyer might supply the seller with the tools, dies,
designs, etc. required to manufacture the imported goods, or he could pay
the seller separately to acquire these production inputs. In either case, the
buyer relieves the seller of a cost or debt the seller would otherwise incur
in order to produce the imported goods. For that reason, the Agreement
requires the cost or value of these production inputs to be included in trans-
action value.
Generally, two questions must be answered when dealing with an import
involving assists:
1. whether a service or product that the buyer provides a manufacturer
falls within one of the Article 8 assist categories and, if so,
2. what amount should be added to the invoice price to account for the
assist; in other words, what is the cost or value of the assist?

(b) Assists – categories and conditions

(i) The four assist categories
Article 8 deines four categories of assists. These are:
1. Materials, components, parts and similar items incorporated in the
imported goods.
For example, raw materials (fabric, metal or plastic sheet, chemicals,
etc.), parts and components (fasteners, electrical components, auto-
mobile subassemblies, etc.) or semi-inished articles that a producer
might require for manufacture of imported goods.
2. Tools, dies, molds and similar items used in production of the imported
goods.
All variety of hand and power tools, and production machinery sup-
plied by the buyer would fall under this category.
3. Merchandise consumed in the production of imported goods.
Various products or materials that are used in production but would
not necessarily be identiiable in the inal product (in contrast to parts/
components), such as chemical catalysts, fuels, lubricants or Freon
used in manufacture of semiconductors.
4. Engineering, research, development, design work, and plans and
sketches undertaken elsewhere than in the country of importation and
necessary for the production of the imported goods.

This covers certain types of “know-how” a buyer may provide a seller

in order to produce the imported goods. It includes speciications for
manufacture, product design and testing, construction of product pro-
totypes and models, artwork, blueprints, schematics and other draw-
ings that are used in the production process.
What is NOT covered by this provision are costs of basic research
that a buyer may supply to the seller. The GATT negotiators speciic-
ally intended to distinguish “research” from “development” activity,
by excluding the costs of the former but including the costs of the
latter in customs value.17 As recounted by the GATT Secretariat:
The secretariat has also consulted those present during the negotiation
of the Agreement to discover what more can be said about the intentions
of the drafters in regard to this provision … [R]esearch was considered
by the negotiators in some detail and the decision to exclude it from the
list of adjustments contained in Article 8.1(b)(iv) was a deliberate one,
based on the following considerations: (a) it is virtually impossible to
apportion research costs to speciic imported goods; and (b) research
costs are generally charged to the accounting period in which incurred
as a general overhead, that is, a general expense, and not the time in
which the actual manufacturing of the good may be taking place. These
considerations only arose where research costs have not been included
in the price actually paid or payable and when considering whether, in
certain circumstances, such costs should be added to the price actually
paid or payable as one of the adjustments permissible in order to deter-
mine the customs value of a good under the transaction value method.
Of course, where research costs, as one element in the general costs of
production of a good, are already included in the price actually paid or
payable, research will form part of the customs value under the trans-
action value method.18
WTO Members agreed that the cost or value of development, engineering, art-
work, etc. could be excluded from the customs value if the work is undertaken
in the country of importation. This distinguishes this assist from all others
(where geographic origin is not important).

17
Under accounting deinitions, “research” is “[o]riginal and planned investigation undertaken with
the prospect of gaining new scientiic or technical knowledge or understanding,” while “devel-
opment” is the “[a]pplication of research indings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or
services prior to the commencement of commercial production or use.” International Accounting
Standard (IAS) No. 38.
18
Committee on Customs Valuation, The Term “Development” in Article 8.1(b) (iv) of the Agreement
on Implementation of Article VII: Note by the Secretariat, VAL/W/24/Rev.1 (January 10, 1985). On
the basis of that negotiation history, the GATT Valuation Committee issued decision 5.1, relecting the
GATT parties’ understanding that the term “development” excludes “research.”

Why sh ou ld c o s ts o f en g i ne er i n g an d d es ig n b e
exc lud ed f ro m c ust o m s val u e i f und er tak en in the
cou ntry o f i mp o r tat i o n?
It may seem strange that the Agreement requires customs value to include the cost
or value of production inputs (tools, parts and components or other materials) that
an importer provides to the foreign manufacturer, but excludes any engineering and
design work the importer undertakes in his own country. Both are costs of produc-
tion of the imported product, and would seem to be equally essential.
One reason relates to national tariff policy. Customs tariff rules in a number of
WTO Member countries exempt from customs duties the cost or value of national-
origin materials incorporated in the imported product. To incentivize the develop-
ment of domestic technical service industries, WTO Members may have wished
to provide equivalent tariff treatment to national-origin design and engineering by
exempting the cost or value of such services from customs value of the import.*

* See WTO Committee on Customs Valuation, Minutes of the Meeting of 27 March 2002, G/VAL/
M/26 (paragraph 1.24ff), where the economic rationale for this exclusion is the subject of extended
discussion.

(ii) Conditions for additions to price

Assuming that the buyer has provided the foreign manufacturer with one of
these four kinds of production inputs, the cost or value of the assist must be
added only if:
1. It is not already included in the price paid or payable.
Of course, if the importer has already included the cost or value in the
price declared to customs, no addition is made.
2. The buyer supplied the assist free of charge or at a reduced cost.
If supplied at a reduced cost, an addition will be made only to the
extent of the reduction. For example, if the buyer sells a tool or mold
to the foreign manufacturer at a discount ($500 instead of $1,000)
because, for example, the seller may use the tool for other purposes,
then the “assist” is in the amount of the discount ($500).
3. The assist was supplied directly or indirectly by the buyer.
Example: An Italian buyer directs its subsidiary located in Canada to
supply the screws and bolts to the US manufacturer to use in produ-
cing the tractors shipped to Italy. This assist is supplied indirectly by
the buyer.
4. The goods or services must be for use in connection with the produc-
tion and sale for export of the imported goods.
Thus, the cost or value of general purpose plant and ofice equipment
not used for production should not be included in transaction value
(e.g. heating and air conditioning, ofice machines – such as type-
writers, calculators, photocopiers – fork-lift trucks and conveyors).

Similarly, the cost or value of post-importation technical services or

market research, or other such studies for purposes of a price quota-
tion, which are not necessary to produce the imported good, are not to
be added to the price.
The four assist categories are exclusive. That is, the cost or value of any other
kind of goods or services that an importer may supply to a foreign seller is
NOT to be added to the invoice price (unless, of course, it meets the require-
ments of some other Article 8 category).
Example: An importer supplies building materials to the foreign producer
to enable him to build administrative ofices. Since the building materials are
not used to produce exported goods, they do not fall within the Agreement’s
deinition of any of the four assist categories. Therefore, the cost or value of the
building materials should not be included in the transaction value of the goods
the manufacturer sells the importer.

(c) Assists – valuation and apportionment

Once it has been determined that the buyer supplied an assist to the manufac-
turer, an amount must be added to the price of the goods to relect the assist’s
value. This often involves two aspects: (i) assigning the correct monetary value
to the assist, and (ii) apportioning that value to the products the manufacturer
made using the assist.

(i) Valuing the assist

Assigning the correct value to an assist depends entirely on how it was acquired
by the importer:
• If the assist is acquired from a seller not related to the importer, then
the value of the assist is the cost of acquisition (i.e. the sale price).
• If the assist was produced by the importer or someone related to him or,
if purchased from a related source, its value is the cost to produce it.
The value of an assist, whether based on acquisition cost or cost of production,
should also include transport costs to the place where the exported goods are
manufactured as well as any duties and taxes that are not refunded.
This is broad guidance, and does not deal with many FAQs, such as …
Q. What if the buyer provided the manufacturer with equipment that the
buyer had previously used in other operations?
A. If the importer sends used tools, dies or molds to the seller for use in manu-
facture, then the value of the equipment is original cost of acquisition or
production, adjusted downward to relect the use.
Q. What if the buyer rented the equipment he supplied to the
manufacturer?

A. The value of the assist is the cost of the lease or rental.

Q. What if the buyer repaired or customized a tool before sending it free
to the manufacturer?
A. If assist has been repaired or modiied, value should relect the cost of
repairs or modiications
Q. What if the buyer simply copied the design drawings from a publicly
available source?
A. If the design documents are in the public domain, their value is only the cost
to obtain copies.
Q. What if the buyer supplied design work to the seller, but some of
the design work was done in the country of importation, and some
outside?
A. In cases where production of the element in question involves a number
of countries over a period of time, the adjustment should be limited to the
value actually added to that element outside the country of importation.

(ii) Apportionment
The tools, equipment or other assists supplied by the buyer will often be used
by the manufacturer to produce hundreds or more units of the imported prod-
uct. The manufacturer may deliver some portion to the buyer in later ship-
ments, keep and sell other units in his own market, or ship still other units to
customers in other countries.
This presents the issue of “apportionment.” The value of the assist must
be allocated in a reasonable way over the manufacturer’s entire production. A
“reasonable” allocation might include:
• allocate the full cost of the assist to the irst shipment imported
• allocate the full cost of the assist over quantity of units produced up
to irst shipment
• allocate the full cost of the assist over the anticipated production.
Generally, the method of allocation will be that requested by the
importer, provided that:
• the method of apportionment is in accordance with generally
accepted accounting principles (GAAP) and
• the importer can produce documentary evidence (if necessary) to
justify the method.

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asssis
isttss
An Italian importer sends the US manufacturer special tools required for manufac-
ture of sports cars. The Italian importer purchased the tools from a specialty shop in
Italy for $1,000 and delivered them free of charge to the US manufacturer. The tools
have a useful life of forty cars.

The US manufacturer uses the tools to produce forty cars. He intends to ship
twenty cars to Italy, and twenty to Canada, to the Italian company’s subsidiary.
The irst consignment (ive cars) arrives in Italy. What should the importer declare
to Italian customs authorities as the customs value?
For the answers, see p. 91.

(d) Royalties and license fees

Article 8(1)(c)
1. In determining the customs value under the provisions of Article 1, there shall
be added to the price actually paid or payable for the imported goods:
…
(c) royalties and licence fees related to the goods being valued that the buyer
must pay, either directly or indirectly, as a condition of sale of the goods
being valued, to the extent that such royalties and fees are not included in
the price actually paid or payable;

Article 8 requires “royalties and license fees” that are paid by the buyer as
a condition of the sale of the imported goods to be included in transaction
value.
The phrase “royalties and license fees” usually describes the compensation
that is paid for rights to use some form of intellectual property, such as patents,
trade secrets, trademarks, or copyrights.19 Royalties or license fees may also
be paid for rights to other intangible assets, such as franchise or exclusive
marketing rights. Often, the amount of a royalty or license fee is calculated on
the basis of the number of patented (or trademarked or copyrighted) units that
the licensee manufactures, sells or uses, or on the percentage of the proits the
licensee realizes in the sales. These fees might also be calculated as ixed pay-
ments per unit of time.
More information about intellectual property rights generally can be found
at the Intellectual Property gateway page on the WTO website (www.wto.org/
english/tratop_e/trips_e/trips_e.htm).
A customs valuation issue arises when these royalties or licensee fees are
paid in connection with an import transaction. For example, a buyer may pay
a fee for the exclusive rights to sell the imported goods within a particular
geographical area and/or to use the seller’s trademark on the imported goods.
Or, a buyer may pay a royalty for rights to use an invention imported from the

19
An Interpretative Note to Article 8 thus states: “royalties and license fees referred to in paragraph
1(c) of Article 8 may include, among other things, payments in respect to patents, trade marks and
copyrights.”

seller. A more challenging, but not uncommon, example is when a buyer pays a
license fee for patents and know-how required to manufacture and sell inished
goods using, in part or in whole, raw materials or components imported from
the licencor.

IP li cen cing ar r an g e me n ts
Patent license: A pharmaceutical company may licence a foreign company to prod-
uce medicines under a patented process for sale in that foreign market. In return, the
foreign company agrees to pay a royalty or fee of 3 percent of proits on sales.
Trademark license: The same pharmaceutical company may authorize the foreign
company to sell the medicine under the well-known trademark of the pharmaceut-
ical company, in return for an additional royalty payment.
Copyright license: An owner of a book or record or ilm may authorize a foreign
company to copy and sell in that foreign market the book, record or ilm.

Under the Annex III.6 deinition of transaction value, “all payments actually
made or to be made as a condition of sale of the imported goods by the buyer
to seller, or by the buyer to a third party to satisfy an obligation of the seller”
are to be considered part of the price of the goods. Thus, the customs valu-
ation problem presented by royalties or license fees is whether they are in
fact part of the consideration the buyer pays for the goods themselves, as
opposed to bona-ide rights apart from and in addition to ownership of the
imported goods.
To settle these questions, Article 8 sets out three separate conditions that
must be met before a separate royalty or license fee paid by the buyer is added
to customs value:

(i) Condition 1: the payment must be “related to

the goods being valued”
The royalty or license fee must be related to the imported goods.
If the imported goods are themselves the subject of the license, then the pay-
ment is clearly “related to the goods being valued.” For example, a royalty is
“related to the goods being valued” if the imported goods themselves bear the
licenced trademark or are manufactured using a licenced patent or know-how.
The more dificult questions can arise when the imported goods are subject
to further manufacture, assembly or mixing in the importing country, and the
payment is due on the sale of the inished product.
For example, a royalty may be paid on the number of units of medicine tab-
lets produced or sold in the importing country using a patented active ingredient
imported from the licencor. In such cases, a close examination of the licencing
and sales agreements is required to determine the relationship between the roy-
alty and the imported goods. It may be that, where the processing operations

change the identity of the imported goods, the royalty paid on the inished
product can no longer fairly be said to “relate to the goods under valuation” but
to a new and different product.

I s t he roya lt y r e lat ed to t h e g oo ds
u nde r val uat i o n ?
YES NO
Buyer pays seller a royalty for each In an audit, customs inds that the
box of juice he produces in the buyer paid the seller a royalty for
importing country. The juice is made know-how required to manufacture
by simply diluting with ordinary automobile engines in the country
water a patented concentrate the of importation using domestic and
buyer imported from the seller. imported parts. Customs is considering
whether this royalty should be added to
value of hoses imported from the seller
for use in the production of the cars.

CONCLUSION: Royalty IS related CONCLUSION: Royalty is NOT

to the imported concentrate. related to the imported parts and
materials, but to the inished goods
made in the importing country.

See WCO Advisory Opinion 4.4. US Customs Ruling 547761 (March 14, 2002).

An Interpretative Note identiies one kind of payment that is not added to

transaction value: “charges for the right to reproduce the imported goods in
the country of importation shall not be added.” This may apply to cases where
the importer is charged for rights to duplicate the original – such as copies of
an imported master audio or video tape – as well as rights to reproduce the
concept or idea of the original in other goods, such as the use of an imported
prototype in domestic production of goods.20 In these kinds of cases, it might

20
This is the interpretation of the US customs administration, for example:
[t]he right to reproduce denotes that an idea or an original work is incorporated in, or
relected by, the imported merchandise, and the right is reserved to reproduce that idea or
work in other merchandise by using the imported merchandise. The concept of the right
to reproduce relates only to the following classes of merchandise: originals or copies of
artistic or scientiic works; originals or copies of models and industrial drawings; model
machines and prototypes; and plant and animal species.
19 Code of Federal Regulations Sec. 152.103(h) (2009). The WCO Technical Committee’s Commentary
19.1 is to similar effect.

be said that such payments are not for the imported goods but for other goods
(the goods “reproduced” from the imported original).

(ii) Condition 2: the buyer must pay, directly or indirectly, as a

condition of sale
The question that must be answered here is: could the buyer purchase the
imported goods without paying the royalty? If not, the royalty amount is paid
for the goods, and must be added to the price.
The terms of the sales and licencing agreements may answer this ques-
tion directly by, for example, explicitly providing that the failure to pay the
royalty shall terminate the seller’s obligation to deliver the goods. More
likely, however, the contract terms will not be dispositive, and an examin-
ation of all the facts and circumstances surrounding the transaction will be
required to determine whether the sale of goods is dependent on payment of
the royalty.
The answer to the question may turn on the type of intellectual property
rights involved, as well as whether the payment is made to the seller or to a
third party. For example, if the royalty is paid for rights to a patent necessary
to manufacture the imported goods, it is likely a condition of sale, because the
goods could not be produced and exported to the buyer if the patent fee is not
paid.
On the other hand, payments made for rights related to the marketing or dis-
tribution of goods after importation might be excluded from the customs value.
This is suggested by the Interpretative Note to Article 8(1)(c):
[p]ayments made by the buyer for the right to distribute or resell the
imported goods shall not be added to the price actually paid or pay-
able for the imported goods if such payments are not a condition
of the sale for export to the country of importation of the imported
goods.
In this scenario, the buyer may pay a fee for the right to be the exclusive dis-
tributor of the goods within a particular territory. Or, the buyer may pay for
the right to use a trademark in connection with the resale of the goods in the
importing country.
Because the fee or royalty is related to rights of resale of the goods after
importation, the buyer may be able to import the goods from the seller with-
out paying the royalty. As always, this conclusion depends on the facts of
the particular case. If the licencor is an unrelated third party it is more likely
the payment is not a condition of sale. If the licencor is the seller or related
to the seller, it is more likely that there is a dependency between the royalty
payment and transfer of the goods. In such cases, the licencor may be in a
position to prevent the sale if the buyer fails to make the payment.

(iii) Condition 3: the payment is not already included in the price

actually paid or payable
This condition simply repeats the general conditions applicable to all Article
8 adjustments. Simply stated, the same payment should not be counted twice
in customs value.

n owl
Te st you r k now lee dg
d g e – royalt
roya ltii es and
an d lic
lice ns e fees
ens
1. A UK company grants a US company an exclusive license to manufacture,
use and sell its patented automobile switchgears. In return, the US company
agrees to pay a royalty equal to 50 percent of the net revenue it earns from
sales of the switchgears it manufactures and sells in the United States. To aid
the US company in manufacture, the UK company provides technical infor-
mation and instructions, as well as models or prototypes of the automobile
switchgears.
Upon importation of these prototypes into the United States, the importer
claims that the price paid or payable should nott include the royalty payment. Is
he right?
2. A US company manufactures medicines under a patent license from a Canadian
research company. The US company sells the inished medicines to a company
in Italy. The sale price does not include a royalty, but the US company requires
the Italian company to pay the fee directly to the Canadian research company,
the patent owner. Upon importation of the medicines into Italy, should customs
add the royalty fee to the sale price?
3. An Italian irm buys a set of phonograph records of a musical performance
from a US manufacturer. The recording is of a Canadian musician. When the
Italian irm resells the records in Italy, Italian law requires payment of a roy-
alty of 3 percent of the sale price to the Canadian musician. The payment
does not accrue to the manufacturer directly or indirectly, nor does the US
manufacturer make the payment a condition of the export sale. Should cus-
toms add the royalty payment to the price the Italian irm paid for the imported
records?
For the answers, see p. 91.

2.2.5 Proceeds

Article 8(1)(d)
1. In determining the customs value under the provisions of Article 1, there shall
be added to the price actually paid or payable for the imported goods:
…
(d) the value of any part of the proceeds of any subsequent resale, disposal or
use of the imported goods that accrues directly or indirectly to the seller.

Article 8 requires any “proceeds” associated with the resale or use of imported
goods which accrue to the seller to be included in transaction value.
What are these “proceeds”? Proceeds arise in transactions where the seller
will receive some portion of the revenue or proits that the buyer realizes on
resale, disposal or use of the goods after importation.

Proc eed s v. Co ns i gn me nt s
Remember – transaction value requires an export sale, and therefore cannot be used
if the goods are imported on consignment.
In transactions involving proceeds, the importer is not a consignee. He has pur-
chased and takes title to the imported goods. The parties have simply agreed to delay
payment of the full purchase price until revenue is generated on resale, distribution
or use of the imported goods.

This might occur, for example, where imported goods are new or experimental
in nature and the market price is not established, or perhaps the seller wishes
to ease the buyer’s cash-low dificulty. A common use is in the video movie
rental business, where the purchase price of the movie is very high, the ren-
tal charges low, and the popularity of the movie among consumers uncertain.
Whatever the motive, the proceeds are as much a part of the price for the goods
as if the buyer agreed to a single payment up front.
Proceeds should not be confused with dividends or any other payments made
by the buyer to the seller that do not directly relate to the imported goods.
Dividends are payments made against the overall proit realized by a given
company, rather than proit realized on sale of a given product.
A practical dificulty concerning transactions involving proceeds is the
amount of these kinds of payments may not be known until some time after
goods have been imported and released by customs for sale in the country. As
we shall see in section 4.2, below, in these kinds of situations, where customs
is unable to make a inal valuation determination at the time the goods are pre-
sented for customs clearance, Article 13 of the Agreement requires customs to
release the goods to the importer, subject to the importer’s guarantee of pay-
ment of the duties that may be owed once valuation is inalized. A transaction
involving proceeds is a typical case where this “conditional release” procedure
is used to delay the inal valuation.
The question may arise, however, “how long must customs wait after the
importation to receive the information necessary to inalize customs value?”
The answer depends on whether the resale, use or disposal of the goods occurs
within the time frame allowed under national legislation for delay of inal
valuation.

N atio nal le g i sl ati o n – p ro c ee d s

Example: A buyer contracts to import a new product. Not knowing whether the
product ultimately will sell in the United States, the buyer agrees to pay the seller
initially $1 per unit with an additional $1 per unit to be paid upon the sale of each
unit in the United States. Assuming the resale price in the United States can be
determined in a reasonable period of time, the transaction value of each unit
would be $2. Otherwise, the transaction value could not be determined for want
of suficient information.

Source: US Customs regulation (19 C.F.R. 152.103(g) (emphasis added).

As stated in Article 8.3 of the WTO Customs Valuation Agreement, the adjust-
ments for proceeds can be made only on the basis of objective and quantiiable
data. If such data cannot be found within the delayed period – or at all – then
the transaction value method cannot be used, and the next valuation method
must be considered.

Test
Te yo ur
st you r k now le dg e – p ro c e ed s
1. An Italian company purchases pharmaceutical products from a US manufac-
turer. The Italian company agrees to pay the US manufacturer $10,000 for the
products upon importation, plus 5 percent of its gross sales proceeds realized
on the imported goods in Italy over one year. Should the 5 percent payment be
added to the price of the goods ($10,000)? What problems do you foresee with
this kind of transaction?
2. The Italian company is the subsidiary of the US manufacturer. At the end of
the inancial year, the Italian company remits to the US company 75 percent
of its net proit realized over that year. Should you add this amount to the price
of the pharmaceutical products in order to calculate the transaction value?
For the answers, see p. 92.

2.2.6 International transport costs

Article 8(2)
2. In framing its legislation, each Member shall provide for the inclusion in or
the exclusion from the customs value, in whole or in part, of the following:
(a) the cost of transport of the imported goods to the port or place of
importation;
(b) loading, unloading and handling charges associated with the transport of
the imported goods to the port or place of importation; and
(c) the cost of insurance.

The Agreement provides WTO Member countries the option of including or

excluding from customs value some or all international transport costs and
associated loading, handling, and shipping insurance charges. Most Members
have chosen to include these transport costs in customs value. Whichever
option a country chooses, the Agreement requires that the choice be positively
relected in its legislation.
It may seem curious that an Agreement which is intended to promote
“greater uniformity” in customs valuation speciically allows Members
to treat transport costs differently. Largely, the anomaly is due to WTO
Members’ wishes to carry over into the Agreement the treatment given
transport costs under their respective predecessor valuation systems.21 As
noted in our discussion of the history of the Agreement in section 1.2, while
the ninety plus countries applying the Brussels Deinition of Value prior to
the adoption of the GATT Valuation Code included the costs of international
transport in customs value, a small but important group of countries, includ-
ing the United States, Australia, and New Zealand, used an f.o.b.-based
valuation system.22
The transport and related costs that can be included are part or all of the
“cost[s] … to the port or place of importation.” WTO Members are free to
deine for themselves what is meant by “place of importation.” For example, a
country may deine the importation point as the land frontier where the goods
irst cross the border of the country, and thereby exclude the cost of transport
from the border to the place of unloading or where the irst customs ofice is
situated.
Alternatively, the port or place of importation might be the inland Customs
point where the goods are irst reported, and thus the cost of the inward journey
from the frontier would be included in the customs value.
In any event, the Agreement makes clear that any charges related to trans-
port after the point or place of importation – regardless how it is deined by the
country – are to be excluded from customs value if they can be distinguished
from the price of the goods.

21
“We have also recognized that at present some systems are based on a c.i.f. concept and some on
an f.o.b. basis. Whilst it would be clearly desirable to establish a single approach we have taken the
view that, at least in these negotiations, it is unlikely that we shall all be in a position to agree either
on f.o.b. or on c.i.f. as a unique basis. We have therefore made provision for those countries which
wish to apply the rules on a c.i.f. basis, to add to the price of the goods, to the extent that it is not
already included, the transport costs.” GATT Multilateral Trade Negotiations Group “Non-Tariff
Measures” Sub-Group “Customs Matters,” Statement Made by the Commission of the European
Communities at the Meeting of the Sub-Group of November 15, 1977, MTN/NTM/W/126 (Nov. 21,
1977).
22
See Chapter 1 above, text accompanying note 34.

Te st your kn ow l e dg e – tr a n sp o r t c ha rg es
If the seller provides the transport free, at no charge to the buyer, must the cost of the
transport nevertheless be included in customs value?
For the answers, see p. 92.

2.2.7 No other additions

The Article 8 list of additions to price that is described in this chapter – sellers’
commissions, assists, royalties and proceeds, etc. – is exclusive. That is, these
and only these Article 8 payments and costs may be added to the price paid or
payable for the goods.

Article 8(4)
4. No additions shall be made to the price actually paid or payable in determin-
ing the customs value except as provided in this Article.

However, this statement should be understood in the context of the expansive

deinition of the “price paid or payable” under the Agreement, discussed in
section 2.1, above, which is:
all payments actually made or to be made as a condition of sale of the
imported goods, by the buyer to the seller, or by the buyer to a third party
to satisfy an obligation of the seller.
Under this deinition, any payment that a buyer makes, if it can be shown to
be a condition of sale of the imported goods, is not an “addition to price”; it is
part of the price itself.
What are the additional payments or services provided by a buyer that were
intended to be excluded from transaction value by Article 8(4)? Some sug-
gestion might be found in the negotiation history of the Agreement, where
various proposals were made to expand the list of Article 8 additions, but were
ultimately rejected by the GATT parties. These rejected proposals for Article
8 additions included:
• advertizing by the buyer in the country of importation
• warranty and guarantee services provided by the buyer in the country
of importation
• ADP or accounting services provided by the buyer to the seller
• costs of storing goods in the country of exportation.23
23
GATT Multilateral Trade Negotiations Group “Non-Tariff Measures” Sub-Group “Customs Matters,”
Customs Valuation – Revision, MTN/NTM/W/175/Rev.1 (November 6, 1978) (revised negotiating
text).

Some WTO Members have thus explicitly provided in their national legislation
that costs for these kinds of services provided by the buyer shall not be added
to the transaction value.24

2.3 WHEN TRANSACTION VALUE CANNOT BE USED

Article 1(1)(a)–(d)
1. The customs value of imported goods shall be the transaction value …
provided:
(a) that there are no restrictions as to the disposition or use of the goods by the
buyer other than restrictions which:
(i) are imposed or required by law or by the public authorities in the
country of importation;
(ii) limit the geographical area in which the goods may be resold; or
(iii) do not substantially affect the value of the goods;
(b) that the sale or price is not subject to some condition or consideration
for which a value cannot be determined with respect to the goods being
valued;
(c) that no part of the proceeds of any subsequent resale, disposal or use of the
goods by the buyer will accrue directly or indirectly to the seller, unless an
appropriate adjustment can be made in accordance with the provisions of
Article 8; and
(d) that the buyer and seller are not related, or where the buyer and seller are
related, that the transaction value is acceptable for customs purposes under
the provisions of paragraph 2.

The alternatives to the transaction value method under the Agreement can be
used only if “the customs value of goods cannot be determined under the provi-
sions of Article 1.” As we have seen, the transaction value method is primary,
and is used by customs administrations in practice to value the great majority
of import transactions. In some transactions, however, a transaction value may
simply not exist or, even if there is a transaction value, it cannot be used as a
reliable basis for customs valuation.
The starting point for the transaction value method is the price paid or
payable for the imported goods when “sold for export.” If there is no sale,
then there can be no transaction value, and one of the alternative valuation

24
For example, the EU customs legislation provides that “all activities relating to advertising and pro-
moting the sale of the goods in question and all activities relating to warranties or guarantees in respect
of them” undertaken by the buyer, even if the buyer is obligated under an agreement with the seller to
provide these services, shall not be considered indirect payments included in transaction value. Article
149, Commission Regulation (EEC) No. 2454/93 of 2 July 1993.

methods must be used. The typical cases where goods are exported without
a sale include:25

• Gifts, samples and promotional items shipped free of charge to the

buyer.
In these kinds of transactions, there is no price paid by the buyer for
the goods (they are free), and therefore no sale takes place.
• Goods shipped on consignment.
In a consignment transaction, the exporter will ship goods to a com-
mission agent in the country of importation, who will try to ind a
buyer. However, the goods remain the property of the exporter (at
least, until the agent is successful), so there is no sale for export.
• Goods shipped by parent company to branch ofices.
A sale requires a buyer and seller. Generally, branch ofices are not
considered legal entities separate from their parent company. In these
transactions, it is as if the seller is shipping the goods to himself.
• Goods imported under hire, lease or loan.
These goods remain the property of the exporter; ownership or title
to the goods does not pass to the importer. Accordingly, there is no
sale.

In addition, a transaction value cannot be determined where customs does not

have the information necessary for the appraisement, whether from the importer
or other sources. For example, “objective and quantiiable data” is required by
Article 8.3 in order to make an addition under Article 8 to the price; if such
data are missing, then an addition cannot be made and a transaction value can-
not be calculated. Similarly, under the WTO Ministerial Decision Regarding
Cases Where Customs Administrations Have Reasons to Doubt the Truth
or Accuracy of the Declared Value (discussed in section 4.3, below), if cus-
toms is not satisied that the importer’s declaration is truthful and accurate, it
may reject the use of transaction value.
Finally, apart from these implicit restrictions on use of Article 1, Article
1(1)(a)–(d) expressly disallows the use of a transaction value in four speciic
situations, as follows:

1. the buyer is subject to certain restrictions on his use or disposition of

the imported goods which substantially affect the value of the goods
2. the sale or price is subject to some condition or consideration for
which a value cannot be determined with respect to the goods being
valued

25
These examples appear and are further elaborated in the Technical Committee’s Advisory Opinion 1.1,
“The Concept of ‘Sale’ in the Agreement.”

3. proceeds accrue to the seller when the buyer resells, disposes of or

uses the imported goods, and the appropriate adjustment to the sale
price cannot be made
4. the sale is between a related buyer and seller, and the parties’ price is
not acceptable for customs purposes.
In the main, these might be understood as transactions that involve conditions
such that a price paid for the goods cannot be determined accurately or that
the declared price cannot be considered an acceptable representation of the
“actual value” of the goods within the meaning of GATT Article VII (that is, a
“price … in the ordinary course of trade under fully competitive conditions”).
These express limitations on the use of transaction value are discussed in
turn below.

2.3.1 Restrictions on distribution and use of goods

Article 1(1)(a) provides that the transaction value method cannot be used if
the buyer is subject to certain “restrictions as to the disposition or use of the
goods.”
Why not use transaction value when these kinds of restrictions are present?
If a seller imposes restrictions on how or where or to whom the buyer can use
or resell the imported goods, would not the price the parties negotiate take into
account the impact of the restrictions, and thus relect the (possibly dimin-
ished) market value of the goods?
There is no mention of the rationale underlying this provision in the writ-
ten record of GATT valuation negotiations. However, it may have to do with
doubts about the bona ides of such sales.26 In commercial law, a “sale” is com-
monly deined as the passing of title to the goods from the seller to the buyer
for a price.27 By taking title to the goods, the buyer obtains ownership and the

26
This is the rationale that appears to have been the accepted by the government of the United States, one
of the main participants in the Tokyo Round negotiations on valuation, as indicated by proceedings in
the US Congress at the time. See US Congress House Report No. 317, 96th Cong., 1st Sess. 82 (1979)
(“The Committee understands that the purpose of these limitations is to insure that a particular trans-
action is bona ide and ‘at arm’s length’ before the transaction value standard will apply.”). In fact, the
text of Article 1(1)(a) of the Agreement appears to have been taken, with some modiication, from the
pre-existing US value law. Under that US law, an export sale price for imported goods could be used
as the basis for customs value provided such goods were “freely sold … or offered for sale.” That US
law further provided that if the purchaser were subject to “restrictions as to the disposition or use of
the merchandise” the goods could not be considered “freely sold,” unless those restrictions were of a
type that “(i) are imposed or required by law, (ii) limit the price at which or the territory in which the
merchandise may be resold, or (iii) do not substantially affect the value of the merchandise to usual
purchasers at wholesale.” 19 US Code 1401a(f)(1) (1976).
27
For example, this deinition of a sale appears in the “Uniform Commercial Code,” which is a common
basis of commercial legislation in the United States.

right to use or dispose of the goods as he chooses, subject to requirements of

local laws and regulations. However, if these usual ownership rights do not
pass to the buyer or are substantially restricted – whether due to the terms of
the sales contract or otherwise – then there is a question whether the transac-
tion can be considered a genuine “sale,” as that term is normally understood in
commercial practice.
It is important to note that this restriction in the Agreement on the use of
transaction value has a narrow application. In particular, the Agreement deines
three exceptions to the prohibition which may cover many or most cases where
restrictions on rights of resale or use on imported goods appear in practice.
Under these exceptions, transaction value may be applied, if the restrictions on
use or disposition of the goods:

• are imposed or required by law or by the public authorities in the

country of importation;
These might include safety, health or environmental controls on use
of a product, or consumer labeling or conditions as to time and place
regulated products can be sold (e.g. alcohol, irearms, etc.).
• limit the geographical area in which goods can be resold; or
See the sample contract clause (above).
• do not “substantially affect” the value of the goods.

R estr ict io ns on re sa l e
APPOINTMENT. Seller hereby appoints Reseller, and Reseller accepts such
appointment, to act as a non-exclusive reseller of Products only to Customers located
in the Territory. Sale of Products to other resellers or Reseller’s afiliates is strictly
prohibited. Reseller will only sell the Products in face-to-face transactions from
physical store outlets located in the Territory, and will not market or sell the Products
using any Internet site or mail order catalog without speciic written authorization
by Handspring.
TERRITORY. “Territory” means the United States of America.

Sample sales contract clause

The practical application of this last exception may be the most challen-
ging: how does one determine whether a restriction on resale or use “substan-
tially affect[s]” the value of the imported goods?
A commentary issued by the Technical Committee suggests that this must
be a case-by-case determination. A number of factors may be considered, but
the relative importance of each must depend upon the circumstances of the
particular transaction:

These factors include the nature of the restriction, the nature of the
imported goods, the nature of the industry concerned and its commercial
practices, and whether the effect on the value is commercially signiicant.
Since these factors may vary from case to case, it would not be proper to
apply a ixed criterion in this respect.28
The commentary further suggests that one should consider whether the
restriction is “usual” for the industry concerned. This suggestion also
appears in an Interpretative Note to Article 1, which provides the follow-
ing example:
Among restrictions which would not render a price actually paid or pay-
able unacceptable are restrictions which do not substantially affect the
value of the goods. An example of such restrictions would be the case
where a seller requires a buyer of automobiles not to sell or exhibit them
prior to a ixed date which represents the beginning of a model year.
The restriction described in the Interpretative Note does not prevent the importer
from reselling the imported cars, but only imposes a delay on the time of resale
for reasons that are not inconsistent with marketing practices in that industry.
If this kind of restriction is “usual” in the industry concerned, then it cannot be
said to “substantially affect” the value of the imported goods.

Test
Te st yo
youur
r k
knn ow le
l edg
dg e – d o th t h es e s al
aleess re
r ess tri
tr ict
ctio
io ns
prev ent u se ooff t r an
a n sact
sac t i on val
va luue
e??
1. Mr. X purchases a dangerous chemical from abroad. He applies for an import
license for this chemical and the government grants the license only on the
condition that Mr. X use the chemical for the purposes stated in his application.
Does this restriction on Mr. X’s use of the imported chemical mean that transac-
tion value cannot be used?
2. Mr. T has invented a chemical product that can be used as a cleaning product or
as a food additive. Mr. X wishes to buy the chemical to use as a cleaning product
in France. Mr. T has a patent in France for the product for both uses but he sells
the product to Mr. X only for use as a cleaning product. Mr. X cannot use the
product in France as a food additive without infringing Mr. T’s patent. Does this
restriction on Mr. X’s use of the imported product mean that transaction value
cannot be used?
3. The XYZ Charity purchases a new car from abroad for a nominal fee. The sale,
however, is subject to the restriction that the imported car may be used only for
charitable, non-commercial purposes. Can the imported car be valued on the
basis of the transaction value (the nominal fee paid by XYZ)?
For the answers, see p. 93.

28
Technical Committee, Meaning of the Term “Restrictions” in Article 1.1(a)(iii), Commentary 12.1, in
WCO Compendium.

2.3.2 Price subject to condition

Article 1(1)(b) of the Agreement states that transaction value cannot be used
in sales where: “The sale or price is … subject to some condition or consider-
ation for which a value cannot be determined with respect to the good being
valued.”
This expresses – again – the requirement that the elements of transaction
value must be “quantiiable.” Clearly, if the consideration given by the buyer
in exchange for the goods cannot be quantiied, it will not be possible to deter-
mine the price of the goods accurately.
The examples provided in the Interpretative Notes indicate that this prohib-
ition was intended to cover so-called “countertrade” transactions and “tie-in”
sales. See Interpretative Note to Article 1, paragraph 1(b).

C OU N TE RTRA DE
A means of trading, whereby the exporter is required to accept goods or other instru-
ments of trade in part or whole payment for his sales. This allows the buying country
to save foreign currency. Countertrade is thus used by countries experiencing for-
eign exchange shortages. Countertrade may take different forms, including barter,
buy-back or compensation, counterpurchase, offset requirements, swap, switch, evi-
dence or clearing accounts. As a means of payment, countertrade is not encouraged
by international and multinational inancial institutions as the price-setting mech-
anisms underlying such transactions frequently lack transparency.
1. Barter is the oldest and simplest method of countertrade by which goods are
exchanged against other goods of equivalent value. It is the only way of under-
taking trade with no or little money involved. As it does not involve the use of
money, it is often used by countries with blocked currencies.
2. Counterpurchase is one of the most common forms of countertrade. Under this
arrangement, the exporter undertakes to buy goods from the importer or from a
company nominated by the importer, or agrees to arrange for their purchase by a
third party, within a speciic period (usually one to ive years). Both parties pay
for their purchases in cash (at least in part) but commit themselves, by signing
a “protocol” contract, to fulil the purchase counter obligation. The goods being
sold in exchange are typically unrelated but may be equivalent in value.
3. In offset, the exporter agrees to use goods produced in the importer’s country as
an input of the products being sold, and up to an agreed percentage of the ori-
ginal sale. In a direct offset, the exported goods are an integral part of the inal
product, and the agreement involves a co-production arrangement based on the
transfer of production technology to the importing country. In an indirect offset
the selling country agrees to purchase unrelated products from the importing
country.
4. In a compensation or buy-back deal, exporters of equipment, technology, or
even entire plants, agree to purchase a certain percentage of the output of the
facility as payment.

5. Switch is a complex form of barter, involving a chain of buyers and sellers in

different markets and countries, based on the multilateral clearance of bilateral
trade imbalances. A specialized countertrade house will typically buy (at a dis-
count) from country A the value of its bilateral trade surplus with country B, and
sell it at full value to company or country C, which has a bilateral trade deicit
with party A. The trading house will often have to take title to certain goods,
which it then has to sell against hard currency.

Source: UNCTAD/WTO International Trade Center Glossary on Trade Financing Terms (2000)
(www.intracen.org/tfs/docs/glossary/ce.htm).

A tie-in sale occurs where the price for imported goods is subject to the buyer’s
agreement to purchase other goods from the seller or another person.

Tyin g arr a n g e me nt s
“The producer of a desired product may sell it only to those who also buy a second
product from him. The manufacturer of color ilm, for example, might sell it only
to those who buy black-and-white ilm from him. In the customary terminology, the
manufacturer ‘ties’ the sale of the ‘tying’ product (color ilm) to sales of the ‘tied’
product (black-and-white ilm). Such a tying arrangement might be relected in a
formal agreement, a refusal to continue selling color ilm to those who buy their
black-and-white ilm elsewhere, or a package sale requiring the buyer to take both
products simultaneously.”

Phillip Areeda, Antitrust Analysis, 438–39 (1967).

In such cases, the price of the imported goods is inluenced by another transac-
tion. The price the buyer pays for the goods he wants may be lower than if he
were able to purchase them separately, but the price of the “tied” goods may
be higher. The extent to which one transaction inluences the price of the other
may not be possible to quantify.
There is an important caution in the Interpretative Note to Article 1(1)(b),
however: “conditions or considerations relating to the production or marketing
of the imported goods,” whether or not “quantiiable,” do not preclude the use
of the transaction value method (emphasis added). In particular:
[t]he fact that the buyer furnishes the seller with engineering and plans
undertaken in the country of importation shall not result in rejection of
the transaction value for purposes of Article 1.
Likewise, if the buyer undertakes on the buyer’s own account, even
though by agreement with the seller, activities relating to the marketing
of the imported goods, the value of these activities is not part of the
customs value nor shall such activities result in rejection of the trans-
action value.

As noted previously, the cost or value of advertizing or similar activities that

the buyer undertakes on his own account to prepare the market for the imported
goods, even if they beneit the seller, shall not be included in the transaction
value of the imported goods. See section 2.1, above.
In the case of engineering and design plans that a buyer might be required
under the sales contract to supply to the seller, Article 8 of the Agreement pro-
vides that the cost or value shall not be included in customs value if the design
work is done in the country of importation. See section 2.2 above, concerning
the additions to price required by Article 8.
Consequently, whether or not the cost or value of such marketing activ-
ities or engineering plans can be quantiied should have no bearing on customs
value.

2.3.3 Proceeds

Article 1(1)(b) of the Agreement states that the transaction value method can-
not be used if any “… part of the proceeds of any subsequent resale, disposal
or use of the goods by the buyer will accrue directly or indirectly to the seller,
unless an appropriate adjustment can be made in accordance with the provi-
sions of Article 8.”
As discussed in section 2.2 regarding the Article 8 additions to price,
“proceeds” – or payments that a seller receives on the resale, distribution or use
of the goods after importation – must be added to the price of the goods when
determining a transaction value. And as also discussed, Article 8.3 requires
that the addition for proceeds or any other Article 8 element must be based on
“objective and quantiiable data.” Accordingly, if “objective and quantiiable
data” are not available to allow the adjustment for proceeds, it is implicit in
Article 8.3, and explicit here in Article 1(1)(b), that a transaction value cannot
be calculated.
Why does the Agreement single out proceeds here? Surely if the appropri-
ate adjustment cannot be made for any Article 8 element, the transaction value
method cannot be used?
The special focus on proceeds in Article 1 may be due to the unusual
customs administrative problem they present. As noted in our discussion
of Article 8 proceeds, because the amount of the proceeds will not ordinar-
ily be known at the time the importer presents the goods to customs, there
must be a delay in inal valuation until the goods are resold and the proceed
amount is realized. If the proceed amount cannot be calculated because,
for example, the buyer is unable to resell the goods within a reasonable
time after importation, the appropriate adjustment cannot be made under
Article 8, and the next method of valuation under the Agreement must be
considered.

2.3.4 Related-party transactions

Perhaps the most important situation in which transaction value cannot be used
is where the buyer and seller are related to each other, and that relationship has
inluenced the price of the imported goods.
In an arm’s-length transaction – one where the buyer and seller do not have
any ownership or control of the other, but are each motivated by self-interest
to maximize their own proit – the price negotiated represents the market value
of the goods.
On the other hand, related-party transactions may not take place under fully
competitive conditions and, therefore, the parties’ price may have been determined
by other than market considerations. These other considerations may be entirely
legitimate, such as a desire to reduce tax liability as much as possible, to gain a
foothold in a new market, or for other commercial reasons. This does not mean
that related parties tend to avoid paying duty, but that pricing decisions between
them can be affected by the inancial or other interest each has in the other.
For these reasons, and the increasing importance of intra-irm transactions
in world trade, valuation of related-party transactions is given special and
detailed treatment under the WTO Customs Valuation Agreement.

T he im po rta n ce of r e l at ed - pa rt y t ra de
“Beginning in the 1970’s and accelerating in the 1980’s, the world economy entered a
second phase of development – what is now typically referred to as a phase of ‘global-
ization’. Rapid advances in information technologies and communications, together
with the systematic reduction of global trade barriers, have allowed global irms to
break up the production process and to locate its various components in different
markets around the world. The surge in foreign investment lows represents the most
unique feature of the globalization phase. Trade is no longer the sole or even the main
vehicle for delivering products and services across borders; investment has become an
even more powerful force for integration, as transnational corporations extend their
global reach by establishing a direct presence in foreign markets. The cumulative
assets of foreign investment have trebled since 1987 – to over US $3 trillion – while
the annual sales which these assets generate have overtaken the value of world trade.
But trade is also growing as more and more crossborder transactions take place
within companies or their afiliates, and as more and more trade encompasses all
phases of the production process – from components and services, to design and
engineering. Intrairm trade within transnational corporations or related partners
now accounts for about two-thirds of world trade. And trade as a share of global out-
put has more than tripled since 1950 – from 7 to over 22 per cent. Businesses now
trade to invest and invest to trade – to the point where both activities are increasingly
part of a single strategy to deliver product across borders.”

Source: former WTO Director General Renato Ruggiero, Address to the International Industrial
Conference (IIC) (September 29, 1997).

(a) Deinition of related parties

Article 15(4) and (5)

4. For the purposes of this Agreement, persons shall be deemed to be related
only if:
(a) they are oficers or directors of one another’s businesses;
(b) they are legally recognized partners in business;
(c) they are employer and employee;
(d) any person directly or indirectly owns, controls or holds 5 per cent or
more of the outstanding voting stock or shares of both of them;
(e) one of them directly or indirectly controls the other;
(f) both of them are directly or indirectly controlled by a third person;
(g) together they directly or indirectly control a third person; or
(h) they are members of the same family.
5. Persons who are associated in business with one another in that one is the sole
agent, sole distributor or sole concessionaire, however described, of the other
shall be deemed to be related for the purposes of this Agreement if they fall
within the criteria of paragraph 4.

Article 15 of the WTO Customs Valuation Agreement deines the “related

parties.” This deinition, which seems to have been taken from the pre-Tokyo
Round US value law (and which can also be found in the WTO Agreements on
Dumping and Countervailing Measures) is not necessarily the same as those
used for tax or securities laws, or even in ordinary business parlance.29
Under the Agreement, a buyer and seller are considered “related” only if their
relationship can be characterized by one of the following eight deinitions:

Family Members of same or Financial/legal control

afiliated business enterprises

The buyer and The buyer and seller are A person owns, controls or
seller are members legally recognized partners holds 5 percent or more of the
of the same family in business outstanding voting stock of both
buyer and seller

29
The pre-GATT Code valuation law of the United States thus deined related parties as:
“(A) Members of a family, including brothers and sisters (whether by the whole or half blood),
spouse, ancestors, and lineal descendants;
(B) Any oficer or director of an organization and such organization;
(C) Partners;
(D) Employer and employee;
(E) Any person directly or indirectly owning, controlling, or holding with power to vote, 5 per
centum or more of the outstanding voting stock or shares of any organization and such organ-
ization; and
(F) Two or more persons directly or indirectly controlling, controlled by, or under common con-
trol with, any person.” (19 US Code §1401a(g)(2) (1976).)

Family Members of same or Financial/legal control

afiliated business enterprises
The buyer is the employer The buyer directly or indirectly
of the seller, or vice versa controls the seller, or vice versa
The buyer and seller are Both buyer and seller are directly
oficers or directors of one or indirectly controlled by a third
another’s businesses person
Buyer and seller together
directly or indirectly control a
third person

Any other relationship between buyer and seller is not in itself a reason to
question the use of transaction value. Perhaps most importantly, Article
15(5) of the Agreement expressly provides that a sale to a sole agent or sole
distributor is NOT considered a related party transaction unless the seller
and his sole agent/distributor also have one of the eight relationships deined
above.

(i) Family
A buyer and seller are considered related for purposes of the Agreement if they
are members of the same family. Clearly, when two members of the same fam-
ily deal with one another in a sale transaction, there is a strong possibility that
the usual, competitive market conditions will not prevail.
A question that is left to individual WTO Members to deine in their national
legislation or practice is “who is family?” Here is one example:

Wh o are “ me mb e rs o f t h e sa me fam ily”? nat ional

leg islati on
Persons shall be deemed to be members of the same family only if they stand in any
of the following relationships to one another:
• husband and wife
• parent and child
• brother and sister (whether by whole or half blood)
• grandparent and grandchild
• uncle or aunt and nephew or niece
• parent-in-law and son-in-law or daughter-in-law
• brother-in-law and sister-in-law.

Source: Article 143(1)(h), Commission Regulation (EEC) No. 2454/93 of July 2, 1993.

(ii) Members of the same or afiliated business enterprises

A buyer and seller are considered related if they are legally recognized partners
in business or they are employer and employee.
A business partnership is a legal entity created under commercial law. The
Agreement leaves to each WTO Member to deine the conditions (if any) under
which a business partnership would be recognized under that Member’s laws.
A buyer and seller are related if they are oficers and directors of one
another’s businesses. This refers to the case of the “interlocking directorate,”
where both the buyer and seller participate either as executive managers or
as directors of each other’s business. For example, the chief executive oficer
of the seller may also act as the president of the buyer. In such positions, that
individual can inluence or manipulate pricing decisions of one business to the
advantage of the other.30

(iii) Financial/legal control

The previous deinitions discussed largely concern relationships involving
individuals (employment, family members, partners, directors and oficials of
businesses). In terms of trade volumes, the more important relationships are
those that involve related companies or other related legal entities, such as
transfers between a parent and subsidiary company or transfers between afili-
ates within the same corporate family.31
The WTO Valuation Agreement sets out two different tests to determine
whether a transfer of goods between two entities shall be considered a related-
party transaction: one based on stock ownership; the other based on a concept
of “control.”

Stock ownership: A buyer and seller are related if a third person directly
or indirectly owns, controls, or holds 5 percent or more of the outstanding
voting stock of both the buyer and seller. This deinition describes the case
where the buyer and seller are members of the same corporate family. One
person or entity (the corporate parent) is in a position to exercise inluence
both on the buyer and seller as a result of an ownership interest it has in each
of them. (As the Interpretative Note to Article 15(4) makes clear, a “person”
could include a legal person, such a company or other business entity, which

30
Strictly speaking, the deinition would deem the director or oficers of the two interlocking irms to be
related, as opposed to the irms themselves. As such, the deinition has limited reach, as it would seem
unlikely as a practical matter that directors would sell to each other as individuals, rather than conclude
the sale through their respective companies. However, in such cases, the two irms might be considered
related under the broader concept of control (see Control concept, below).
31
For example, nearly 30 percent of all US exports are made to a foreign consignee that is owned by, or
who owns, the US exporter. Press Release, US Department of Commerce, US Goods Trade: Imports
and Exports by Related Parties 2007 (May 9, 2008) at www.census.gov/foreign-trade/Press-
Release/2007pr/aip/related_party/.

owns or controls the buyer and seller, which themselves might also be such
business entities.)
Why is voting stock of 5 percent important? Although not said in the
Agreement, it was likely intended to mark the boundary between a pure port-
folio-type investment, where the investor is interested only in the inancial returns
from investment in a business, from a direct investment which the investor
makes for purposes of exercising management control. This same 5 percent
standard appears, for example, in US securities laws, where certain disclosures
are required by anyone seeking to acquire more than 5 percent of a company’s
securities because such offers are considered an effort to gain control of the
company. Compare also the OECD/IMF deinition of a direct investment.
Direct investment: is a category of international investment made by a
resident entity in one economy (direct investor) with the objective of
establishing a lasting interest in an enterprise resident in an economy
other than that of the investor (direct investment enterprise). “Lasting
interest” implies the existence of a long-term relationship between the
direct investor and the enterprise and a signiicant degree of inluence
by the direct investor on the management of the direct investment enter-
prise … Ownership of 10 percent of the ordinary shares or voting stock
is the guideline for determining the existence of a direct investment rela-
tionship. An “effective voice in the management”, as evidenced by an
ownership of at least 10 percent, implies that the direct investor is able
to inluence, or participate in, the management of an enterprise; absolute
control by the foreign investor is not required. (IMF/OECD Glossary of
Foreign Direct Investment Terms (1996))

Control concept: Stock ownership does not cover all business arrangements
whereby one business may be in a position to exert inluence over the pricing
or other commercial or strategic decisions of another irm. For example, con-
sider these cases:

• The majority shareholder of company S (the seller) is also a director

of company B (the buyer).
• Company S (the seller) directs, under a management contract, the
day-to-day operations of independent company B (the buyer).
• Company B (the buyer) is a franchisee of company S (the seller).
• Company S (the seller) is the majority creditor of company B (the
buyer) or holds a mortgage against its assets.
• Company S (the seller) and Company B (the buyer) together form a
joint venture company, Company C, which is the ultimate consignee
of the imported goods.
In these kinds of cases – where there is not a relationship in terms of a stock
ownership, family, employment etc. – the buyer and seller might nonetheless

be considered related if one person or entity “directly or indirectly control[s]”

the other, or if both directly or indirectly control or are controlled by a third
party.
The Interpretative Note to Article 15 provides the following deinition of
“control”:
For purposes of this Agreement, one person shall be deemed to control
another when the former is legally or operationally in a position to exer-
cise restraint or direction over the latter.
There is no “bright-line” or set of quantitative criteria that can be applied here.
What is required by the deinition is a case-by-case examination of the circum-
stances of a particular relationship to determine whether there is control of the
nature described in the Interpretative Note.
Perhaps the clearest – and most common – case of legal control within the
meaning of the Interpretative Note is the parent-subsidiary corporate relation-
ship, where one irm fully owns or has a controlling interest in the other, and is
thereby “legally … in a position to exercise restraint or control” by, inter alia,
appointment or removal of management or directors of the subsidiary.
Other cases may require closer examination. For example, a seller may be
“operationally in a position” to restrain or direct the buyer where the seller’s
president also acts as the chief operating oficer of the buyer. On the other
hand, where the president of the exporter is just one of a seven-member com-
mittee that directs the buyer, each with an equal vote, the requisite control has
been found not to exist, and the buyer and seller therefore not related.32
Buyers and sellers typically enter into contracts for sale of goods, and con-
tracts by their nature impose legally-enforceable obligations (i.e. deliver goods
within speciied period, pay the agreed price, use speciied means of transport,
etc.). In some cases, one party may be in a stronger bargaining position than
the other – such as a franchisor of well-known/high demand trademark prod-
ucts – and the terms and conditions may be one-sided as a consequence. Does
the fact that a seller (or buyer) can enforce performance of a sales contract
mean that he is “legally … in a position to exercise restraint or control” over
the other within the meaning of the Interpretative Note? If so, would not all
transactions between buyers and seller under contract be considered related-
party transactions?
A Technical Committee Explanatory Note answers no:
It can be concluded that it is not the intent of the Agreement to create
a relationship out of every contract or agreement which of their very
nature establish legal rights or obligations enforceable under national
laws. Therefore the wording of the Interpretative Note to Article 15.4(e)

32
This was the decision of the US customs administration in Ruling Letter 543425 (September 28,
1985).

must normally be taken to apply to situations which go beyond usual

buyer/seller or distribution agreements and involve a position to exer-
cise restraint or direction in respect of essential aspects relating to the
management of the activities of the other person.33
A companion Technical Committee Case Study inds that “essential aspects
relating to management” include decisions about changes in management per-
sonnel, or ownership or voting control, or location of the business. A sales
and distribution contract that provides the seller with rights to approve these
kinds of decisions by the buyer evidences the kind of control required by the
Interpretative Note to Article 15.34

(iv) Sole agent/distributor/concessionaire

Article 15(5) emphasizes that a sale to a sole agent or distributor or concession-
aire (hereinafter, “sole agent”) is not to be considered related-party transaction
unless the seller and his sole agent fall within one of the eight relationships
deined above.
The main purpose of this provision is to distinguish clearly the treatment
of sole agents under the WTO Agreement from the treatment of such agents
under the BDV.
Generally, an agent or distributor has rights to sell the foreign supplier’s
goods within a speciied geographic region.35 If the right is “sole,” the foreign
supplier cannot appoint another agent to sell his good in the same territory.36
Agents and distributors generally bear their own marketing and sales costs and
risks. In compensation, an agent is usually paid a commission on the supplier’s
sale price of the imported goods, while a distributor is compensated in the form
of the resale margin over the price paid to the supplier.
Under the BDV, discounts or other reductions in price granted to “sole
agents” or “sole concessionaires” were required to be included in dutiable
value. The BDV rationale was that such “privileged” discounts would not be
found in a “normal price,” i.e. an open market sale between a buyer and seller
independent of each other.37

33
WCO, Explanatory Note 4.1: Consideration of Relationship under Article 15.5, Read in Conjunction
with Article 15.4 (July 1998).
34
WCO, Case Study 11.1: Application of Article 15.4(e) Related Party Transactions (July 1999).
35
A difference between an agent and a distributor is that the agent is authorized by the supplier to enter
into sales agreements with customers, on the seller’s behalf, but does not take title to the goods. A dis-
tributor purchases the imported goods from the foreign seller, and resells the products on to his own
customers.
36
See Cleaver Fulton Rankin, Agency and Commercial Agents Regulations, www.investni.com/agency_
and_agents.pdf. If the agent or distributor also has “exclusive” rights, then the supplier himself is also
prohibited from making direct sales into the territory.
37
World Customs Organization, The Brussels Deinition of Value and the GATT Valuation Agreement: A
Comparison (1985), 9.

The WTO Valuation Agreement adopts the contrary view – that a distribu-
tion or agency contract, even with exclusive rights, is consistent with a normal,
arm’s-length commercial arrangement. Thus, as Article 15(4) indicates, a sole
agency or distributor arrangement is no longer, by itself, suficient to establish
that the agent and his supplier are related.
This view of sole agents was resisted both in the Tokyo and Uruguay Round
negotiations by a number of developing countries.38 More recently, the sole
agent problem has been described as one of implementation: the dificulty –
particularly for customs administrations with limited resources – in obtain-
ing the contract and other commercial documentation necessary to determine
whether a sole agent is in fact “controlled” by the foreign seller within the
meaning of the Interpretative Note deinition.39
As noted in section 1.2, the Uruguay Round negotiations produced a WTO
Ministerial Decision to prompt the Technical Committee to conduct studies
in order to assist developing countries in dealing with the sole agent issue. In
response, the Technical Committee has produced a case study on sole agents,40
as well the revised explanatory note and case study on related parties men-
tioned in the previous section. Nevertheless, the Agreement’s treatment of sole
agents continues to be a source of contention.41

(b) Related parties – tests

Article 1(2) of the WTO Customs Valuation Agreement sets out a structured
framework for the analysis of related-party transactions. It requires customs to
test the declared price with a series of questions and exchange of communica-
tions with the importer, as follows:

38
In the Tokyo Round, developing countries took the position that the Agreement text “did not deal
adequately … with the question of sole agents and distributors” and proposed (without success)
that developing countries be permitted to treat these entities as related parties under the Agreement.
GATT Multilateral Trade Negotiations, Group “Non-Tariff Measures” Sub-Group “Customs
Matters,” Meeting of 3 April 1979, MTN/NTM/67 (April 5, 1979) (Summing up by chairman
of the negotiating subgroup). The Uruguay Round discussions on sole agents are described in
section 1.2.
39
“Article 15.5 put the burden of proving a relationship on the customs administration. It was unlikely
that the customs administration in the importing country would have access to pertinent business
documentation on contracts that would be necessary to prove such a relationship.” WTO, Report of
the Committee on Customs Valuation to the Trade Negotiations Committee on the Implementation-
Related Issues in Accordance with Paragraph 12 of the Ministerial Declaration, G/VAL/49 at 6
(November 25, 2002) (Secretariat summary of rationale for proposal to treat sole agents as related
parties).
40
WCO, Case Study 9.1: Sole Agents, Sole Distributors and Sole Concessionaires.
41
See G/VAL/49 at 6 (November 25, 2002) (India proposal to modify the agreement provisions on sole
agents).

CUSTOMS IMPORTER

Are the Buyer and

No Seller related?

Yes

Are there “doubts”

No about the declared
price?

Yes

Provide
Notify Importer Information
Transaction Value
can be used

Did the
No relationship Provide
influence the Information
price?

Yes

Yes Does the declared

value “closely Provide
approximate” a “test Information
value”?
No

Transaction Value
cannot be used (go to
next method)

Figure 7 Analysis of a related-party price

Are the Buyer and

Seller related?

A buyer and seller are related if their relationship is one deined in Article 15
of the Agreement. See discussion of “Deinition of related parties,” above.

Are there “doubts”

about the declared
price?

The Agreement does not permit customs to reject a declared price simply
because the buyer and seller are related. Based on available information,
whether supplied by the importer or obtained from other sources, customs
must have some grounds for inding that the buyer and seller’s relationship
inluenced the price.
Nor does the Agreement require that customs examine every related-
party transaction before it can accept the transaction value. Given the vol-
ume of related-party trade, it would be impractical for customs to do so.
Rather, the Agreement intends that customs select for examination those
related-party transactions “[w]here there are doubts about the accept-
ability of the price.” See Interpretative Note to Article 1, Paragraph 2
(below).
There may in fact be related-party transaction values about which customs
will have no doubts:
For example, the Customs administration may have previously examined
the relationship, or it may already have detailed information concerning
the buyer and the seller, and may already be satisied from such exam-
ination or information that the relationship did not inluence the price.
(Interpretative Note to Article 1, Paragraph 2)
Similarly, if identical or similar goods were previously imported, customs may
be satisied that the declared value is consistent with those accepted in the prior
transactions.
On the other hand, customs may have doubts about the validity of related-
party transactions involving new or unknown traders, or where a declared
customs value is signiicantly less than transaction values customs found in
prior transactions involving identical or similar goods. It also would be consist-
ent with the Agreement if customs relied upon risk management to select for
examination those related-party transactions that present a higher probability
of unacceptable values, and allow the low-risk traders or transactions to pass
without further review.

Notify Importer

If customs does have doubts that the price was affected by the relationship,
Article 1(2) of the Agreement requires that customs communicate those
grounds to the importer, and that the importer be given a reasonable opportunity

to respond. If the importer so requests, customs must provide this communi-

cation in writing.
An importer can justify a transaction value challenged by customs by either
of two means:
1. the declared price (transaction value) can be used if the circumstances
surrounding the transaction demonstrate that the parties’ relationship
did not play a role, or
2. whether the relationship inluenced the price or not, the price that the
parties settled on is nearly equivalent – “closely approximates” – the
transaction value of similar or identical goods.
“Circumstances of sale” and “test values” are alternatives: the importer need
establish or meet only one of them.

Did the
relationship
influence the
price?

Customs is required to accept a related-party price if the circumstances sur-

rounding the transaction show that the buyer and seller, although related, buy
and sell from each other as if they were not. The Agreement leaves to the dis-
cretion of the customs authority the kinds and sources of information it may
take into account to determine whether the relationship inluenced the price.
An Interpretative Note suggests three proofs that an importer could offer
to demonstrate an acceptable price:
1. the price had been settled in a manner consistent with the normal pri-
cing practices of the industry in question, or
2. the price was settled in a manner consistent with the way the seller
settles prices for sales to buyers who are not related to him, or
3. the price is adequate to ensure recovery of all costs plus a proit that is
representative of the irm’s overall proit realized over a representative
period of time in sales of goods of the same class or kind.

Does the declared

value “closely
approximate” a “test
value”?

Even if the price was inluenced by the parties’ relationship, the importer
may nevertheless establish that the price is acceptable if it “closely
approximates” a test value. A test value is one that customs had previously

accepted for imports of identical or similar goods. In the words of the

Agreement:
[a transaction value in a sale between related parties] shall be accepted
… whenever the importer demonstrates that such value closely approxi-
mates one of the following, occurring at or about the same time:
i. the transaction value in sales to unrelated buyers of identical or simi-
lar goods for export to the country of importation
ii. the customs value of identical or similar goods as determined under
the provisions of Article 5 [deductive value]
iii. the customs value of identical or similar goods as determined under
the provisions of Article 6 [computed value].
Typically, therefore, when customs searches for test values, three questions
must be answered:
1. Are the goods in the prior shipment “identical” or “similar” to the
goods under valuation?
The question whether one shipment of goods is “identical” or
“similar” to another is exactly the same question that arises under the
second and third methods of customs valuation. See the discussion of
identical and similar goods in section 3.1, below.
2. Does the transaction value declared by the importer “closely approxi-
mate” a test value?
A test value can be used to support the importer’s declared value
even if it is not the exact same price. The importer’s declared trans-
action value must only “closely approximate” the value of the prior
shipment.
An Interpretative Note makes the point that a large difference in
prices of goods in some industry sectors may not be commercially
signiicant, while small price differences for other types of goods may
well be signiicant. Thus, in determining whether the declared value
“closely approximates” a previously accepted customs value, customs
should consider factors such as:
• The nature of the goods (e.g. perishables, high-tech goods, novelty
items with short-interest span, etc.).
Apples are apples, but the price for week-old apples presumably will
be lower than the price for fresh apples. The same may be true for
novelty or seasonal items.
• The nature of the industry (e.g. high tech, video games and toys,
chemicals, etc.).
Competitive conditions differ between industries. Certain industries
compete on price, and therefore the range of market prices gener-
ally will be small. Other industries compete on innovation or brand

name (e.g. toothpaste), where there may be a greater range of market

prices.
• The season in which imported (e.g. fruits and vegetables, wear-
ing apparel, seasonal activity equipment such as tennis and skiing,
etc.).
These factors will vary from case to case. Therefore, it would be wrong
to apply a rule across-the-board to all commodities that, for example,
one price will be considered to “closely approximate” another if there
is no more than a 5 percent difference between the two.
In addition, the Agreement accepts that a low related-party value
can be said to “closely approximate” a higher customs value that was
previously accepted by customs if the difference in price is shown to
be due to any of the following reasons:
• differences in commercial level (wholesale, retail, consumer, sales)
• differences in quantity levels (bulk shipments v. individual items)
• differences in Article 8 elements (assists, transport costs)
• differences in seller’s costs in sales to unrelated parties versus sales to
related parties (i.e. marketing costs, market research, etc.).
For example, the related party price might involve a wholesale quan-
tity, while the higher-price “test-value” shipment may have been a
retail quantity. Where the price difference is demonstrated to be due to
a usual wholesale discount, the related-party price might be accepted
as a “close approximation.” Similarly, in a WTO Member country
which includes the costs of international transport in customs value,
the declared goods may have been shipped by ocean, whereas the pre-
viously accepted values may have included (usually more expensive)
air freight charges.
3. Does the declared value “occur at or about the same time” as the test
value?
The test value must “occur” at or about the same time as the trans-
action value between the related parties. When a test value can be said
to “occur” is not altogether clear under the terms of the Agreement,
and WTO Members have developed different interpretations. Some
Members use the time of export. Other Members use the time of
export if the test value is a transaction value, but use time of sale if the
test value is a deductive value and time of import if it is a computed
value.42

42
GATT Committee on Customs Valuation, Time Standard for Test Values under Article 1.2(b) of the
Agreement, VAL/W/18 (April 29, 1983).

Regardless of the point in time used as the reference (the date of

export or otherwise), the Agreement provides that transactions taking
place “at or about” that date may be considered. Prices can change
simply because of the passage of time; therefore, the closer in time
the prior shipment, presumably the more accurate a relection of the
market value of the imported goods. Of course, because market con-
ditions are different between industries and products, it may be appro-
priate to consider only transactions occurring within a short period of
time for some types of goods (for example, perishable goods) but a
longer period for others. Therefore, the Agreement sets out a lexible
standard, and leaves the implementation to the discretion of individ-
ual WTO Members in their national laws and procedures.

(c) Transfer pricing and customs valuation

“Transfer pricing” refers to the allocation by multinational corporations of their
proits among members of the corporate group for tax purposes.43 Other factors
being equal, a corporation will normally choose to shift its proits to countries
with lower tax rates, and to report low earnings in countries with higher rates.
Manipulation of the transfer price – the price paid for goods exchanged across
borders between members of the corporate group – is a means by which the
multinational can reduce its worldwide tax burden.
For example, a producer located in a country that imposes high taxes on
earnings might establish a low transfer price for goods it ships to a related dis-
tributor located in a country with low tax rates. The producer is subject to tax
on the minimal proit it earns on the sale to the distributor (i.e. the difference
between its costs and the low transfer price). The distributor will earn a larger
share of the overall proit (i.e. the difference between the low transfer price and
the resale price to the purchaser in the country of import), but those proits will
be subject to a low rate of tax.
National tax authorities have concerns similar to customs administrations
about abuses of related-party pricing – although customs authorities are nor-
mally concerned that the declared price may be understated to avoid duty,
while the tax authority’s concern is that the price may be overstated to avoid
tax on earnings. And, parallel to the WTO Valuation Agreement, Article 9 of
the OECD Model Tax Convention establishes an international standard – the
“arm’s length” principle – that is used by tax authorities and multinationals to
establish acceptable transfer prices for purposes of taxation.

43
J. Neighbor, “Transfer Pricing: Keeping it at Arm’s Length,” OECD Observer (2002); OECD, Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations (2001).

The “arm’s-length” principle simply means that a transfer price should be

the same as if the two companies involved were two independents, rather than
part of the same corporate group. This principle is further elaborated in the
OECD Transfer Pricing Guidelines, which deines several methods that can be
used to establish an acceptable transfer price. These include:
• “Comparable uncontrolled price method” – the “arm’s-length”
principle is satisied if the transfer price is equivalent to a price in
a comparable transaction between unrelated parties in comparable
circumstances.
• “Resale price method” – an acceptable transfer price can be estab-
lished by subtracting from the price at which the distributor resells
the imported goods to an independent purchaser an “appropriate gross
margin,” i.e. a margin covering a distributor’s proit and expenses
equivalent to that you would ind in comparable transactions with or
between independent enterprises.
• “Cost plus method” – the transfer price can be determined by add-
ing to the costs incurred by the producer or supplier of the goods
an “appropriate cost plus markup” to allow the producer or sup-
plier an “appropriate proit,” i.e. a proit margin found in compar-
able transactions with or between unrelated parties (the “cost plus”
method).
What impact does a transfer pricing determination by the national tax authority
have on customs value? Can information that justiies a tax transfer price also
justify a customs transaction value between related parties?
The uses to which transfer-pricing information may be put in related-party
examinations is a matter for national customs administrations. But there are
obvious similarities in the purposes and methods of the OECD Guidelines and
the WTO Valuation Agreement. On the other hand, there are also differences
which may bear on the relevance of transfer-pricing information in a customs
related-party examination.
One important difference is the factors used to determine whether a related-
party transaction is comparable to a transaction between independents. The
WTO Valuation Agreement focuses on similarity of imported goods in deter-
mining whether one transaction is comparable to another; that is, whether the
goods are “identical” or “similar” or “the same class or kind.” Under OECD
Guidelines, tax authorities will consider the economically signiicant condi-
tions of the transactions in full, and particularly “the functions performed by
the parties (taking into account assets used and risk assumed), the contrac-
tual terms, the economic circumstances of the parties, and the business strat-
egies pursued by the parties.” Thus, a sale of imported toasters by a distributor
who takes on responsibility for advertizing and marketing (which impacts his
expenses and proit margin) is not directly comparable for tax purposes to a

sale of identical toasters by another distributor who does not perform these
functions or assume these risks.
Given these overlapping but distinct methods, customs administrations
have considered transfer pricing information to be relevant to determining the
acceptability of related-party price, but not conclusive. In the words of one
customs administration:
Based on these considerations, [the US customs administration] has ruled
that the fact that the importer’s transfer pricing methodology satisies one
of the [tax] methods is not determinative of whether it is an acceptable
transaction value for customs purposes. Rather, a related party transac-
tion value will be considered acceptable only if it satisies either the cir-
cumstances of sale test or closely approximates one of the test values as
provided in customs value law …
[But customs] recognizes that in some cases, the underlying facts
and the conclusions reached in an APA44 or transfer pricing study45 may
contain some relevant information about the circumstances of sale and
thus may be considered in applying the circumstances of sale test. For
example, they may contain pertinent information about how the related
parties transact business and may include information about sales of simi-
lar products to unrelated purchasers. The weight given to the facts and
conclusions in an APA or transfer pricing study depends in large part on
the particular circumstances presented and the transfer pricing method-
ology used.46

Te st you r k now
n owl
lee dg
d g e – ci r
rccu
u mstan
m sta nce
cess o f s ale
al e
1. A Korean manufacturer sells auto parts to his 35 percent-owned subsidiary in
Kenya at $10 per item. An examination of the circumstances of the sale indi-
cates that the Korean manufacturer sells identical goods to unrelated customers
in Japan and Mexico at the same price and under same sales conditions. Is the
price inluenced by the relationship?

44
An APA is an advanced pricing arrangement. This is an “arrangement that determines, in advance
of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate
adjustments thereto, critical assumptions as to future events) for the determination of the transfer
pricing for those transactions over a ixed period of time. An advance pricing arrangement may be
unilateral involving one tax administration or multilateral involving the agreement of two or more tax
administrations.” OECD, Transfer Pricing Guidelines, at G-1.
45
A study prepared by the multinational to support its transfer price. These “generally include a descrip-
tion of intercompany transactions, the company’s transfer pricing methodology, a discussion of …
transfer pricing methods and the selection of the best method, and conclusions regarding the arm’s
length nature of the intercompany pricing.” US Customs and Border Protection, What Every Member
of the Trade Community Should Know About: Determining the Acceptability of Transaction Value for
Related Party Transactions (April 2007), 14.
46
Ibid. at 15–16.

2. A company in Ghana sells cocoa to its subsidiary in Norway at $1,500 per short
ton. An examination of the circumstances of the sale indicates that this price is
based on the published prices on the London Commodity Exchange for cocoa.
Is the price inluenced by the relationship?
3. The president of an exporter is also one of a seven-member governing commit-
tee which controls the importer. An examination of the circumstances of the sale
reveals that each member of the importer’s governing committee has an equal
vote, and none of the other members of the importer’s governing committee is
associated with the exporter. Is the price inluenced by the relationship?
For the answers, see p. 93.

2.4 ANSWER KEY

Test your knowledge – can transaction value

be used?

Pricing formulae
Question 1. Transaction value is the primary method of value under the
Agreement, and should be used where possible. In this case, a transaction value
cannot be determined at the time of importation. However, customs could allow
the goods to be released under Article 13 of the Agreement, which allows goods
to be withdrawn from customs (under guarantee, if necessary), and the inal
value assessed later, when all necessary information is available. Of course,
if objective and quantiiable data is not made available, the transaction value
method must be rejected and the next method of value should be considered.

Package deals (one price for several items)

Question 2. There is a price paid or payable for the goods so transaction value
can be used. Customs will have to apportion the price among goods that are clas-
siiable under the different tariff categories. Guidance on methods of apportion-
ment in these kinds of cases is provided in Technical Committee’s Commentary
8.1. “Treatment of Package Deals,” reprinted in WCO Compendium.

Barter deals
Question 3. In a strict barter exchange of x goods for y goods there is no price
paid or payable, and transaction value cannot be used. Customs must consider
the next method of value. Other cases of barter situations where transaction
could be used are discussed in the Technical Committee’s Advisory Opinion
6.1, “Treatment of Barter or Compensation Deals under the Agreement,”
reprinted in WCO Compendium.

Test your knowledge – should these payments

be included in transaction value?

Question 1. No. These would be considered payments for post-importation ser-

vices, and are therefore excluded from transaction value.
Question 2. Yes. It could be argued that the “penalty” amount is not a pay-
ment for the imported goods – and therefore should not be included in transac-
tion value – but a payment for the number of items that the buyer did not import
to meet the minimum. However, customs administrations have considered this
to be a kind of “price formula” where the buyer and seller agree to a provi-
sional price for the imported goods, which is subject to adjustment up or down
based on factors determined after importation. Price formulae can be used as
the transaction value because the deinition of transaction value includes the
price actually paid or payable.
If you wish to read more about the use of price formulae for transac-
tion value, see Commentary 4.1 of the Technical Committee, “Price Review
Clauses,” reprinted in WCO Compendium.
Question 3. A warranty is a guarantee for the goods that are imported.
Accordingly, the Technical Committee, and a number of customs admin-
istrations, take the position that the buyer’s payment to the seller for the
warranty is part of the transaction value of the imported goods, even if separ-
ately invoiced.
A different result might be possible if the buyer and seller have a separate
legal agreement for the warranty (apart from the sales agreement for the goods)
and the warranty agreement can be shown to have been optional; that is, not
imposed on the buyer by the seller as a condition of sale of the goods.
If you wish to read more about customs valuation issues presented by
warranties, see the Technical Committee’s Case Study 6.1 (“Insurance
Premiums for Warranty”) and Commentary 20.1 (“Warranty Charges”), both
of which are reprinted in WCO Compendium.

Two questions for experts

1. Multi-tier transactions
Where there are successive sales prior to importation, most customs adminis-
trations take the position that the last sale is the only one which can be consid-
ered under Article 1 of the Agreement.
In a 2007 commentary, the Technical Committee conirmed this inter-
pretation: where there are a series of sales, “the price paid or payable for the
imported goods when sold for export to the country of importation is the price
paid in the last sale occurring prior to the introduction of the goods into the

country of importation.”47 In the scenario outlined in the Commentary, the earl-

ier or irst sale cannot be used as the basis for customs value.
The Technical Committee’s interpretation is based on a close reading of
the text of the Agreement, which suggests that the drafters of the Agreement
intended that the buyer in the sale to be used for valuation purposes would be
the importer located in the country of importation. For example, certain of the
Interpretative Notes interchange the term “importer” for “buyer”. Also, Article
1(a) refers to restrictions imposed on the “buyer” by authorities in the “country
of importation.” Finally, unless the last sale is used for valuation purposes, par-
ties could avoid making the Article 8 adjustments that are necessary to relect
in the transaction value “the substance of the entire commercial import transac-
tion” – such as additions to the declared price for goods and services supplied
by the purchaser in the country of importation to the foreign manufacturer free
or at reduced price.
As a contrary view, certain customs administrations will accept customs
value based on an earlier (and, presumably, lower) sale price where the declar-
ant can prove that prior sale led to the export of the goods to the particular
country of importation.
For example, the European Union rules provide that the last sale that led to
the introduction of the goods into the customs territory (or the last sale taking
place in the customs territory before the goods are released for free circulation)
should be considered the sale for export, unless the declarant can demonstrate
to the satisfaction of the customs authorities that a prior sale qualiies. Article
147, Commission Regulation (EEC) No. 2454/93 of July 2, 1993. The kind of
proof that might be presented to support such a claim may include:
– the goods are manufactured according to EC speciications, or are
identiied (according to the marks etc. they bear) as having no other use
or destination,
– the goods in question were manufactured or produced speciically
for a buyer in the EU,
– speciic goods are ordered from an intermediary who sources the
goods from a manufacturer and the goods are shipped directly to the EC
from that manufacturer.
Customs Code Committee (Customs Valuation Section) Commentary No. 7,
reprinted in European Commission, Directorate-General Taxation and
Customs Union, Compendium of Customs Valuation Texts (January 2007)
(available at the website of the EU Customs Directorate, http://ec.europa.
eu/taxation_customs/customs/customs_duties/declared_goods/european/
index_en.htm).

47
Technical Committee Commentary 22.1, Meaning of the Expression “Sold for Export to the Country
of Importation” in a Series of Sales.

Similarly, the US Customs Service “presumes” that transaction value is

based upon the price paid by the importer. The importer who wishes to use
a prior sale must provide “complete details of all the relevant transactions
and documentation (including purchase orders, invoices, evidence of pay-
ment, contracts and other relevant documents). General Notice – Determining
Transaction Value in Multi-Tiered Transactions, T.D. 96–87, Vol. 30/31, No.
52/1 Cust. B. & Dec. (January 2, 1997). This may be a dificult burden, where
the importer is not a party to that prior sale.

2. The tourist trader

Under the Technical Committee’s Advisory Opinion No. 14, the importer’s
purchase of the goods – such as a used car – on the foreign market can be con-
sidered a “sale for export.” That opinion states:
the fact that the goods are presented for valuation of itself establishes their
importation which, in turn, establishes the fact of their exportation. The
only remaining requirement then, is to identify the transaction relating
thereto…If the importer can demonstrate that the immediate sale under
consideration took place with the view to export the goods to the country
of importation, then Article 1 can apply.
Advisory Opinion 14.1, Meaning of the Expression “Sold for Export to the
Country of Importation,” in WCO Compendium. The speciic case of pur-
chase of a car on the foreign market for export is discussed in Study 1.1,
Treatment of Used Motor Vehicles, WCO Compendium. As noted in these
decisions, the result may be otherwise if the car is used after purchase and
prior to importation.
The European Community, in its customs legislation, provides a similar
answer to the question: “[f]or the purposes of Article 29 of the Code [the trans-
action value method], the fact that the goods which are the subject of a sale are
declared for free circulation shall be regarded as adequate indication that they
were sold for export to the customs territory of the Community.”48

Test your knowledge – “objective and

quantifiable evidence”

The Agreement is very clear. Where data does not exist, you cannot make the
appropriate adjustment to calculate a transaction value and, therefore, cannot
use transaction value as a basis for customs value.

48
Article 147, Commission Regulation (EEC) No. 2454/93 of July 2, 1993.

In the context of royalty and license fees, the interpretive notes describe
some speciic examples where “objective and quantiiable” data does not exist,
and transaction value cannot be used:
• if the payment of the royalty is based partly on the imported goods
and partly on other factors which have nothing to do with the imported
goods, it would be inappropriate to attempt to make an adjustment for
the royalty
• where imported goods are mixed with domestic ingredients and are
no longer separately identiiable (and there is therefore no way to
apportion the royalty payment to the imported element of the inished
goods)
• where the royalty payment cannot be distinguished from special
inancial arrangements between buyer and seller.

Test your knowledge – apportionment of assists

The full cost of the tool ($1,000) should be apportioned to the total number of
units produced (40 cars), or a cost of $25 per car. The importer then has some
choices:
• The importer can allocate the full cost of the tool over the anticipated
production. In this case, he would declare $125 ($25 × 5 cars) on the
irst shipment.
• The importer can allocate the full cost of the tool to the irst con-
signment. The full cost of the assist is $1,000. However, the tool will
be used to produce cars exported both to Italy and to Canada. The
importer should be permitted to take into account only the production
destined for Italy when allocating the cost of the tool. Thus, if the
importer chooses to declare to Italian Customs the full cost on the irst
consignment of ive cars, he would declare $500 ($1,000 × 20 ÷ 40),
which is the full cost of the tool as it pertains to exports to Italy.

Test your knowledge – royalties and license fees

Question 1. The importer is likely right, and the payment should not be included
in the price of the prototypes. This is because the royalty is not related to the
imported goods (the prototypes) but to other goods, namely, those that the US
company manufactures and sells in the United States.
Question 2. In this case, the royalty must be added to the sale invoice price
because (1) it is related to the imported goods (the goods are made with the

patent), (2) it is paid by the buyer (the Italian company) and is a condition for
export sale (the US company requires payment of the royalty as a condition
of its sale of the medicine to the Italian company), and (3) it is not already
included in the invoice price.
Question 3. While the royalty is related to the imported goods, it is not a
condition of sale of the imported goods but arises under the laws of Italy upon
the resale of the imported goods in Italy. Therefore, it should not be included
in the customs value of the imported records.
In this regard, you might note the Interpretative Notes state “payments made
by the buyer for the right to distribute or resell the goods will not be added
provided such payments are not a condition of sale for export to the country of
importation of the imported goods.”

Test your knowledge – proceeds

Question 1. Five percent of the Italian company’s gross sales proceeds realized
on the imported pharmaceutical products will be considered proceeds on resale
of the imported goods, and therefore should be added to the price paid for the
goods ($10,000). A dificulty here, however, is that the total amount realized on
resales payable to the seller will not be known for a year after the import takes
place. This means that customs may require legal authority under its national
laws to delay inal valuation and collection of duty on the goods, as well as to
verify, if necessary, the buyer’s accounting.
Question 2. In this case, the remittance cannot be considered as proceeds
since it represents the low of dividends or other payments from the Italian
buyer to the seller which do not relate to the imported pharmaceutical products.
Therefore, this payment is not part of the transaction value of the imported
goods.

Test your knowledge – transport charges

Where a country chooses to include transport in customs value, the Agreement

provides it may include “cost of transport” rather than, for example, the amount
the buyer actually paid or will pay for the transport. The European Union, for
example, requires the cost of transport to be included in customs value even
if transport is free or is provided by the buyer, based on freight rates nor-
mally applied for the same modes of transport. Article 164(c), Commission
Regulation (EEC) No. 2454/93 of July 2, 1993.

Test your knowledge – do these sales

restrictions prevent use of transaction value?

Question 1. Although this is a restriction on Mr. X’s ability to use the goods,
it is a restriction imposed by government authorities. Therefore, transaction
value can be used.
Question 2. This is a restriction on Mr. X’s use of the product but the restric-
tion does not substantially impair the value of the imported product to Mr. X.
After all, Mr. X imported the product to use it as a cleaning product, not as a
food additive.
Question 3. The answer is no, according to the Technical Committee. A
restriction “which could have a substantial effect on the value of the imported
goods is one that is not usual in the trade concerned.” By limiting the buyer’s
use of the imported car to charitable purposes, the restriction “substantially
affects” its value, and thus precludes use of transaction value. See Technical
Committee, Meaning of the Term “Restrictions” in Article 1.1(a)(ii), in WCO
Compendium.

Test your knowledge – circumstances of sale

Question 1. No. Since the Korean manufacturer settles prices in the same man-
ner to unrelated buyers in Canada and Mexico, this would demonstrate that the
price was not inluenced by the relationship.
Question 2. No. This price is consistent with the normal pricing practice in
the industry and shows that the price was not inluenced by the relationship.
Question 3. Parties may only be technically related, but not have real con-
trol over the other. In this case, the circumstances of the sale suggest that the
president of the exporter is not in a position to exercise the requisite degree of
control required to inluence the price.

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