When embarking on a study of any new subject, the obvious thing to do is to establish its essence. Once the essence is known, the migration to an understanding of the significance and relevance of associated concepts, or the administrative imperatives, follows. In the case of the Cinderella tax (customs duty), which tends to be largely administrative by nature, a question regarding its essence solicits a diverse range of responses. Without exception, these tend to be concerned with administrative provisions.

This should be contested. The ultimate concern of anyone involved in the importation of goods (products) should be the amount of customs duty payable on such imports – the customs duty liability. The identification of the core principles of customs duty was the subject of a recent study, ‘The Core Principles of Customs Duty: A South African Perspective’, which attempted to establish the essence of customs tax through researching its origin, providing fascinating insight.

The determination of the value of imported goods was first mentioned in the Arthasastra around 400 BC, while the classification of imported goods dates back to the Roman Customs Administration, around 199 BC. The distinction of origin was first applied by the Byzantine Empire in defining a preferential rate of duty to trade with Russia around 907 to 911.

Thus, to determine the customs duty liability of a good, there are three principles that need to be accounted for, namely what it is (classification, what it is worth (valuation) and where it is from (origin). The study supported its determination on the basis that there are two World Trade Organisation (WTO) agreements and a World Customs Organisation (WCO) convention for these principles.

The core principles of customs duty could be illustrated by the diagram.

Tariff classification (C), customs valuation (V) and origin (O) fall within the ambit of customs compliance, which, essentially, entails collection, protection and facilitation. This is managed within the confines of the legislative framework and the administrative framework. The legislative framework refers to the Customs and Excise Act 91 of 1964, encompassing the schedules of the Act (the Tariff Book) and the rules of the Act. The administrative framework refers to the standard operating procedures (SOP), the external policy (EP) and the customs forms.

Misuse of Customs Valuation Databases
On October 27, the WTO held a half-day workshop on valuation databases and reference pricing, which the International Chamber of Commerce (ICC) attended as the sole business organisation. The workshop, the first occasion for the WTO to discuss and share experiences and perspectives on the misuse of valuation databases, was attended by about 100 participants, comprising WTO delegates, WCO representatives and customs agencies officials.

The workshop was the result of several appeals over the past two years by the ICC’s Commission on Customs and Trade Facilitation to the WTO and the WCO to address the misapplication of customs valuation databases that set reference and minimum prices.

At the request of the WTO, the ICC provided business’s views, offering insights to government experts from Africa, Asia, Europe and North and South America. The ICC concerns related to the proliferating misuse of customs valuation databases, even though it acknowledged that these databases could provide a useful tool for customs risk assessment. The ICC provided country examples of where WTO members were using valuation databases to set reference and minimum prices – a practice prohibited by Article 7 of the WTO Customs Valuation Agreement. According to the ICC, these practices violated the positive basis of the ‘price actually paid or payable’, which is the core principle of transaction value under the WTO Customs Valuation Agreement (Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994).

Even though the customs valuation databases are a means to identify the undervaluation of imported goods, the potential misuse of such databases was acknowledged as a sensitive issue. The workshop highlighted that detecting customs value fraud was of vital importance, particularly in developing countries, where customs revenue is a main source of national income. Developing countries often have a large informal-trade sector and the lack of a formal financial trail – such as authentic commercial invoices, bills of lading or letters of credit – constitutes a daunting challenge in determining a valid customs declaration. The ICC recognised the special dynamics of developing countries and called for the use of a ‘green lane’ system for formal trade and trusted traders so as not to impede broader cross-border trade flows and economic growth.
The ICC felt that legitimate traders and economic operators have as much at stake as customs authorities in ensuring that imported goods are properly valued, and collaboration with the private sector should be promoted.

There was consensus that customs valuation databases alone cannot justify the rejection of declared values, but that it could play a part as a customs risk assessment tool for customs valuation compliance. With respect to developing countries with large informal-trade sectors, the WCO said that – in line with WTO rules (Decision 6.1 of the Committee on Customs Valuation) – countries should seek an explanation from the trader should there be a reasonable doubt regarding the declared customs value.

The WCO and the ICC also promoted the expanded use of postcustoms clearance audits as a more effective long-term solution in managing customs valuation compliance. Representatives of several countries also encouraged the use of advance rulings. In this context, the importance of capacity building was emphasised.

To address the abusive use of valuation databases, the ICC recommended the provision of training on – and the registration of – database usage, the promotion of greater clarity and transparency, and increasing collaboration between customs agencies and the private sector.