Excerpt
Table of Contents
Content Page
Chapter One
1. Introduction
1.1 Background of the study
1.2 Statement of the Problem
1.3 Objective of the study
1.3.1 General Objective
1.3.2 Specific Objectives
1.4 Scope of the study
1. 5 Methodology
1.6 SIGNIFICANCE OF THE STUDY
Chapter Two
2. Literature Review
2.1 Theoretical review
2. 1.1 Significance of customs valuation
2.1.2 International valuation standards
2.1.3 The Agreement on Customs Valuation (ACV)
2.1.4 Methods of determining customs value
2.1.5 Customs valuation and transportation costs
2.1.6 CUSTOMS VALUATION AND TRANSFER PRICING
2.1.7. CUSTOMS VALUATION PROBLEMS
2.1.8 Customs valuation in Ethiopia: an overview
2.2 Empirical review
Chapter Three
3. Discussion and analysis
3.1 Customs valuation rules in Ethiopia
3.2 Customs declaration procedures
3.3 Customs valuation and duty assessment
3.3.1 Customs valuation process
3.4 Customs valuation systems control mechanisms
3.5 Customs operational challenges
Chapter Four
4 Conclusion and Recommendation
4.1 Conclusions
4.2 Recommendations
References
Chapter One
1. Introduction
Customs valuation is the process where customs authorities assign a monetary value to a good or service for the purposes of import or export. The authorities engage in this process as a means of protecting tariff concessions, collecting revenue for the governing authority, implementing trade policy, and protecting public health and safety. Customs duties, and the need for customs valuation, have existed for thousands of years among different cultures, with evidence of their use in the Roman Empire, the Han Dynasty and the Indian sub-continent. The customs value of imported goods is determined mainly for the purposes of applying ad valorem rates of customs duties. It constitutes the taxable basis for customs duties. It is also an essential element for compiling trade statistics, monitoring quantitative restrictions, applying tariff preferences, and collecting national taxes. Customs valuation is the determination of the amount up on which the rates of duty and tax are applied in order to calculate the value of customs liability of a taxpayer. While these rates are unambiguously fixed by the statute in a tariff schedule, the declared value of imported goods may vary from transaction to transaction. The fluctuating tax base has important implications for the customs tax policy of a country. An importer engages in under invoicing and misrepresenting the value of shipment to reduce taxpayer’s duty liabilities. Unless the under invoicing practices are detected and remedial actions are taken, the government revenues are lost and the importer receives unfair advantages over its competitors. The other main issue in customs valuation relates to related parties’ transactions. The difficulties relevant to related parties pricing appear due to the fact that intra-company prices do not represent appropriate value. Customs value should not be arbitrary, fictitious, or based on indigenous goods. It should rather be real based on actual value of the imported goods or identical goods. If the actual value is not determinable, customs value should be based on the nearest ascertainable equivalent of such value using prescribed criteria.
Under this chapter we try to presents the research problems, the objectives of the study, scope and limitations and methodology of the study.
1.1 Background of the study
Indirect taxes contribute the significant portion of tax revenues in developing countries in general and Ethiopia in particular. Custom duties and import taxes are among the important indirect taxes levied on imported commodities in Ethiopia. Tax and custom administration system of Ethiopia have been designed in the ways which are closely linked to enhance domestic recourse mobilization and facilitating international trade and investment decision in terms of transparency, integrity and fairness. When it came to customs valuation practice among countries, there was a large diversity and inconsistency of application.
Customs valuation is a major feature, and concern, of modern customs tariff systems. It is important not only for the assessment of customs duties, whether for purposes of generating revenue or as a means of encouraging and protecting domestic industry but is also a significant element in a variety of other aspects of international trade such as trade facilitation, statistics, taxes and other charges levied at importation as well as in the application of preference systems.
Despite the fact that, foreign trade taxes and duties provide significant revenues to Ethiopia, there is serious and complex problem of under invoicing of import values by importers. Duties and taxes escape the net resulting in gross economic distortions such as uneven playing field and unfair competition for legal traders. Such circumstances also result in loss of revenues to government. Although, customs valuation is a fundamental factor for facilitating trade and generating revenue, adequate investigations relating to customs valuation operations in Ethiopia were not conducted.
1.2 Statement of the Problem
Customs valuation practices are subject to the WTO Agreement on Customs Valuation which mandates that the customs value of imported goods, to the greatest extent possible, should be the transaction value, that is, the price paid or payable for the goods. Valuation work is practically difficult in some countries in which the reliability of commercial invoices tends to be poor, and where trade undertaken by the informal sector and in second-hand goods is significant. Customs valuation method used to determine value will directly affect the amount of tariff duties collected on a particular import item. Due to this, customs valuation has historically been a jealously guarded function of government with regard to international trade. For many countries the discretion given to customs authorities in valuing trade for the imposition of tariffs and duties has been an important source of revenue. This is more so in developing countries which are often characterized by shallow tax bases.
Ethiopian customs proclamation No. 859/2014 article 33 provides the customs value of imported goods to be the price actually paid or payable for the goods. However, Ethiopian Ministry of Revenues (MOR) is still using the minimum and referenced price data base custom valuation system. Taking these facts in to account, the study attempted to assess the practices and challenges of customs valuation at Ethiopian Ministry of Revenues Kality branch.
1.3 Objective of the study
1.3.1 General Objective
The general objective of this study is to assess the factors that affecting Ethiopian importers during customs valuation.
1.3.2 Specific Objectives
The study was conducted to assess the practices and challenges of customs valuation. In particular, the research project attempted to achieve the following specific research objectives:
- To explain practices of custom valuation;
- To identify the major factors that affect importers during the procedures of customs valuation.
- To analyze and describe challenges in customs assessment processes.
- To discover the customs operational problems in Ethiopia.
- To identify inspection or physical examination problems during custom valuation process while enhancing the objective of trade control.
1.4 Scope of the study
Ethiopian Ministry of Revenues (MOR) collects taxes and duties levied on various goods imported for business as well as personal purposes. However, this study covers only customs valuation of commercial commodities. In addition, the study did not consider the whole customs assessment operations of MOR, but merely its customs valuation systems. MOR currently has 5 regional branch offices, 2 special branch offices, 2 offices of coordination. The research focused only on the operation of kaliti regional branch office located at Addis Ababa.
1. 5 Methodology
In this study the investigators employed the survey approach, and report analysis for gathering data from different sources. The study demands looking at legislative documents and the records of MOR for analyzing methods and procedures used, and with which written on the legislative. Regarding data analysis, this study mainly employs descriptive analysis.
1.6 SIGNIFICANCE OF THE STUDY
In view of the importance of valuation to the correct assessment and application of customs duty, due concern should be given to collect revenue. Particularly, in developing country like ours, custom valuation is a basic source of revenue for the government in the form of tax and duty compared to developed countries which is for control purpose than revenue. To simplify procedures and facilitate trade, customs valuation plays great role.
Importers have to be clear in advance how much to pay duty for goods before they actually import the goods. In this regard Ethiopian customs valuation system has a lot of operational problems and lacks transparency for every importer. This study were identified the problems in customs valuation system and forwarded suitable remedial actions in order to alleviate the problems. The outcome of this research project would hopefully provide substantial information to Ethiopian revenue and customs authority to alleviate the observed problems.
Chapter Two
2. Literature Review
2.1 Theoretical review
Customs value of imported goods as Customs value of imported goods means the value of goods for the purposes of levying ad valorem duties of customs on imported goods. Customs valuation is the procedure used by customs officials to determine the value of the imported goods for the purposes of calculating the right import duty. The customs value is essentially the transaction value that an importer pays for the goods, but can include other additional costs such as commission, packaging and royalties. Where an ad valorem tariff applies to goods, customs officials need to know the value of the goods in order to work out the amount of duty the goods are subject to. The question of value arises only in cases of ad valorem tariffs, as opposed to specific tariffs. This is because specific tariffs are levied on specific amounts of goods and the tariff amount does not depend on the value of the good concerned. In the case of ad valorem tariffs, the tariffs are levied as proportions of the value of the good. Hence, determination of customs value is important. (Goorman and Wulf, 2005),
Customs valuation is distinguished from commercial valuation. It is concerned not only with the transaction between the buyer and the seller but with all issues related to transactions between them. An important issue in customs valuation is thus the need for a valuation standard, which constitutes the customs definition of value. As stated by Goorman and Wulf (2005), the World Trade Organization (WTO) agreement on customs valuation, Article VII of the General Agreement on Tariffs and Trade (GAAT), is presently the last instrument in a series of efforts to come up with an internationally acceptable customs valuation system.
2.1.1 Significance of customs valuation
Most import tariffs are based on ad valorem duties, that is, a rate expressed as a percentage of the value of the imported goods. Customs valuation is the determination of the amount upon which the rate of duty is applied. While these rates are unambiguously fixed by statute in a tariff schedule, the declared value of imported goods may differ from transaction to transaction. This has three important implications for tariff policy, as pointed by Goorman and Wulf (2005). First, an importer may engage in under invoicing and not declare the full value of the shipment to reduce his duty liability. Unless the under-invoicing is detected, government revenue is lost and the importer receives unfair advantage compared to its competitors. Second, government can take advantage of the valuation system to increase or decrease duty liabilities for revenue or protective purposes, there by offsetting tariff concessions made under multilateral or bilateral trade agreements. Third, undervaluation and overvaluation are used for capital flight.
The increased importance of customs valuation is a feature of the development of modern customs tariff system. In the past, the usual purpose of imposing import duties was to raise revenue (Bashar 1999). In more recent time, the purpose of imposing import duties has begun to turn towards protection and encouragement of home industry and as the "ad valorem" system has been found to be more suitable for this purpose (for various reasons including fluctuating prices and the need to take into account gradations of quality) and its use has become widespread. According to Bashar (1999), this development has greatly extended the field of customs valuation and has included in it many classes of merchandise entailing special valuation problems. More adequate and precise valuation procedures have thus become necessary.
Empirical studies also revealed that there has been a remarkable increase in extra revenue realized by governments because of enhancement of declared transaction value.
2.1.2 International valuation standards
Customs valuation systems have been the subject of a number of international harmonization and standardization efforts. International efforts toward harmonization began in the early 20th century, but significant results did not come until the 1947 General Agreement on Tariffs and Trade (GATT). As pointed out by Goorman and Wulf (2005), the first significant international agreement on customs valuation was reached at the 1947 GATT negotiations that established principles to be adhered to by trading partners. These principles, embodied in GATT's Article VII, emphasize that customs value should not be arbitrary, fictitious, or based on value of indigenous goods. These principles have remained the basis for customs valuation. In the context of the above introduction on the international valuation standards, the following discussions briefly present the different international standards formulated indifferent years.
The Value is based on the concept of “normal price” – the price that the goods would obtain under open market conditions between unrelated buyers and sellers under specified condition of time and space (Goorman and Wulf,2005).
2.1.3 The Agreement on Customs Valuation (ACV)
According to Rege (1999), the WTO agreement uses transaction value, that is the price actually paid or payable for the good, as the main basis for customs valuation. In cases where the transaction value does not reflect the correct value of the good, the agreement lays down five additional bases of valuation to be applied sequentially. These are transaction value of identical goods, transaction value of similar goods, deductive method, computed method, and fallback method. In addition to these, the agreement also incorporates provisions defining the terms used in it, provisions on currency conversion, right of appeal of importers, clearance of goods on providing guarantee, and special and differential treatment of developing countries.
2.1.4 Methods of determining customs value
United Nations studies by the Asia-Pacific Research and Training Network on Trade (2008) “found out that the importance of efficient and transparent customs valuation processes has long been recognized and has led WTO members to sign a separate agreement on the implementation of GATT Article VII, commonly referred to as the WTO Customs Valuation Agreement (CVA)”. The CVA is based primarily on the transaction value method (TVM), i.e., value is assessed based on the value indicated in the invoice provided by the trader” (UN, 2008). In fact, the CVA is specifically intended at facilitating trade, considering information provided by the trader as the basis for valuation. Whenever possible the transaction value should be primary taken as the basis for the calculation of customs value according to GATT article VII. However, CVA or the Code contains a total of 6 different methods (articles I up to and including VII) in a hierarchical relationship to each other. Therefore, in addition to transaction value methods the code allows for five other methods to be considered Customs having doubt about the invoice value provided. The lists are:
1. The transaction value of the imported goods (art. 1);
2. The transaction value of identical goods (art. 2);
3. The transaction value of similar goods (art. 3);
4. The deductive value (art. 5);
5. The computed value (art. 6);
6. The flexible valuation method (art. 7).
Only if the customs value cannot be determined under the provisions of the first method, starting with method number 1, the next methods may be tried. An exception to this rule is formed by the importers right to request the order of application of methods 4 and 5 be reversed
(art. 4)” (D.Pagter and R.V.Raan 1981).
2.1.4.1 Transaction value method (article 1)
The transaction value system stipulates that the transaction value method must be used wherever possible. This method bases the customs value on the “price” paid for the imported goods (Ghimire et al. 2005). Certain amounts not included in the price such as transportation, insurance, packing charges, royalties and license fees, assists, and other payments may have to be added to arrive at the precise customs value.
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