Many of us understand that members of the World Trade Organization (WTO) require a good knowledge and appreciation of the Agreements on Valuation and the Rules of Origin. In addition, the World Customs Organization’s (WCO) Harmonized Commodity Description and Coding System Convention (HS) is used as the member’s basis for their customs tariffs and trade statistics. These 3 areas form the core of revenue management for border processing.
Our question is, why do some country members of the WTO and WCO focus so acutely on valuation threats as their primary concern for revenue evasion, and why do they perceive a valuation database as the solution to detecting possible undervaluation attempts at the border? From our perspective, we see undervaluation as only one of several fiscal threat types employed by importers who seek to evade revenue owed.
To help clarify, this blog is not a discussion on the 6 WTO methods of determining valuation. Instead this blog presents how a customs administration might best assess when goods have been deliberately undervalued by the importer in order to evaded revenue owed at the border.
I’ve seen instances where Customs Administrations create a list of HS codes for those commodities they believe are of highest risk for undervaluation, and set flags in systems like ASYCDUA and other declaration processing systems to announce when those commodities are being imported. They can then scrutinize the transaction and shipment to determine whether the goods are indeed being undervalued. This process is often qualitative in nature and subjective based on who and how the HS target is placed into the system. The technical functionality is not difficult and requires a simple data vetting activity. Collecting resultant information is normally not performed dynamically for maintaining a list of relevant target HS codes. If it is done, it’s generally a static process.
Here's an example form for Customs accounting purposes including HS code, value for duty, and value for tax purposes:
Some countries are attempting to deploy valuation databases which store the “value for duty” alongside the HS code in a historical database. This information can be used to decipher whether the commodity (when next reported and declared on file) includes a suspect valuation or not. A range of discrepancy can be applied to flag suspect valuations. Here are a few questions for member customs administrations to consider:
1. Is a valuation database an accurate method for determining when goods are potentially undervalued?
a. I would suggest it is not the best methodology for the following reasons: Undervaluation is only one means of evading revenue owed at the border. Goods can be mis-classified to obtain a lower duty rate, and the origin can be mis-declared to obtain a preferential rate of duty. We would actually promote that our clients look at valuation as a subset of a more strategic revenue evasion problem.
b. Unless we are referring to the same year, make, model of a used automobile imported within 20 days of each other; one shipment compared to the next can vary drastically in valuation due to any number of variables including size, weight, volume of the shipment, packaging, processing, refinement of the commodity, currency exchange, freight costs, handling, inflation, bulk/break-bulk vs containerized, raw vs manufactured goods, Full Container Loads (FCL) vs Less than Container Loads (LCL) etc... In almost every situation, there are few tangible aspects to suggest the value for duty on one shipment should be nearly identical to the next.
2. Does ASYCUDA World provide this capability?
a. Our understanding is it does not.
3. Is a valuation database the best means of recouping or preventing lost revenue at the border?
a. We would suggest there is a better way. Instead of looking at this from strictly a valuation perspective, we would suggest it needs to be looked at as a more strategic revenue evasion problem which includes:
- Mis-declaration of Origin
b. For those of us who were customs inspectors (who actually looked at a paper declaration/entry for commercial goods); -we would have reviewed the transaction/entry package for anomalies in valuation, classification, and origin, -and then extracted the pertinent information for our decision making. Today, our technical approach follows a similar logic and seeks out and compares the inherent risk associated with entities (shipper, consignee, notify party, importer, broker, carrier), geography and routing (place of receipt, port of load, port of discharge, place of destination, country of origin, country of manufacturing, etc.) commodity description (both free text and HS code), equipment number and type, marks and numbers, weights and volumes, and more, etc.
c. Our point is, why would you look at valuation and classification alone when there are so many other aspects of a commercial shipment that are related, and link to the overall/inherent risk to suggest a potential revenue evasion threat is at hand?